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Build-To-Rent Real Estate Investing: Pros, Cons and How To Invest

Build to rent real estate investing

Rich Fettke

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Franklin D. Roosevelt once said: “Real estate cannot be lost or stolen, nor can it be taken away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” In an evolving property landscape, one investment strategy that affirms this adage is the emerging trend of Build-to-Rent (BTR) real estate.

Real estate investors are always looking for ways to maximize returns while mitigating risks. Build-to-Rent investing provides an opportunity to do precisely that, as it promises stable cash flow and low vacancy rates. It offers a relatively low-risk investment, enabling investors to sidestep common concerns such as high tenant turnover, which characterize other types of real estate investments.

Build-to-Rent gained traction in the UK in the early 2010s, before making its way across the pond to the US. This was largely in response to the increasing demand for high-quality rental accommodation, amidst a backdrop of growing shortage in the affordable housing sector. The built-to-rent model soon became an avenue for developers to create purpose-built rental properties, which offered tenants flexibility and convenience, while generating stable long-term returns for investors.

Today, BTR real estate has expanded beyond simply providing affordable living. Modern build to rent investments blur the line between home and leisure space, integrating services such as gyms, restaurants, and communal spaces to cultivate a sense of community and elevate resident satisfaction.

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In the following sections, we will delve deeper into build to rent. Learn what is build-to-rent, the pros and cons of this strategy and learn the process of how to get started with build-to-rent real estate investing.

What is Build-to-Rent Real Estate?

The concept of Build-to-Rent (BTR) or Built-for-Rent (BFR) real estate can be likened to a twist on the traditional apartment rental. However, instead of living in vertical apartment buildings, tenants reside in standalone homes with larger living spaces, private yards, and still enjoy amenities typically associated with apartment living.

The charm of BTR real estate lies in the myriad benefits it offers. Renters of BTR properties get the best of both worlds — the independence and space of single-family homes, coupled with the convenience, amenities, and support staff associated with apartment rentals. These properties are professionally managed, often with community amenities and an on-site leasing office, ensuring a high standard of maintenance and tenant satisfaction.

In recent years, BTR has demonstrated exciting growth prospects, with property values and rents increasingly outpacing traditional multifamily properties. According to Fixr.com, using data from the NAHB, the BTR market has been growing rapidly, with over 119,000 BTR homes constructed in 2022 alone.

Build to rent home starts

Image Source: Fixr

One crucial factor boosting the attractiveness of build to rent investments is today’s evolving lifestyle choices. Increasingly, families and remote workers seek larger living spaces and greener environments. This makes suburban BTR schemes an attractive option that blends the vibrancy of city life with the serenity of suburban living.

So, how does BTR real estate work? Unlike the traditional merchant build-to-sell model, where individual homes in a single-family community are sold off separately, in a BTR model, a community of homes is developed with the specific intention of appealing to renters. Owned by investors, these properties provide tenants with not just a residence but a lifestyle, akin to a traditional multifamily setup but in a more sprawling, standalone format. Think of it as creating a community with a single-family feel but operated like a multifamily asset.

Therefore, the defining aspect of BTR real estate is its emphasis on creating communities that not only offer comfortable and modern housing options in a market with a significant demand-supply gap but also contribute a unique, community-focused lifestyle that is reshaping the landscape of rental living. Later on in this article, we’ll look at how to invest in BTR properties.

What are Build-to-Rent Communities?

Build-to-Rent communities share a resemblance with traditional single-family neighborhoods or homeowners’ associations but boast an innovative twist. What sets a BTR community apart is its forward-looking design, recognizing that the community will function as a cohesive rental space rather than as a neighborhood of individually-owned homes. These communities are typically owned as a single property and designed so that the entire community stays together legally, even if it is sold later down the line.

When evaluating the pros and cons of build to rent real estate investing, it’s crucial to consider the unique offerings and benefits of BTR communities. These communities not only provide a high-quality living experience for tenants but also offer an exciting investment opportunity within the build to rent real estate sector.

These high-quality, detached single-family residences include an array of shared amenities, such as gyms, swimming pools, and recreational spaces. These communities cater to specific demographics and hold strong appeal for families with young children, forming 44% of the BTR market according to Fixr.com. BTR communities range in size, with a standard community comprising 120-130 homes, though some can accommodate up to 300 homes across 10 to 30-acre parcels.

