Build-to-rent (BTR) properties are growing in popularity as a high-return-potential option for real estate investors. BTR projects are developed from the ground up with today’s renters’ needs and preferences at the center of each design decision, creating in-demand properties that command high rental rates.
Here are the top five benefits of build-to-rent properties for investors.
1. Greater Demand and Resident Retention
Renters love the modern layouts, energy-efficient systems, and updated amenities of new BTR developments. These ground-up builds are more likely to attract well-qualified tenants who intend to stay longer than the average renter.
This increased demand means fewer turns of each unit, which reduces vacancy losses, vacancy marketing expenses, and owner-absorbed turnover costs (like cleaning, carpet cleaning, and painting).
2. Potential for Higher Rental Rates and Returns
Residents are typically willing to pay more for BTRs than traditional apartment units. This is due to a number of factors, including the modern design, energy efficiency, and amenities that make the property so in-demand. Additionally, BTRs often offer prime locations, flexible leasing options, and professional property management that attracts renters with higher budgets.
At the same time, maintenance costs may be lower with new construction because you’re not dealing with aging systems and structures. Appliances and HVAC may even be under warranty for the first several years, helping the owner(s) avoid expensive repairs and replacements.
The combination of higher rental income and lower expenses can lead to greater profit margins and a better return on investment.
3. Fewer Limitations and More Options
Compared to purchasing a turnkey rental property, you have far more options and fewer restrictions with build-to-rent projects.
When you get in at the ground floor of a real estate development, you’re not limited by the existing property inventory. You can decide where and how to build, tailoring your property to meet the demands of today’s renters.
4. Value-Add Advantage
By building a property from the ground up, you are forcing appreciation by adding instant value to the property. When done correctly, the completed property will be worth substantially more than your cost for the lot, labor, and materials.
At this point, you could cash out, selling the newly constructed BTR for strong short-term gains. Assuming the property has been developed to match local renter preferences, it may be easy to find an investor-buyer willing to purchase the turnkey development at a premium. Or, you could carry your holding into the rental phase to take advantage of longer-term recurring passive income.
5. Additional Tax Benefits
Real estate investing offers many tax benefits, including depreciation, operating expense deductions, and lower capital gains rates on the sale (as opposed to earned income tax rates). But new developments may offer additional tax benefits depending on location and building strategies.
For example, new BTR construction may qualify for federal energy efficiency incentives, reducing tax liability while improving the property's long-term operating costs. There may also be state and local programs that offer tax incentives for green building practices.
Additionally, BTR investors can leverage accelerated depreciation via cost segregation. A cost segregation study breaks down the construction costs of a new BTR development into components with shorter depreciation schedules (5, 7, or 15 years) than the standard 27.5 years for residential real estate. This allows investors to front-load depreciation, creating large non-cash deductions that can offset taxable rental income and potentially shelter other active or passive income (depending on tax status).
How to Invest in BTR Properties
- Manage your own BTR. This option is best reserved for those with real estate development experience and a team of qualified architects, designers, and contractors behind them.
- Partner with a BTR development sponsor. If you like the idea of maintaining sole ownership over the BTR, but you don’t have the experience or connections necessary to facilitate the build, consider partnering with a development sponsor. Gatsby Investment, for example, offers a built-for-you program in which you retain full ownership over the project while leveraging Gatsby’s knowledge, network, and systems to handle every detail of the development process for you. This is typically more cost-effective and far less stressful than attempting to develop a BTR on your own.
- Invest in a BTR syndication project. Real estate syndication pools funds from multiple investors to finance a real estate project, such as a BTR development. By pooling funds, investment minimums are dramatically reduced. You could, for example, buy into a $3.2 million BTR development with as little as $25,000 with Gatsby’s multi-family BTR syndication offerings. Gatsby handles every detail on behalf of the investors and has a history of providing double-digit average annualized returns on this type of investment.
Whether you go it alone, partner with a sponsor, or invest through syndication, give your real estate investment portfolio all the benefits of a BTR property!