Built-to-Sell (BTS) vs. Built-to-Rent (BTR) for Investors

These strategies have important implications for real estate investors, so it’s important to weigh the pros and cons of each method to see which is the better fit for you under current market conditions. But first, let’s look at the key advantages offered by both models as new developments (compared to existing inventory).

Benefits Offered by Both BTS and BTR Developments

• Forced appreciation. When you get in on the ground floor of any well-managed real estate development project, you benefit from the fact that the completed structure is worth more than the total cost of the land, materials, and labor. 
• More control over the quality and results. Building from the ground up allows you to control where, when, and how to build, rather than having your options limited by the inventory of existing properties on the market.
• Ability to respond to local housing demand. Adding new units to areas with persistent housing shortageshelps to ease the inventory issues and create more sustainable market growth. Plus, you can tailor your strategy to provide the type of properties in the greatest demand, such as single-family homes or multi-family buildings.
• Potential for economies of scale. Building multiple units at once (whether in one multi-family building or as several single-family buildings) allows you to leverage bulk pricing and repeatable systems, reducing the per-unit construction costs and boosting margins.
  
  

The Pros and Cons of Built-to-Sell

• Faster return of capital. By selling immediately upon completion, you can recover your investment and deploy those funds into the next project quickly.
• No property management requirement. Since BTS developments typically sell before lease-up begins, you don’t have to pay a property manager to handle tenants or invest your own time and energy in ongoing resident management as a landlord. 
• Market-timing advantage (under the right conditions). If you complete the build while the market’s hot, you can capture top-of-market pricing on the sale.
  
  

• Heavy exposure to the real estate cycle. If interest rates increase or demand drops mid-project, your newly-completed building may debut to cool conditions, resulting in a longer time on the market and potentially lower returns.
• Lack of recurring income. You lose the long-term cash flow and appreciation that a rental portfolio builds.
• Smaller buyer pool. Without tenants in place, the property is less appealing to buyers. You’re limited to a subset of buyers who are willing to take a risk on an unproven project and have the means to secure funding, which can also be more difficult with a vacant investment property.
• Higher marketing and sales costs. Because of the smaller buyer pool, selling a vacant building is usually more difficult and requires more time, effort, and promotion.
• Ordinary income tax rates. Proceeds from the sale are taxed as ordinary earned income, rather than long-term capital gains (which offer a lower tax rate). 
  
  

The Pros and Cons of Built-to-Rent

• Long-term cash flow. Once the units are leased, you earn recurring passive income.
• Appreciation. Real estate assets tend to appreciate over time. Holding the asset for a longer period may increase your total return over time.
• Tax breaks. By holding the property, you capitalize on many of the tax benefits of real estate investing, including standard deductions, depreciation deductions, and (as long as the property is placed in service as a rental for at least 12 months), favorable long-term capital gains rates when you eventually sell. 
• High renter demand than existing inventory rentals. Compared to existing rental buildings, new construction BTR is more tailored to current renters’ needs and wishes. As a BTR investor, you’ll likely benefit from higher resident retention, lower vacancy losses, and higher rental rates. 
• Higher buyer demand when you’re ready to sell. Properties that have been stabilized (have had several consecutive months of steady rental income) typically generate greater buyer interest because they represent a lower risk. The income is proven, so buyers (and their lenders) can proceed with the acquisition more confidently.
• A higher sales price (in all likelihood). Not only is the sales price likely to be higher thanks to long-term appreciation and increased buyer demand, but stabilized buildings are also valued based on the income they provide rather than recent sales of comparable buildings. This income approach to valuation often provides a higher appraised value, which can further boost the sales price.
• Flexibility with the timing of the sale. When the property is intentionally built to rent, you can hold the property until market conditions are favorable for selling without worrying about holding costs (since those are covered by rental income)
  
  

• The slower return of capital. Your invested amount could be tied up for years in a BTR. Importantly, you might not have to wait to sell to recover your funds. Depending on market conditions, you may be able to complete a cash-out refinance after stabilizing the property to access your original capital. This is a common strategy in the BRRRR method of investing (buy, renovate, rent, refinance, repeat).
• Ongoing management and maintenance. Repairs, tenant turnover, and day-to-day operations require time, money, or both.
• Regulatory exposure. While not a major risk, the longer a property is held, the greater the likelihood of running into regulatory changes that might affect your bottom line (such as rent control measures or other legal changes that put owners at a disadvantage).
  
  

Which Is the Better Investment: BTS or BTR?

How to Invest in BTS and/or BTR

1. Manage your own project. If you have real estate development experience, you may have the knowledge, skills, connections, and resources to complete your own BTS or BTR development.
2. Partner with a development sponsor. If you have access to the funds but don’t have the experience, systems, or network needed to manage your own project, you can outsource the management to an established development sponsor. With Gatsby’s Investment’s Built-for-You Developments, for example, you retain full ownership over the project while leveraging Gatsby’s experts to acquire a suitable plot, construct the building, and lease-up the units.
3. Invest in a BTS or BTR through real estate syndication. Real estate syndication pools funds from multiple investors to finance a specific real estate project (such as a BTS or BTR development). This gives you access to unique opportunities with low minimums, while allowing you to invest completely passively.      

Partner with Gatsby Investment Today!