2022 Spring Issue - 110

landwrites
able providing construction loans to BTR
borrowers. Each type of lender is focusing
on what it knows best; a small group of
lenders have been able to do both.
Upon stabilization of the communities,
traditional multifamily lenders-including
government-sponsored enterprises
(GSEs)-are entering the BTR market, providing
long-term fixed- and floating-rate
options to borrowers. The key requirement
for these lenders is that BTR communities
need to be contiguous with no fractured
ownership structures. These lenders will
become the lifeblood of the BTR sector,
providing the much-needed validation and
long-term stable capital it needs to continue
increasing liquidity in the space.
Entry Points
As is in the case in traditional real estate
sectors, BTR deals can come together
at several stages-unentitled raw land,
entitled raw land, fully developed finished
lots, acquisition in phases at certificate of
occupancy, and fully stabilized communiA
key highlight of the BTR
investment strategy is the operating
model, which is more akin to a
traditional multifamily model than
the more challenging scatteredsite
single-family rental business
model. The single location is the
key to BTR for many investors who
are accustomed to multifamily
underwriting and property
management.
110
URBAN LAND
SPRING 2022
ties. Each of these structures carries its
own risk profile.
Because BTR is a hybrid of multifamily
and single-family housing, different
stakeholders are entering the space in
different manners. For example, traditional
homebuilders heavily focused on building
communities for the ownership market
have been increasingly comfortable creating
these same communities for investors
who will lease and manage them as rentals.
Often they will sell them to investors
in phases, similar to their for-sale business
with little change in business model. The
benefits include eliminating price risk by
locking in a contract sales price, eliminating
market risk by selling to one owner,
maintaining a comparable gross margin,
and cycling capital more quickly.
Some traditional multifamily developers
are entering the sector and assembling
land positions where they will oversee horizontal
development, vertical construction,
and lease-up before they either exit or hold
for the longer term. They see the benefits
of adding a product type to their toolkit.
Operations
A key highlight of the BTR investment
strategy is the operating model, which is
more akin to traditional multifamily model
than the more challenging scattered-site
single-family rental business model. The
single location is the key to BTR for many
investors who are accustomed to multifamily
underwriting and property management.
There are some key differences between
multifamily and BTR-most notably the
slower turnover rate for BTR, which is
generally half that of multifamily. While
this is of benefit for the overall model, it
frequently leads to higher turnover costs
because homes have been occupied longer
and require replacement more frequently.
This is a key item that needs to be underwritten
properly.
Many national and regional multifamily
property management firms are entering
the BTR space, as are some managers of
scattered-site single-family rental properties.
The ability of investors to use highquality
property management firms they
already have a relationship with is another
key element helping increase the number
of investors entering the space.
Exit
Investors in all asset classes regularly seek
to identify risks and mitigate them as best
they can, and real estate investors are no
different. The single-family rental sector in
its infancy in 2009-2015 was perceived
as fraught with risks and unknowns. Many
investors had questions. How will you
acquire and manage homes across multiple
metro areas and states at the same
time? How do you control costs when you
are buying and renovating homes one at a
time? How will you exit the investment?
The question regarding exit was among
the most difficult because no investor had
exited a portfolio in bulk. Those questions
have largely been answered now that portfolios
have traded in bulk between investors
and back to individual homeowners
and investors.
With BTR in the early stages of its formation,
many operators have been asked
about exiting stabilized communities.
A small number of early BTR operators
began selling their stabilized communities
in 2020 and 2021, proving that investors
would value these assets like class A multifamily
housing based on prevailing market
cap rates in the low 3 percent to low 4
percent range. Now actual comps exist to
prove that institutional investors seeking a
stable yield are actively acquiring BTR communities
upon stabilization. These comps
will begin to provide stability to this new
segment of single-family rental housing. UL
SUDHA REDDY, a member of ULI's newly formed
Single-Family Rental Council, is managing principal at
Los Angeles-based Haven Realty Capital, which controls
a $1.1 billion portfolio of 34 communities in nine states
totaling 3,480 homes in various stages of development,
construction, or stabilization.
2022 Spring Issue

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