You’ve probably heard that the best way to win at investing is to shoot for sustainable long-term returns that compound over time. One way investors are creating these sustainable returns is by investing in build-to-rent homes and communities (also called BTR homes and communities).
The BTR product has seen explosive growth since Covid-19 hit, though it was already growing before that. This growth is propelled by a decline in homeownership, overall affordability, and the number of exit strategies for investors.
Before the pandemic struck, BTR was undeniably the property market’s fastest-growing trend. Builders and developers had already started building out entire neighborhoods and communities with BTR units; now they’re doing it even faster than ever before because of the demand for property, high rental yields (i.e., more money from tenants), and strong capital appreciation potential (i.e., higher resale value).
With commercial, office, retail and industrial all set to suffer as a result of Covid-19, single family build-to-rent communities are becoming more popular among developers, pension funds, and private equity funds.
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What is a Build-To-Rent Home?
Build-to-rent homes are similar to standard apartments and multi-family structures, but there are a few key differences. Build-to-rent homes are specifically intended to be an ideal option for people searching for a long-term rental residence.
They also often have more amenities than traditional apartments or multi-family buildings, such as access to swimming pools, gyms, and other community spaces that can make living there feel more like home.
Many people today, particularly Millennials, are opting to rent instead of buying-creating a trend called lifestyle renting where people rent luxury homes instead of owning them. This means that they want something more than just a place to live: they want an experience that feels like home. And build-to-rent properties are especially attractive because they represent everything a homebuyer would be getting without the monumental cost of buying real estate outright or having to put down a down payment on their own home purchase (which can be quite expensive).
The allure for real estate developers and builders is that by selling these properties to investors who will typically purchase multiple properties, they can shift housing stock faster.
What is a Build-To-Rent Community?
Build-to-rent communities are the new kid on the block. They’re not your average neighborhood, and they definitely aren’t your average apartment complex. They’re built for long-term tenants who desire the simplicity of renting, but also want to live in a beautiful place.
Build-to-rent communities offer a balance of versatility and luxury. They aim to be flexible enough to meet varying residents’ needs. They also offer an attractive alternative to traditional rental options by offering amenities like professionally managed groundskeeping and maintenance services.
Are Build to Rent Communities the solution to the current housing shortage?
Build-to-rent communities are one of the solutions to the current housing shortage, and for good reason. Build-to-rent has been identified by housing experts as a missing piece of the puzzle that hasn’t been worked in for decades—which means we’ve got some catching up to do.
“They are that missing middle ground between apartments and single-family houses,” according to Brad Hunter, the owner of Hunter Housing Economics, in an interview with ABC Action News.
Build-to-rent has become a hot topic right now because renter demand is shifting towards single family homes.
“There’s a big evasion of tenants from apartment buildings after Covid and one of the reasons for this is nobody likes to actually get in the elevator together with their neighbor or the guy across the hall. Nobody wants to touch that elevator button; nobody wants to go to the same gym with, you know, hundreds of people”, says Wagner Nolasco, founder of B2RDirect.
Another reason why build-to-rent is needed at this time is that due to Covid, building homes takes longer than it previously did. Supply chains across the U.S. shutting down halted the production of homes and with that, the demand for housing began to increase.
The example to the right from a FreddieMac research note shows that in 2020 the U.S. had a housing supply deficit of 3.8 million units.
The same research explains how the primary reasons for the shortage of housing are the long-term decline in SFR construction and a decrease in the supply of “Starter homes”. Since the 1980’s the construction of entry-level homes has continued to decrease as shown in the image below.
But why should this matter to you? It matters because this decline over the past 50 years has made it difficult for new home buyers to find a home. This gap in starter homes is where the build-to-rent product fills the demand.
“So we have a different concept where everybody can live in their own single-family home residence or townhome in one complex and have the same amenities as a stand-alone building. So we have swimming pools, gourmet barbecue areas, walk-in trails for kids, play areas; picket ball courts, tennis courts. We brought all the amenities that are so desirable in an apartment building into a single family home community”, Wagner says.
Benefits of Investing in Build-To-Rent Homes
The United States has an affordable housing crisis on its hands, and it’s affecting everyone from first-time homebuyers to renters.
But what if there was a solution? One that could help solve the problems of our current rental market while also helping to meet the needs of those who want to buy?
Well, there is! Build-to-rent (BTR) communities are an innovative new approach to building and managing rental properties that have the potential to make a huge impact on the future of housing in America.
According to an article published in REALTOR® Magazine, BTR development is experiencing a considerable increase both in number and popularity. However, while this may be positive news for developers and investors alike, only about 5% of properties are estimated to fall within this category—meaning that there has never been a better time for investors who want to stake their claim in this market niche!
1. Low barrier to entry
Build-to-rent is a smart option for those who want to invest in real estate but don’t have the time or expertise to manage a multifamily building. The ability to partner with a BTR developer simplifies the investment experience considerably and allows for easy passive income.
On the developer side, cities prefer the idea of detached homes over multifamily buildings because they are less likely to be perceived as “slums.” Also, there are usually opportunities to acquire properties that do not quite meet the needs of other developers but will work quite well for the build-to-rent model.
2. Long term tenants equal long term cash flow
With the increase in the number of people who are renting, especially millennials, there is also an increasing demand for more residential properties. This has made build-to-rent homes a very attractive investment option for many investors.
Build-to-rent homes are typically larger than traditional apartment units and often have three or four bedrooms, which are suitable for families. They also feature more amenities than regular apartments, making them more attractive to renters who want to live in a community that feels like home.
The biggest advantage of investing in Build-to-Rent homes is their steady cash flow. Because these communities attract tenants with longer leases, they ensure that you will receive regular income from these properties over time.