They may be further sub-categorized into:

  1. Horizontal multifamily properties that share similarities with traditional multifamily housing in terms of unit sizes, types, and amenities, but with units located side-by-side rather than stacked.
  2. BFR Single-family attached properties that offer larger unit sizes, attached garages, and varying layouts, densities, and orientations.
  3. BFR Single-family detached, typically offering the largest homes within BTR communities, frequently containing three or more bedrooms.

What makes Build–to-Rent communities unique is their unified design and construction process, bringing together all elements in a more streamlined and efficient manner than in traditional single-family subdivisions.

Since these homes are put together all at once and in bulk, they can be constructed faster than individual homes, with limited disruptions due to buyer preferences or concerns. This ultimately results in cohesive communities built to cater specifically to tenant needs and preferences, prioritizing on-site management and maintenance to ensure tenants enjoy a high-quality rental experience.

Pros of Build-to-Rent Real Estate Investing

It’s pertinent to understand build to rent pros and cons if you’re considering a build-to-rent investment strategy. BTR’s allure extends beyond tenants seeking a lucrative living arrangement to include savvy investors eyeing promising returns. Let’s delve into the myriad benefits this dynamic investment avenue offers, from stable yields to portfolio diversification, and why it’s catching the attention of discerning investors worldwide.

1. Rising demand for Single Family Rentals (SFRs)

One notable reason why Build-to-Rent (BTR) real estate investing is an attractive prospect is the skyrocketing demand for Single Family Rentals (SFR). This rising demand captures an evolving paradigm in the housing market – a burgeoning preference for larger rental spaces among many demographics seeking convenient, flexible, and low-maintenance lifestyles.

According to a report by RCLCO, a leading real estate consulting firm, the US will need an additional 2.5 million SFR units over the next decade to meet the growing demand. Such predictions are underpinned by shifting societal patterns, such as the rise of debt-ridden millennials entering their prime housing years looking to accommodate their families.

With the prohibitive costs of buying homes, many of these individuals turn to renting units that provide the convenience and space of a home within their financial means. Not to be left out are renters-by-choice – individuals who prefer rentals due to various lifestyle leanings, further intensifying the demand for SFRs. Build-to-rent developers are responding to these changing dynamics, contributing to a favorable investment landscape.

Despite price corrections in the housing market, demand for SFR/BTR continues to surge. A testament to this growing interest is the contrasting rent and sale price figures seen in recent times. While the price of for-sale homes witnessed a decline of 0.77% between June and July, the nationwide average monthly asking rents for SFRs escalated by a staggering 11.2% to a record-high of $2,092 in July, as reported by Yardi. Concurrently, vacancy rates dipped to 5.1% in Q2 2022 — its lowest level in over two decades, according to U.S. Census Bureau data.

By building new, high-quality rental homes in desirable locations and offering amenities that cater to the needs of modern renters, BTR investors can capitalize on this growing demand and generate strong returns in the coming years.

2. Lower tenant turnover

Designed specifically to attract long-term renters seeking stability and continuity, BTR properties attract tenants who are committed to investing in their homes, and this often translates to better property care and lower maintenance costs.

BTR properties are frequently let on extended leases, often spanning five years or more. This allows investors to enjoy the peace of mind of knowing that their property will remain occupied for the foreseeable future, which in turn translates to a more stable and predictable income stream.

3. Higher rental yields

Among the many significant benefits of investing in Build-to-Rent (BTR) real estate properties is the potential for higher rental yields. Given their modern designs, quality finishes, and appealing amenities, these new properties can command higher rental rates than their older counterparts.

These purpose-built rental communities, designed to cater to today’s increasingly demanding renters, resonate with modern tastes and preferences. The attractive design features and amenities often render BTR properties capable of securing premium rental values, thereby offering investors more attractive rental yields compared to traditional rental homes or properties.

Adding to the yield benefits, BTR properties also present long-term potential for appreciation in value. Strong tenant demand coupled with limited supply implies that BTR properties can witness value growth over time.

Historically, single-family rental yields have been observed to rise fastest in secondary metro areas. This trend has fueled demand for BFR land in places such as Augusta, Savannah, San Antonio, St. Paul and smaller cities in Florida like St. Cloud, Pensacola and Port Charlotte.

