Build to Rent (BTR)

What is Build to Rent?

Sometimes referred to as B2R, build to rent is a type of residential new construction, purpose-built to be rented out, rather than sold to homebuyers.

It’s actually not a new concept. Builders and developers have been constructing apartment complexes, apartment buildings and 2 – 4 family homes for generations. But what makes build to rent different is that it centers specifically on building single-family homes as rental units.

Build-to-rent properties bridge the gap between apartments and homeownership for renters who desire and can afford a better living space but cannot afford to purchase a home. And unlike often cramped apartments, build to rent homes are typically attached townhomes or single-family detached houses.

Build-to-rent neighborhoods are constructed by developers who may either retain the properties to generate income, or to be sold off to other investors. And because they are growing in popularity, financing is readily available from various lending sources, or from individual investors investing through a real estate crowdfunding platform.

Why Build-to-Rent Properties are Popular

Build-to-rent properties are becoming increasingly popular due to two primary forces: affordability and demographics.

Affordability

The median price of a home in the United States was $347,500 at the end of the first quarter of 2021. And that’s just a midpoint. In many markets, especially large metropolitan areas, little is available under $500,000. In California alone, the statewide median house price has reached nearly $814,000.

Qualifying for a mortgage to purchase a home is a big enough challenge for many would-be buyers, especially given the recent upsurge in prices. But an even bigger issue may be making the down payment. A 20% down payment on a $500,000 house will require $100,000 upfront.

For many households, especially those headed by someone under 40, coming up with that kind of cash is out of reach.

The twin challenges of qualifying for a mortgage and coming up with a down payment on a high-cost home is relegating an increasing number of households to renter status.

Demographics

Superficially at least, demographics are a separate force driving the move toward build to rent. But it may be more accurate to say that the shift in demographics – from owning to renting – is being driven by affordability.

The high cost of ownership is showing up in the slow but steady decline in the homeownership rate. After reaching an all-time high of 69.2% in the second quarter of 2004, it stood at 65.6% in the first quarter of 2021.

Though the difference of 3.6 percentage points may seem small, it translates into millions of households. These are often younger Americans who have been unable to purchase a home.

Though renting in newly built rental housing isn’t limited to any specific age group, it is much more common among Millennials and Generation X. This should hardly be surprising, given that they are competing for jobs in a highly competitive job market, and are often burdened by large amounts of debt.

The combination of student loans, credit card debt, and one or more car payments often leave little room for saving money for a down payment, let alone qualifying for a mortgage.

41% of households in new build-to-rent homes are under 35, versus 25% of households in new, owner-occupied single-family homes. Just as interesting, the median household income for renters living in newly built single-family rentals is $77,000, compared to just $42,000 among all renter households. This indicates build-to-rent properties are becoming increasingly popular even among higher-income households.

If the price of single-family homes continues to rise, as it has in the past several decades, we may see an entire generation of renters.

Why Investors Like Build to Rent Properties

There are multiple reasons why investor interest in build-to-rent properties is becoming increasingly popular.

A Fast-Growing Market

For all the reasons discussed above, in connection with affordability and demographics, millions of households are becoming at least semi-permanent renters. For financial reasons, they may need to defer homeownership until much later in life than earlier generations did. But it’s also possible some may become permanent renters, preferring the advantages renting provides over ownership.

Lower Cost to Build

A major attraction for build-to-rent developers is the ability to take advantage of economies of scale in the cost of building B2R neighborhoods. By building hundreds of rental units at the same time, the overall cost of construction is low, leading to higher returns on rental income.

While the cost of building build to rent single-family homes is higher than the cost for an equivalent number of apartments, it’s considerably lower than the per-unit cost of building individual build-to-own homes. And as we’ll see in Why Renters Like Build to Rent Properties below, build-to-rent homes appeal to a higher income demographic than apartments, which translates into higher rent income.

Longer Tenant Occupancy

Because of the larger size and more abundant amenities, tenants in build-to-rent properties tend to stay longer. This is especially true of newly built units since occupants have a natural tendency to prefer being the first residents in a new home.

On the financial side, that translates into less tenant turnover, and lower costs for rental unit cleaning and renovation costs between tenants. It’s also likely to lead to lower vacancy rates than is typically the case with apartment complexes.

Higher Rents than Apartments

Yet another major benefit is the ability to charge higher rents. Tenants are typically willing to pay more for newly constructed rental homes than they will for older properties. That’s largely because they include updated amenities, like late-model appliances, contemporary floor plans, granite countertops, and wood floors. Some units may be available with basements and garages.

But since build-to-rent neighborhoods are typically targeted for the upper end of the rental market, on-site amenities offer the potential for still higher rents. Examples include pools, clubhouses, tennis courts, fitness centers, and walking trails.

Increasing Availability of Build-to-Rent Capital

As the popularity of build-to-rent has increased, funding for projects is now widely available. One of the most popular ways to raise capital to build new neighborhoods is through real estate crowdfunding, online platforms where investors come to invest capital in build-to-rent neighborhoods being built by developers. Investors can invest in either equity or debt in a project.

Meanwhile, financing for build-to-rent neighborhoods has been steadily expanding with the increase in demand. Not only is financing being provided by institutional investors, like banks and insurance companies, but quasi-government lending agencies Fannie Mae and Freddie Mac also offer financing.

