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One of the hottest specialty markets in home construction is benefitting from the boom in single family rentals that began as a way for entrepreneurs to provide from the flood of foreclosures that has reached 4 million properties since 2007.

Built-for-Rent now Five Percent of New Home Construction

One of the hottest specialty markets in home construction is benefitting from the boom in single family rentals that began as a way for entrepreneurs to provide from the flood of foreclosures that has reached 4 million properties since 2007.

However, instead of buying foreclosures and renovating, some home builders are designed and building homes from scratch to be rented out rather than sold, with the builder operating as property manager and well as retaining ownership.

Despite some recent ups and downs, the share of single-family homes built for rent has doubled. According to data from the Census Bureau’s Quarterly Starts and Completions by Purpose and Design, the market share of single-family homes built for rent, as measured on a one-year moving average, stands at 5.1 percent for the third quarter of 2012. This is only slightly lower than the recent peak of 5.35 percent set at the beginning of 2011, and is considerably higher than the 20-year average of 2.7 percent.

With housing starts currently at 861,000 a year, the number of new built-for-rental properties is about 43,911 annually at the current market share. Only 27,000 homes started over the past year, according to the National Association of Home Builders

The built-for-rent share of single-family homes is considerably smaller than the single-family home portion of the rental housing stock, which is 27 percent according to the 2010 American Community Survey. As single-family homes age, they are more likely to transition from the owner-occupied to the rental housing stock.

A new entrant in the built-for-rent market is Jacksonville Wealth Builders,which had been buying foreclosed homes to sell to investors. So many investors are pursuing bank-owned homes to operate as rentals that it’s pushed prices as high as it would cost to build them.

With demand for single-family rentals on the rise, Jacksonville Wealth Builders has turned its attention to buying foreclosed residential lots, building rental homes to sell to investors, renting the homes and providing property management services.

“We’re starting to see prices go much higher [on foreclosed homes],” said Greg Cohen, Jacksonville Wealth Builders managing partner told the Jacksonville Business Journal. “We’ve basically bought 95 percent of our properties through [the Multiple Listing Service] and the connections we have, but those opportunities aren’t there as much.”

One option that turns renters into owners are rent-to-own programs that reduce carrying costs on unsold inventory and helps convert more homes to sales.

Some builders have a separate division to handle the rental side of their business, while others prefer to work with customers on a case-by-case basis. T&M Building Co. of Torrington, Conn., and Classic Communities Corp. of Harrisburg, Pa., are two examples.

Renters sign a use-and-occupancy agreement that allows them to live in the home until they can refinance it and take T&M out of the equation. In most cases, customers are able to purchase their home after renting for one year. Occasionally it takes two years. Ugalde says there have been no defaults or evictions. Customers can also elect to sign a conventional lease, but they always have the option to buy, he says.

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