3. Possibility of charging higher rents
Build-to-rent homes are newer, more luxurious and offer better amenities than their “for sale” counterparts.
They attract higher-quality renters who are looking for a nice place to live in a safe neighborhood.
Build-to-rent projects usually have lower vacancy rates than other residential properties. Therefore, investors can charge higher rents because they know renters love newly built homes in high quality neighborhoods.
4. Lower Vacancy Rate than Multifamily Rentals
One of the big benefits of investing in build-to-rent homes is that they fill up faster than multifamily rentals and tend to have lower vacancy rates because people want to sign longer tenancies (up to 10 years).
5. Could double as a Short Term rental w/ higher cash flow
Short term rentals are a great way to make money off of your home, and build-to-rent homes make it easy for tenants who want to do this.
The Airbnb Resident Hosting program allows landlords and property managers to offer Airbnb as an amenity for their residents and enable people in their communities to host on Airbnb.
You can specify home sharing terms for residents, such as requiring guests to submit a government ID to Airbnb.
6. Apartment Style Amenities but for Single Family Homes
It’s challenging to find an affordable new home in today’s market, and if you do find a home it will most likely be overpriced. Most homes you may find could be 30+ years old and you’d still pay over $300,000. BTR homes are more affordable and are often newly built. This can be a great product for those who can’t afford to buy a home but don’t want to live in a Multi-Family Residence (MFR).
A good example of this demographic would be millennials that just graduated college. Millennials are piled with student debt and buying a home can be expensive. Homes that are built to rent are more affordable for this demographic.
A large majority of people are moving away from the city and looking for a home with a yard and an office space. But, they want to retain some of the pleasant amenities they had before. This is where the build-to-rent product fills this demand. Build to rent checks all of these boxes; it’s affordable, renters get their yard, home office, and still get to enjoy amenities.
This is important for build-to-rent landlords, because it means there will always be a consistent pool of renters.
7. Offers a more flexible exit strategy
Investors who buy apartment buildings are usually rental property investors who don’t care much about the long-term value of the property. They just want to lease it out and make money off their tenants’ rent payments. If they can manage to sell at a profit, great! But that’s not what they’re focused on.
B2R properties are different. They’re designed for renters who want to own their homes over time, not just pay monthly rent checks. That means when you sell your build to rent property, it’s not just going to be another apartment building that goes on the market. It could be sold as a single family home to a home buyer. Or even better: It can be sold as a rent-to-own —where the tenant essentially leases from you for 10 years with an option agreement at the end of that period where they can purchase it at a fixed price!
Cons of Build-to-Rent Homes
There are a lot of great things about build-to-rent homes and build-to-rent communities. But there are also a few drawbacks to consider as an investor:
1. Competition with institutional investors
BTR is a relatively new concept. But it’s already gaining in popularity as more and more investors and developers look to cash in on the growing trend of renting homes instead of owning them.
But as a small build to rent investor or developer, you’ll be competing with publicly traded single family builders, SFR aggregators and boutique firms. Big players like DR Horton and Lennar have entered the BTR game with bigger support from the major banks. There are also partnerships—an example is the joint venture between Toll Brothers and BB Living that controls about 4,000 home sites and has 20 communities in the pipeline in higher priced markets with larger-than-standard SFR homes.
2. It takes time to find willing lenders
Build-to-rent homes are the new kid on the block when it comes to multifamily real estate. And while they don’t have as much history or data to base their risk off of, lenders and developers are still figuring out how to underwrite these projects.
For example, when you’re building a BTR project, it’s difficult to estimate how much rent will go up in the future. And because of this, it can be difficult for lenders and developers to accurately underwrite risk in new build-to-rent projects.
3. Greater maintenance costs and costly HOAs
Effective building management and maintenance are important for protecting the long term value of your BTR project. So, if you want to keep up with the Joneses in terms of attracting tenants, you’re going to have to shell out more on maintenance costs.
The number of building staff, management costs, debt service [i.e. mortgage payments], and luxury shared amenities (such as a pool) will add to your fixed costs. And let’s not forget about HOA fees. If you aren’t careful with your budget, these costs will eat up your profits!
4. They only work in Renters Markets
Build-to-rent housing only works in renters markets, where buying a home is more expensive than renting. This type of market can be a profitable market for investors, but it’s very vital that you consider all of your options before making any investment. If you’re looking to invest in build-to-rent housing, there are two things you must consider: the right type of product and the right market.
If you’re looking at build-to-rent housing as an investment opportunity, make sure you do your research first. Not every build-to-rent project will be successful—and not every build-to-rent project will be profitable. You need to know what type of product works best in which market before investing in anything.
So, Should You Invest in Build-To-Rent Homes?
Build-to-rent homes are an increasingly popular option for investors looking to get into the real estate game in 2022 and beyond. They’re a great way to diversify your portfolio and get a steady income stream, but they can also be a lot of work—and it’s wise to make sure you’re doing your due diligence before taking the plunge.
In 2020, Upwork commissioned a survey of freelancers in the United States. The results showed that over 14 million Americans plan on moving away from large metro areas to suburban areas with lower costs of living. This is because they can now work remotely.
This mass suburban migration as a result of increasing remote work adoption means that BTR single family homes are poised for success.
However, there is a lot to think about when deciding whether or not to invest in BTR. An important factor to consider is the risk involved. If you decide to invest on your own you could have the potential to have a higher return; however, you will carry a higher risk.
The other option would be to invest in a Real Estate Investment Trust (REIT) or private real estate fund. When you invest in a REIT or private fund you get to make money from real estate (including Build to Rent) while personally carrying minimal risk.
For investors looking to purchase a single family build-to-rent home in Central Florida. Check out some of our projects at B2RDirect.
Investors who do not want a physical property but want to invest in a fund that holds these properties/communities should visit ArabellaCapital.com.