In our introductory article on this topic, What is Build-to-Rent?, we offered a comprehensive overview of the build-to-rent (BTR) process. We explained how real estate investors and developers are building new rental units from the ground up, with the sole intention of renting them out long-term to meet the growing demand for rentals.
These build-to-rent properties could be any residential property type, including:
Single-family homes. These stand-alone residences are traditionally built to accommodate one household. However, it’s becoming increasingly common to build a single-family structure with a separate Accessory Dwelling Unit (ADU) on the property that can accommodate a second household.
Duplexes, triplexes, and four-plexes. These are properties that contain multiple residential units under the same roof (two, three, and four units respectively).
Townhomes. Known in parts of the country as “row homes,” townhomes are a row of units built side-by-side with a shared roof and shared walls between each unit.
Multi-family homes. Multifamily apartment buildings have long been built-to-rent. These properties can contain dozens or even hundreds of units. They might all be under one roof, or they might be “garden style” in which the units are arranged in a series of structures in close proximity to one another.
The build-to-rent model comes with several advantages for real estate investors. But it also has a few potential downsides for investors to be aware of.
In this article, we’re doing a deep dive on the build-to-rent pros and cons for real estate investors. By the end of this article, you’ll know if this BTR model is a good fit for you.
Pros of Build-to-Rent
Let’s start with the benefits of build-to-rent homes, as compared to other investment types.
1. Passive Income and Long-Term Appreciation
One of the primary advantages of investing in build-to-rent properties is the ability to generate regular passive income while growing in value over the long term. This is a key reason why investing in rental property is a smart strategy compared to investments that either cash flow (like residential real estate investment trusts REITs) or appreciate (like vacant land holdings).
2. Higher Rental Rates
When compared to existing rental properties that could be decades old, build-to-rent properties can command much higher rental rates simply because they are newer, with modern designs, quality finishes, and attractive amenities. Furthermore, BTR single-family homes can bring in higher rental incomes than traditional apartments by appealing to renters who prefer to live in a private home rather than in a unit in a shared building.
3. Lower Tenant Turnover Rates
Because build-to-rent properties are designed with long-term renters in mind, they tend to attract tenants who are seeking stability and continuity. As a result, BTR properties typically see less renter turnover than traditional rental properties. Not only do these reliable long-term renters provide consistent rental income, but they also minimize vacancy losses and the expenses required to find replacement tenants for a unit.
4. Lower Repair and Maintenance Expenses
Newly constructed build-to-rent properties typically require fewer repairs and less maintenance than older properties simply because the new materials don’t have any prior wear and tear that shortens their useful life. In fact, many of the appliances and systems will be under warranty, allowing investors to replace faulty fixtures at no cost for years to come.
5. Increased Options
Investing in BTR properties offers a wide range of options in terms of property types and locations. Rather than choosing from the existing pool of inventory currently available in the housing market, BTR investors can hand-pick the location and decide which property type best suits their interests. This flexibility gives investors more control as they build a real estate portfolio.
6. Value-Add Advantages
By building from the ground up, BTR investors have a unique opportunity to add instant value and force immediate appreciation. You can tailor your design to meet renters’ expectations in your local market and add even more value through enhanced amenities or energy-efficient appliances to attract higher-paying tenants and potentially achieve greater returns.
7. Government Incentives
Due to the housing shortage, some state and local governments are offering incentives and tax benefits to encourage the development of additional housing units. You might be able to take advantage of construction grants, favorable financing terms, and/or streamlined permitting processes to help offset initial costs and improve overall returns. Even if no other incentives are being offered, the tax benefits of real estate investing still apply to BTR investors, helping to boost your bottom line.
Cons of Investing in Build-to-Rent
Now that we’ve explored the pros of build-to-rent investing, let’s consider the cons.
1. Competition from Established Developers
Established developers and institutional investors may already have a substantial share of your local build-to-rent market. This can make it difficult for individual investors to enter the market, as these competitors may have staked a claim on local resources, like materials and workers. The established developers might also have existing industry relationships that make it easier for them to negotiate deals, secure permits, and find renters.
2. High Upfront Expenses
Investing in build-to-rent homes typically requires substantial upfront capital. Even if your chosen real estate market is not overpriced, the cost of acquiring the land, grading the lot(s), securing permits, laying the foundations and infrastructure, completing construction, and marketing to renters add up quickly.
For this reason, it might make more sense to join other investors in a crowdfunding or syndication investment model. Crowdfunding and syndication investments in BTR would allow you to pool your funds with those from other investors to help you access deals more valuable than your immediate means could support. Furthermore, these deals are professionally managed by a real estate sponsor, who brings many of the advantages of an established developer to private investors.
3. Knowledge, Skill, and Time Requirements
Investing in a BTR on your own requires a deep understanding of real estate analysis, permits, architecture, interior design, construction, leasing, and property management. Developers spend decades honing their skills in these areas. And, in many cases, developing and managing BTR properties is a full-time job.
This is another reason why investors are opting to take advantage of crowdfunding and syndication to get in on the build-to-rent market. With crowdfunding and syndication, you get to leverage the experience, knowledge, and skills of an entire team of professionals to maximize return potential while minimizing risk.
4. Delayed Returns
Unlike turn-key properties, which can cash flow from Day One, BTR properties require longer timeframes to start generating rental income. Even if there are no delays in the design, permitting, or construction processes, it still takes around six months to two years to construct a rental from the ground up. And then it may take a few additional months to lease up the development (depending on the number of units). Plus, if you use financing to purchase the property and/or complete construction, a substantial portion of your rental income will be used to make the mortgage payments and construction loan payments.
The payoff for build-to-rent properties can be substantial, but investors should be prepared to hold the investment for some time before realizing the returns.
5. Potential Renter Challenges
Even as the low risk of investing in real estate attracts BTR investors, any rental property comes with some risk of tenant issues. In some cases, renters can be difficult to find, particularly for BTR properties with higher rental rates. This can add to the delay in returns that we just discussed. It’s also possible to have tenants who chronically pay the rent late or cause issues among the neighbors with inconsiderate behavior.
You might consider offering a concession (something like two weeks free) to incentivize renters to choose your property. And you should establish a good, impartial screening process to determine which applicants are most likely to pay on time and behave responsibly. This is another area in which you could save both time and frustration by investing in BTR communities through a crowdfunding or syndication platform with a dedicated sponsor to manage the day-to-day.
How to Invest in Build-to-Rent through Gatsby Investment’s Online Platform
As we have seen, many of the potential downsides of BTR investments can be mitigated by investing with a crowdfunding or syndication platform rather than investing alone.
And Gatsby Investment makes it easy! Gatsby is a real estate syndication company with an impressive track record (having earned average annualized returns of 24.22% for investors from 2017 through 2022). As a reputable real estate sponsor, each detail of your investment is meticulously managed. From vetting potential deals, negotiating purchase terms, engaging award-winning architects and designers, and overseeing construction to handling ongoing property management and disbursing proceeds back to investors, Gatsby has you covered!
