Build-to-Rent Single-Family Homes Enter the Affordable Housing Space

Taking the cue from the success of build-to-rent (BTR) single-family homes in the market rate space, some affordable housing developers are building the product for low-income families looking to live in single-family homes.

“We are building better quality, affordable housing for lower costs…,” explains Ben Taylor, vice president and project partner, development of Lincoln Avenue Communities, which is building a build-to-rent housing project in the Phoenix metro in Arizona. “The product is superior. You walk in and say – ‘I could live here for a long time.’ It does not feel like an apartment…This gives families who may not want to live in an apartment, the opportunity to live in a home.”

Ron Mehl, senior vice president and project partner at Dominium, believes BTR affordable housing will “become a standard affordable housing option in the future.” Dominium has a BTR project in Maricopa County, AZ.

“These have been happening for many, many years in the market rate space,” says Mehl. “There are a lot of people who aren’t ready to buy who want the amenities of a single-family home. Your own front door, a fenced-in yard, doggie doors…but no one has looked at it much before to extend into affordable housing. But now I see others in affordable housing jump into this space.”

A Unique Affordable Housing Option
Dominium’s project in Maricopa County will offer 215 homes, 25 two-bedrooms, 95 three-bedrooms and 95 four-bedrooms.

“We knew they would draw families, so we decided to go with large units and no one-bedrooms,” explains Mehl.

Mehl says the project is comprised of primarily duplexes and row houses side-by-side. The development will target people making 60 percent of the area median income (AMI). Based on current rent limits, without the utility allowance, the units will rent for $1,430 for a two-bedroom, $1,654 for a three-bedroom and $1,837 for a four-bedroom.

“We closed on the property in December,” says Mehl. “We have two years before it is completed, and residents can move in.”

“Many of our residents in our apartments are single-parent households,” Mehl adds. “I think this provides a housing option for them that has not been out there at an affordable rent.”

He says that the project offers outdoor recreation spaces for kids of all ages, such as concrete ping pong tables and concrete corn-hole.

Lincoln Avenue’s first BTR, single-family project is called The Ranches at Gunsmoke, which is eight months into construction in Pinal County. The 25-acre project will offer 271 units at build-out and will include amenities, such as a clubhouse and pool. A solar project on the site is expected to pay for 60 to 70 percent of the energy consumption of the project.

Of the 271 units, 137 will be two-bedroom houses with rents of $1,389 per month and 134 units will be three-bedrooms with rents of $1,604, including all utilities. The development will target those making 60 percent AMI. Taylor expects Lincoln Avenue to start leasing for the project in late 2025.

“You share a wall, but you don’t have anyone above you or below you, and you have your own backyard,” he says.

Taylor expects families that move into the development will stay there longer than they would in an apartment complex.

“We expect our retention to be substantially longer,” he says. “It feels more like a single-family home than an apartment…”

Project Challenges
Taylor says it may take more time to explain to city officials the intricacies of BTR projects.

“The one thing you run into is cities don’t quite know how to approach this and wonder if it is apartments or single-family homes,” he says.

Taylor says the density of the project is about half of what the company usually needs with the typical walk-up, three-story affordable projects. The BTR project has about ten to 12 units per acre, as opposed to 22 units per acre on a traditional apartment-style project.

“You are less dense with less height,” he says.

Mehl says Dominium can also “go chase” more parcels of property because it can look for land zoned for 11 units per acre.

Mehl adds that the financing for their project is the “typical financing as you would see in an affordable housing apartment building.”

“We went to the Arizona Housing Authority and requested private activity awards to finance it and received an award,” says Mehl, adding that the project also was awarded Low Income Housing Tax Credits.

Investors typically require affordable housing projects to use guaranteed maximum price contracts (GMP) and payment and performance bonds (P&P bonds), which offer a sense of assurance that the work will be done on time without cost overruns. Taylor says it has been tough to find competitive contractors who will do P&P bonds and GMP contracts, who also build BTR. The majority of BTR is currently built by single-family general contractors, which differ greatly from the commercial general contractors who typically build affordable developments. The efficiencies in the single-family construction market are what drive the lower costs for affordable BTR.  

“Every investor wants you to have the payment and performance bonds,” explains Taylor. “We had a cost-plus contract and did not provide P&P bonds, but we found an investor willing to partner with us on this new product type.”

Taylor adds that investors also struggled with the “odd intricacy” of the project in Arizona that “we don’t actually get our building permits until eight to ten months after we close.” WNC is the investor of The Ranches at Gunsmoke.

Taylor says they have found a few other general contractors for subsequent projects who could do P&P bonds and do a stipulated sum or GMP contract.

“We need to open it up to more investors,” Taylor says. “That’s our limiting factor on expanding BTR.”

Mehl says the project’s cost is about the same or even a little less per unit than typical affordable housing apartment projects.

“We think it is going to be as profitable for cash flow as our apartment building projects…,” says Mehl. “The operating costs for units are about the same as senior developments and the three-story walk-ups. We may have more landscaping costs on a BTR because it’s more spread out.”

More Build-to-Rent Projects
Taylor says Lincoln Avenue is looking to develop BTR projects in other states. The company has a project in the pipeline in Colombus, OH that should start construction this year and is also looking to build in the Texas and Washington, DC area.

Mehl says Dominium is seeing more proposals for the projects that go through the company’s investment committee for consideration.

“There are four or five of them that have been approved,” Mehl says, citing Texas as one of the states where a project might be pursued.

Taylor says Lincoln Avenue also would like to spread BTR projects to other states.

“We would love to export this and bring it to Nevada, Colorado, etc. – any state that is willing to work with us on it…,” Taylor says. “I think anywhere single-family homes are being built you can build BTR as an affordable option. And I think we should because it is a superior product by far.”