More Builders Are Turning to New Market: Rentals

The U.S. home building industry is trying to rise from the ashes, albeit in fits and starts, as indicatedby today's read on construction activity in May.

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Housing starts fell unexpectedly, but building permits, an indicator of future construction, rose to levels not seen since 2008.

The usual volatility in monthly government surveys is exacerbated in this particular one by the fact that it reads both single and multi-family (apartment) construction.

Multi-family has been surging of late due to huge rental demand … and that’s where things today are getting even trickier.

A small but growing number of developers are now building single family homes as rentals. Historically, builders did this largely in low-income, government-subsidized housing projects, but the market is quite different today.

Single family rental demand is soaring, as are rents, and investors are rushing to cash in; if you can’t beat ‘em, join ‘em.

“With the economy the way it is, and there are so many people with mortgage issues … and just recognizing these issues will not go away soon, we felt like how could we deliver high quality rental housing in a product that single family homeowners would appreciate?” asks Texas developer Joe Petersen of Insight Real Estate Strategies.

The answer is high-end homes built specifically as rentals. “So it’s basically offering the product they want, with the financing vehicle that works for them recognizing what’s happened with the mortgage industry.”

Petersen’s bailiwick is multi-family, a broker and developer in that space for two decades. Now, he’s clearing land and raising money to build single family homes just outside Ft. Worth. The construction will be different, he admits, as will the maintenance and business plan, but he believes demand is strong enough for him to be able to charge premium rents. He calls it a “compliment” to the single family sales market.

As for his competition, it won’t be apartments, but thousands of previously foreclosed homes that have been purchased by individual investors and put up for rent. Petersen says he hopes his community will offer something those properties don’t.

“We all know what the rent homes typically look like in our neighborhoods, and they are not the nicest homes,” says Petersen. “Through us creating a community specifically for this and having a professional staff on site, maintaining and managing it, we can offer a lifestyle very different from a part-time Realtor or a homeowner who’s renting it because he can’t sell.”

But Peterson may find competition from other builders, like Beazer Homes , which recently launched a “pre-owned” business, “for the purpose of acquiring, improving, renting and ultimately reselling previously owned homes within select communities and markets which we operate,” according to its recent 10-Q.

In other words, Beazer is buying foreclosed homes, 10 percent of which the company originally built, and rehabbing them, then renting them with the intention to ultimately sell.

Petersen intends to build as many as 300 homes, with rents averaging $1,800 a month. He is also considering the rent-to-own option, which several other builders have already started to alleviate a backlog of unsold homes and reduce carrying costs.

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick