The starter home is dead.
According to the New York Times (and our own experience in the business), we can tell you firsthand that these “no frills” affordable homes are few and far between in any market.
There’s been a shortage of housing for over a decade now, but that shortage is especially in these starter homes – homes designed to be attainable for young families hoping to build equity. Instead, we’re seeing new homebuyers wait longer to get into the game. We saw it all the way back in the aftermath of the Great Recession.
Millennials were consistently blamed for sluggish market recovery. “They were supposed to buy houses! They’re not buying houses!”
Instead, many millennials and the generations after them have forgone homeownership in favor of renting. This is increasingly a lifestyle choice, but it’s also a necessity in an unforgiving and unaffordable real estate market.
There’s an undeniable need for starter homes in the U.S. housing market. But in a future without them, we already know what will take their place: single-family rentals and built-to-rent properties.
The Critical Role of SFRs and BTRs in Today’s Housing Market
The numbers don’t lie. Record-high occupancy rates combined with rapidly rising monthly rental income means that rental properties of all kinds are seeing unprecedented demand…and potential. And it comes as no surprise as to why.
Simply put, renting a single-family home, built-to-rent or otherwise, gives residents the square footage and experience of homeownership without mortgage debt and down payments.
What residents lose in potential equity, they gain in housing flexibility, amenities, and convenience. At least, if investors and their management teams are doing it right!
Rentals ease the housing shortage.
Some people are quick to blame to rental industry for the shortfall in housing inventory. They see real estate investors as snapping up properties that “rightfully” belong to homeowners. That might be true of Airbnbs and other short-term rentals, but it’s not the full picture of the industry. The truth is, single-family rentals provide an option for people who would otherwise contribute to housing demand.
That demand is what has kept prices on the upswing, even in the face of rising mortgage rates. If SFRs can ease that mounting pressure and truly invest in the communities where they own properties, it can only be a positive for the industry. SFRs allow households to access neighborhoods, school districts, amenities, and other benefits that they could not necessarily obtain through homeownership.
BTRs address construction sector woes.
Where homebuilding is concerned, it’s not as though builders particularly favor high-end homes over entry-level offerings. It’s the cost of lots and construction that forces them to build more expensive homes so that profit margins are met. It’s just not feasible to build traditional starter homes in the same form we’ve known.
What BTRs do, then, is allow builders to meet their margins while also providing more accessible housing options. Though rental rates are rising and there’s a connected but separate affordability crisis in the rental sector, rentals always have a lower barrier to residents than homebuying.
Similarly, BTRs are often more affordable for investors, too. The cost of construction from the ground up can be more affordable than the renovation of an existing (and increasingly pricey) property. With BTRs, owners benefit from uniformity in quality. You know exactly what to expect when you invest.
In short, rental properties aren’t at odds with the housing market in general. They’re not competing with the traditional housing market – they’re serving people who are pushed out and solving, at least in part, some pressing inventory issues.
The Takeaway for Real Estate Investors
It’s obvious at this point that investing in SFRs and BTRs is the financial move to make. With record-high occupancy rates and steadily climbing rental income, it’s impossible to pass up the opportunity! With that said, even a competitive market doesn’t guarantee success.
You’ve got to invest wisely: higher costs mean higher stakes. You’ve got to prioritize portfolio strategy and the quality of the assets within it. The properties themselves, yes, but also the teams who serve your residents and protect your investment!
Leverage the expertise of the pros. REI Nation serves thousands of investors building wealth through single-family rentals and build-to-rent properties!