We’ve invested roughly $1.5 million in the acquisition of the first phase of Kingsland Heights, a 96-unit single-family rental home community in Brookshire, Texas, about 35 minutes west of downtown Houston.

At a strategic level, this investment fits within our affordably-priced Sunbelt apartment / rental housing thesis. From millennials to retirees, a broad group of Americans has been taking part in a migration from northern to southern states over the past decade, driving continued demand for well-priced, well-located real estate, and supporting steady returns for disciplined investors.

As we reiterated in our second quarter flagship portfolio update, we believe that this long-term trend has only been further accelerated by the pandemic. In an economy where remote work is becoming the norm for more and more people, we expect that an increasing share of the population won’t need to live in expensive gateway cities and will instead seek out locations that offer lower living costs and more agreeable climates.

This initial investment in the project was made by a joint venture between two Fundrise sponsored funds, the Fundrise Interval Fund, which invested roughly $916,000 and the Development eREIT, which invested roughly $611,000.

Strategy

This investment follows a Fixed Income strategy: We’ve provided financing for the acquisition of brand new homes, in exchange for earning a fixed rate of return of roughly 9% annually. However, as part of this investment, we’ve also entered into an agreement with the project’s sponsor that allows us to purchase the community once construction is complete and the homes are leased up.

The combined effect of these agreements is that we are able to earn an attractive income yield on our initial investment that functions similar to a deposit, and we secure a new pipeline of homes to add to our single-family rental portfolio, which we intend to act as a long-term, growth-focused investment.

Business plan

The goal of this investment is to produce an attractive income stream through financing the acquisition of new housing in a growing area. While the property itself is very similar to our other single-family rental home communities that you may be familiar with if you’ve been investing with us for a while, the primary difference with this investment is that we are providing financing to the project’s sponsor for the acquisition of the homes, rather than buying the homes ourselves.

Our investment at Kingsland Heights is structured as preferred equity, which functions like debt, where we are entitled to a cumulative return equivalent to roughly 9% over the term of the investment. Our initial contribution of roughly $1.5 million helped fund the acquisition of 22 finished homes within the community, which is still under construction. The project’s sponsor, Banyan Single Family Residential, intends to acquire and lease up additional batches of homes as they deliver from the homebuilder, eventually taking ownership of 96 brand new single-family homes within the community.

As part of this investment, we’ve entered into an agreement with the project’s sponsor that allows us to purchase the community once it is at least 94% occupied at an agreed upon price relative to annual earnings (this is known as the cap rate in real estate investing terms). By locking in this cap rate now, we believe we will be able to purchase the stabilized community at a discount to market, as demand for single-family rental homes continues to grow.

We’ve committed to invest a total of roughly $6.3 million into the project, which will draw down over time as the project’s sponsor acquires new batches of homes.

Why we invested

  • Fast-growing area: The property is located within the Houston metropolitan area, just 35 miles west of downtown. Between 2010 and 2019, the Houston area’s population grew 19% to approximately 7 million residents, making it the fifth largest MSA in the country, according to the U.S. Census.

  • Social distancing-friendly: We believe the privacy provided by the community’s fully detached and individual homes will be particularly attractive to renters seeking an additional level of social distancing, or who simply need more living space as norms around work and school shift. As the property secures more tenants and generates rental income, the risk in our position decreases.

  • Institutional-quality asset: This deal is structured so as to allow us the option to purchase the entire community once it’s at least 94% occupied. Should we choose to exercise that option, we will have added a stabilized, institutional-quality asset of 96 ready-to-rent homes to our portfolio, consisting entirely of brand-new construction.

As always, if you have any questions or feedback, please visit our help center or reach out to us at investments@fundrise.com.