4. Lower maintenance demands

The use of new materials and appliances in BTR properties not only imparts a freshness that appeals to renters, but their newness also lengthens their functional lifespan. Further, many of these modern features and systems would be under warranty, which significantly reduces the potential costs an investor might incur for repairs or replacements in the initial years.

Furthermore, build-to-rent developments allow investors to control all aspects of the buildings, enabling them to standardize and streamline maintenance processes. This includes selecting materials and appliances that are easy to maintain and repair, as well as establishing preventive maintenance programs to minimize the likelihood of breakdowns.

There are also instances where most maintenance expenses could be covered within the agreement. The investor benefits significantly from such arrangements, as their expenditure related to upkeep and maintenance are kept at a minimum.

5. Professional property management is available

BTR developments, given their scale and the significant investment involved, often attract and employ seasoned property management professionals or agencies. These specialists bring with them rich experience in managing large-scale development projects. Their understanding of the local market, legal stipulations, and tenant preferences can be crucial to optimizing the value of a BTR investment.

The presence of professional management not only takes the burden of daily operations off the shoulders of investors but also ensures that all aspects of the community are handled with the required finesse and attention to detail. Such management inevitably contributes to the successful running of the properties, enhancing the living experience for tenants, and improving tenant retention rates.

6. Value-add benefits

From the very initiation of the project, investors have the potential to infuse instant value and force immediate appreciation by meticulously tailoring designs to align with local market preferences and expectations of modern renters.

In the BTR landscape, every defining detail of the project — from the choice of architectural design to the selection of furnishings, amenities, and energy-efficient fixtures — can be made to cater to the higher standards favored by today’s discerning renters. Consequently, this can fetch premium rental rates, enhancing the property’s overall financial returns.

Cons of Build-to-Rent Real Estate Investing

While build-to-rent (BTR) real estate investing has been gaining traction as an attractive option for many, particularly among the young generations, it’s important to consider the potential downsides of this investment strategy.

1. High upfront costs and development risks

BTR investments can require substantial capital outlay. The journey from acquiring the land to eventually marketing to renters entails a series of costs including, but not limited to, land procurement, securing necessary permits, lot grading, laying foundation and infrastructure, and construction.

Historically, these factors have necessitated investors seeking alternatives to alleviate the financial burden. One of the more popular models that have emerged in response to these steep upfront costs includes crowdfunding or syndication investment models. These models allow investors to pool their resources, enabling them to venture into deals that would otherwise be beyond their individual financial capacities. Furthermore, such deals come with the added advantage of being professionally managed by a real estate sponsor who typically brings the prowess of an established developer to individual investors.

BTR projects often come with their share of development risks, particularly those in the early stages. This is all the more prominent in the case of off-plan investments, where investors place their stakes on properties yet to be built. This factor of uncertainty amplifies the risk quotient of BTR investments. Investors have to contend with variables such as project delays, building code revisions, potential cost overruns, and the market risk of property demand upon completion.

2. Competition with institutional investors

As more developers provide more properties in the BTR market, competition is likely to increase. This competition could lead to better quality properties, improved rental conditions, and more responsive management. However, it could also result in institutional investors leveraging their resources and scale to outcompete individual investors.

Institutional investors, such as real estate investment trusts (REITs) and private equity firms, have significant resources and scale that they can use to their advantage. They can invest in large-scale developments, offer premium amenities, and provide more competitive rental conditions. This could make it challenging for individual investors to compete, especially in terms of pricing and service quality.

3. Delayed returns

One significant downside to BTR investing is delayed returns on investment. Since BTR projects require considerable upfront capital and time, investors often face a long waiting period before they can start enjoying the benefits of rental income.

During this waiting period, investors may encounter several risks, such as unexpected construction delays, permitting issues, and market fluctuations, which can negatively affect the project’s overall profitability. Furthermore, in the initial phase, a significant portion of the rental income is utilized for covering loan repayments and other ongoing expenses, limiting the net positive returns for investors.

4. Regulatory and legal challenges

As the BTR sector is a novel development in the property market within the United States, the legal frameworks concerning construction and tenancies in various states and territories are still catching up.

