The Exit Strategy for Single-Family Rentals Is Less Than Clear

As people flee the cities, single-family rental builders are making moves to capitalize on that potential demand.

As one example, Huntsville, Ala.-based Davidson Holding Co., launched EverGreen Living. The single-family rental community construction and management venture will build single-family rental communities in the Southeastern markets, including Atlanta, Huntsville, Nashville and Raleigh. 

Perhaps more significantly, Blackstone has re-entered the single-family rental home market with its recent $300 million stake in Tricon Residential.

These single-family builders could give urbanites a place to move if they want to escape the city during COVID.

 “They think there is a market for that because so many people are nervous about being in high-rise buildings,” says Charles Brecker, partner at Saul Ewing Arnstein & Lehr. “Now, people can leave their 800-square-foot one-bedroom apartment in New York or Chicago or Miami, and they can move into a place with more space and for a lot less rent.”

But as these builders start constructing homes to meet these emerging demands, they will face challenges. 

To Brecker, the unanswered question with single-family rentals is what exit strategy the owners will employ.

“Now that they’ve built this community, will they be able to sell it as easily as an apartment community?” Brecker asks. “We know apartments have been the hottest sector of the real estate industry over the last 10 or 15 years. Every investor wants to buy rental apartments, but will they be feeling the same way about rental homes? I think the jury is out on that right now because it’s all so new.”

Since the margins are thinner with rentals versus for-sale homes, Brecker says rental builders will need to tone down the finishes.

“They [single-family rentals] are going to have General Electric or some other brand appliance, and they’re not going to have granite countertops,” Brecker says. “They’re going to have some synthetic countertop, which is a little less expensive. The finishes will be cheaper because they’ve got to get to a point where they can underwrite a rental income. These single-family [rental] deals generally all operate on a thinner margin [than for-sale homes].”

Because of these and other questions, single-family rentals aren’t for every builder.

“It’s not like this is some gravy train of money, and everybody should be doing this,” Brecker says. “Now there are some risks involved, and that’s why some companies have decided they don’t want to do this. But in any case, it’s becoming an option.”