The greater availability of capital is increasing the number of projects being constructed. That gives investors and lenders more choice as to which projects they want to invest in or finance.

More Options to Sell the Investment

If the developer or investor chooses to invest in apartment buildings or other types of commercial real estate, the market for selling those properties will pretty much be limited to commercial investors.

With build-to-rent projects, investors can sell their interests to commercial investors, or make them available through real estate crowdfunding platforms. There, individuals or groups of individuals can purchase an investor’s share in a build-to-rent project.

Why Renters Like Build to Rent Properties

Renters have at least as many reasons to like build to rent properties as investors do. This is especially true given the shifting nature of the economy and the rising cost of homeownership.

Renting vs. Homeownership

One of the major attractions of build-to-rent properties to renters is the absence of affordable new homes for purchase. In many markets, newly built homes have been directed toward the upper end of the market. Other than condominiums, little is available at under $300,000 for first-time homebuyers in many markets.

The first cost benefit is the monthly payment. The payment for renters in a new single-family build to rent home averages $1,666 per month. That’s significantly lower than the $2,208 per month payment typical on the purchase of a single-family home.

And of course, renting a home doesn’t require making a large down payment on the purchase of a similar property.

Mobility

Jobs aren’t as permanent as they once were, especially given that so many work on a contract basis. This is common in certain fields, like information technology. Job assignments may change every couple of years or even every few months. In other fields, high job turnover is par for the course.

An individual with an unstable occupation may need the type of mobility provided by renting.

An Opportunity to Move into a Home that’s New

This is one of the most basic attractions of build to rent homes. A tenant has an opportunity to get a place that’s brand-new and has all the latest features and safety systems.

This is in sharp contrast to older homes that are purchased by investors and rented to tenants, or even large apartment complexes that may be decades old.

Greater Space and Privacy than Apartments

Since build-to-rent properties are single-family homes, they’re larger and more private than apartments in large complexes. Not only does it provide more elbow room and a greater sense of security, but it will also feel a lot more like home than a cramped apartment.

Amenities and Lifestyle

Many build-to-rent neighborhoods include amenities similar to those found in large luxury condominium projects. Tenants may be drawn to features like a swimming pool, tennis courts, and clubhouse. Just as important, they may seek the lifestyle such a neighborhood provides, offering a higher quality of life and a greater sense of belonging to the community.

The Shift Toward Work-from-Home

This shift has created the need for a dedicated workspace that’s free from noise and outside distraction. Those qualities are hard to come by in a typical apartment. But a build-to-rent home, with its larger space, provides a greater opportunity to set up a dedicated home office that will maximize productivity.

The Ability to Start a Family Before Buying a Home

Many people prefer to delay starting a family until they can afford to buy a home. After all, the family will require more space, as well as a yard that children can play in. Since build-to-rent homes are built like single-family homes, they provide those features.

Couples who are not yet in a position to buy a home can start a family in a build to rent home. They may choose to stay in that home for several years, until their finances enable them to qualify to purchase a home.

How to Invest in Build to Rent Properties

There are three basic ways to invest in build to rent properties:

1. Build Your Own Build to Rent Home(s)

While this is undoubtedly the strategy chosen by some investors, it’s capital-intensive and requires the know-how and skills to make it happen. You’ll need to be able to find suitable land and construct the home at a price point that will be profitable at the likely rent the property will generate.

If you go this route, you can either retain the property for the cash flow and eventual appreciation or sell immediately to an investor.

2. Real Estate Investment Trusts (REITs)

REITs are something like mutual funds that hold real estate instead of stocks and bonds. Much like mutual funds, they can be highly specialized. Some may invest only in office buildings, others in retail space, and still others in large apartment complexes.

It may be difficult, however, to isolate a REIT that specifically invests in build to rent. Some do specialize in the purchase of individual homes for rent, generally the type that are purchased at distress levels and refurbished, and might also participate in build to rent.

If you can find one that offers build-to-rent, REITs are very convenient. They trade like stocks on major exchanges and can be purchased in small amounts. It’s also a clean way to participate in build to rent since management handles all the details.

3. Real Estate Crowdfunding

This is a more direct way to participate in build-to-rent than REITs. Real estate crowdfunding platforms typically specialize in individual investment properties, some of which may be build to rent homes.

Crowdstreet is a real estate crowdfunding platform that does allow you to participate in build-to-rent projects. Crowdstreet has raised $2.1 billion in capital for property investments and advertises a rate of return on investment of 17.1%.

You can invest either in individual deals or in funds that invest in multiple properties. They also have tailored portfolios that will provide a professionally managed investment strategy to meet your financial goals.

For individual build-to-rent projects, you will need a minimum of $25,000. In addition, investors are required to be accredited investors, which means you must meet certain minimum income and net worth requirements to participate.

Pros and Cons of Build to Rent

Summary

Build to rent is when real estate developers build a tract of single-family homes for the specific purpose of the properties being rentals.

Investors benefit from the properties because rent is higher than apartment buildings and turnover is lower, allowing for higher profits. And renters like them because they get the space and feel of owning a home without the higher costs.