But with the growth in this sector, there may be less favorable regulations in some markets. In some Atlanta suburbs, local councils have recently begun to implement regulations specific to BTR developments. Since early 2014, the city of Alpharetta has largely restricted its residential zones to “For-Sale” developments. Clayton County has taken a more restrictive approach, banning BTR properties outright. In contrast, Holly Springs requires any planned BTR district to apply for discretionary approval.

These regulatory changes require investors to continuously monitor the legislative landscape and be prepared for potential adjustments to their projections. They underscore the need for comprehensive due diligence and risk assessment in the investment planning stages.

5. Limited historical performance data

The BTR concept initially catered primarily to older citizens, creating small single-family properties with convenient features, such as single-floor living and accessible maintenance services. However, the market has since shifted, targeting younger households seeking more space but unwilling or unable to buy homes. This evolving target demographic adds to the challenge of accurately predicting the market’s performance in the future.

The lack of historical data leaves investors with limited insights into the long-term return on investment, potential risks, and the overall stability of the BTR market. As a result, investors might face additional challenges when trying to secure financing for their BTR projects or when convincing stakeholders of the investment’s value.

How to Invest in Build-to-Rent (BTR) Real Estate

Let’s explore the different options available for investing in BTR real estate:

1. Invest as an LP in a BTR real estate syndication

A real estate syndication for BTR properties establishes a platform where potential, often time-restricted, investors converge to collectively finance a BTR project under the guidance of an experienced syndicator or sponsor. The process begins with the sponsor establishing a Limited Partnership (LP) or a Limited Liability Company (LLC).

In these arrangements, the sponsor sells units or membership interests to the investors, incorporating them into the syndicate as passive investors or Limited Partners. Despite not having a direct hand in the daily operations or active deal-making, these LP investors partake in the potential returns of the BTR project.

As LPs, the investors’ risk gets considerably hedged. Firstly, they are investing with an experienced sponsorship team, typically with a proven history of successful real estate ventures. Through their expertise, the sponsor can identify profitable investments, navigate legal and regulatory challenges, and manage the property effectively to deliver the projected returns.

Secondly, the risk to their invested capital is spread out amongst the entire pool of syndicate members, softening any potential financial blows. Additionally, the operational and management burdens of the real estate asset fall squarely on the shoulders of the sponsor. This relieves the LPs from day-to-day decision-making and problem-solving.

One of the most enticing aspects of this investing approach lies in its access. Through syndication, passive investors gain access to larger, more profitable BTR properties that otherwise would be beyond their individual financial capabilities or institutional-grade assets that are ordinarily the preserve of large institutional investors.

2. Buy Build to rent units from a vetted BTR developer

Another viable avenue for investing in the Build-to-Rent (BTR) market is through the purchase of BTR units from a reputable and carefully vetted developer. Real estate developers have various approaches to managing their investments, from land development and sale to long-term property management. Among these, a common approach with BTR projects is pre-selling properties to assist in financing the development.

When you invest by purchasing BTR units from a credible developer, you can choose between pre-sold properties or those that the developer has retained for building their own portfolio and selling only after construction. In either case, buying from a vetted BTR developer ensures that you are acquiring a well-designed and aptly built property suitable for the rental market.

Build-to-rent developers resort to pre-selling to secure construction debt, typically pre-selling between 30% and 50% of a development. This initial presale stage offers a more affordable entry point into the BTR market, as these early sales usually come at a lower price point than post-construction sales. Following the pre-sale phase, the developer aims to maintain an average sales rate that runs parallel to the construction schedule, allowing for continuous sales until the development’s completion.

As an investor, it is essential to not only analyze the developer’s track record but also scrutinize the design and quality of the BTR units to ensure that they cater to the intended tenants’ needs. Picking the right unit from an established and proven BTR developer increases the likelihood of attracting and retaining quality tenants, thus ensuring steady cash flow.

3. Invest in a REIT that buys SFRs for BTR investing

REITs afford investors the chance to participate in the ownership of income-generating properties, such as single-family rentals meant for BTR, without having to purchase, manage or finance the properties directly.

Upon investing in a REIT that acquires SFRs for BTR, your capital gets pooled with that of other investors. The REIT’s management team then leverages these funds to acquire, build, and manage SFR properties designed to generate income that is then distributed to the trust’s shareholders in the form of dividends.

Since REITs are listed on the stock exchange, they offer greater access to smaller investors. They allow for easy trade of shares and offer liquidity that direct real estate investment might not provide.

