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Investors Are Rushing Into Build-to-Rent. How SB-9 Fits In?

Investors are pouring money into build-to-rent homes like never before. Rising home prices, high mortgage rates, and changing housing preferences have created the perfect storm for this trend. In 2023, almost 30,000 build-to-rent homes were completed nationwide, nearly triple the number built just a couple of years earlier. California’s Senate Bill 9 (SB-9) presents a golden opportunity for investors to tap into this growing demand in the state’s single-family neighborhoods.

Why Build-to-Rent Homes Are Booming

Starter homes are scarce, and for many people, homeownership feels out of reach. High prices and rising interest rates have forced prospective buyers to explore alternatives, and many have landed on single-family rentals. Young renters and remote workers, in particular, want rental homes with modern amenities, good schools, and backyard space without the burden of a mortgage or a big down payment.

Institutional investors have taken note, fueling the rise of build-to-rent communities. These developments feature clusters of professionally managed single-family rental homes, often with shared amenities like outdoor spaces, fitness centers, and coworking areas. They appeal to tenants looking for a brand-new home with lower upfront costs and flexible lease terms.

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How SB-9 Creates a New Path for Build-to-Rent Investments

California’s SB-9 makes it easier to split single-family lots and develop two-unit housing, offering a fresh opportunity for investors. While the bill’s primary goal is to address the state’s housing crisis, it also paves the way for small-scale build-to-rent projects. By turning single-family lots into duplexes or two separate homes, investors can add much-needed rental inventory in high-demand neighborhoods without jumping through lengthy zoning and environmental approval processes.

Under SB-9, each newly created lot can hold up to two units, and each unit can be up to 800 square feet. This setup allows investors to build rental properties in desirable locations that were previously limited to single-family homes.

Why Investors Are Looking at SB-9

Faster Development

SB-9 eliminates traditional zoning and approval roadblocks, making it easier to develop rental properties.

Prime Locations

Investors can build rental units in sought-after neighborhoods where large-scale developments aren’t feasible.

High Demand

With more families and professionals seeking single-family rentals, SB-9 properties will likely attract long-term tenants.

Scalability

Investors can multiply rental income by strategically subdividing lots and maximizing the number of allowable units.

How to Invest in SB-9 Build-to-Rent Properties

The demand for single-family rentals isn’t slowing down, and SB-9 offers a unique way to enter the market. Here are some strategies investors can use:

Build a single-family rental: Purchase a single-family lot and develop rental units under SB-9 guidelines. This allows you to create rental housing in areas with tight inventory while meeting legal requirements.
Partner with homeowners: Many homeowners want to split their lots but lack the resources to do so. By funding the project, you can create a win-win situation, helping them develop new units while securing rental income.
Develop multiple two-unit properties: SB-9 may not allow large rental communities, but investors can build several two-unit properties across different lots to scale their rental portfolios.
Invest in SB-9-focused real estate funds: Large institutional funds may struggle with SB-9’s owner-occupancy rules, but smaller funds targeting infill development or single-family conversions could be a great fit.

What Investors Need to Watch Out For

SB-9 offers exciting potential, but there are important regulations to keep in mind. Each new lot must be at least 1,200 square feet, and setbacks and parking requirements still apply. Additionally, at least one of the units must be owner-occupied for three years, which may deter larger investors but presents an advantage for smaller landlords and real estate entrepreneurs.

What’s Next for Build-to-Rent Under SB-9?

The build-to-rent market is evolving, and SB-9 offers a way to add rental housing in high-demand areas without relying on big master-planned developments. Instead of large investor-backed communities, California is opening the door to smaller, flexible rental projects embedded within existing neighborhoods.

While big institutional investors may find SB-9’s owner-occupancy rule restrictive, smaller investors and developers can take full advantage of the law. By strategically subdividing lots and developing small-scale rentals, investors can generate strong rental income while contributing to California’s housing solutions. The demand for single-family rentals isn’t going anywhere, and SB-9 creates a pathway to meet that need while unlocking new investment potential.