Furthermore, REITs are dependable routes into BTR investment due to their strategic focus. Take, for instance, the partnership between NexPoint Advisors and HomeSource Operations to create a new Nexpoint advised REIT that targets existing SFRs and new construction BTR properties in high-growth markets. This REIT not only spotlights SFRs for BTR but also provides an existing portfolio of over 1,000 homes to its investors, showcasing the potential and level of growth achievable through these platforms.

4. Construction of BTR communities

One of the most direct approaches to investing in the Build-to-Rent (BTR) real estate market is by constructing BTR communities yourself. Ideal for seasoned investors with robust equity and real estate development experience, this method can offer significant rewards, albeit at potentially higher risks and a sizable time investment.

The process of investing in BTR real estate through the construction of BTR communities primarily involves land acquisition, infrastructure development, financing, and operational management.

To begin with, you will need to identify and acquire a suitable piece of land ideal for a residential rental community. This initial stage requires knowledge of property valuation and a keen ability to recognize growth potential in different locations.

Once you have secured a location, the development phase begins where you construct properties optimized for rental purposes. These could encompass various property types, such as single-family homes, multi-family units, or a mixture of both, depending on market demand. It’s important to design scalable and standardized floor plans, enabling volume purchasing and savings on construction materials and products.

Such a strategy guarantees cost efficiency and streamlines the building process, leading to faster project completion. Furthermore, this approach establishes steady business relationships with local construction tradesmen, ensuring an uninterrupted labor supply amid the cyclical nature of new for-sale markets.

However, one of the most substantial challenges in developing a BTR community is gaining approval for development finances. Banks and financial institutions are generally cautious when funding speculative developments without guaranteed tenants or pre-leased spaces. To secure lenders’ approval, investors require firm equity, a robust balance sheet, and a proven track record of successful property development projects.

In the current financial climate, which sees banking sector pressures and inadequate loan pay-offs, lenders are even more selective when approving development loans. Therefore, constructing BTR communities is typically a strategy reserved for experienced real estate developers with significant capital.

Is BTR a Good Investment?

Yes, Build-to-Rent (BTR) investments are an excellent option for investors for several reasons:

  1. Rising Demand and Rents: BTR properties now constitute 6% of all newly constructed homes, doubling from 3% pre-COVID. This surge in demand has propelled average rental costs to an unparalleled $2,020 per month, a notable rise compared to traditional rental apartments’ average of $1,736.
  2. Consistent Rent Hikes and High Occupancy Rates: According to the Berkadia report, since 2016, BTR properties have experienced a consistent average rent increase of 4.2%. In the second quarter of 2022 alone, this figure shot up by 9.5% for new leases and renewals. National average occupancy rates exceed 96%, adding to their appeal.
  3. Future-Proof due to Changing Socioeconomic Factors: It is expected that the prevailing US housing shortage, with a deficit of 2 to 5 million homes, will drive future demand. This, coupled with a growing cultural shift towards renting over property buying, could make BTR properties an even more attractive investment in the years to come.
  4. Adaptability to Emerging Work Trends: The increasing demand for more living space as the hybrid workplace model gains traction further amplifies the desirability of BTR properties.

Investing in BTR properties thus presents an opportunity backed by robust market performances and future-proofed by compelling demographic, socioeconomic, and workplace trends.

BTR Cap Rate Estimates for 2023

As per CrowdStreet, BTR asset cap rates typically fall between 4.75% and 5.5%, indicating a favorable comparison with traditional multifamily assets.

Significant BTR construction activity is evident in certain metro areas, including Phoenix, Dallas, Houston, Atlanta, and some cities in Florida and Texas. This suggests a flourishing market. With the underwriting and approval of the asset type by agency lenders like Freddie Mac and Fannie Mae, investors can expect more consistency on debt terms, allowing them to model long-term hold periods.

Conclusion

In conclusion, build-to-rent (BTR) real estate investing is a promising opportunity for investors looking for stable returns and long-term growth. With the increasing demand for affordable housing and the slowdown in development due to interest rates, BTR projects are becoming more attractive to both developers and investors. To learn more about BTR real estate investing and how to invest in BTR projects, visit RealWealth’s partner Grow Developments to learn more about build to rent and other group investment opportunities.

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