Build-to-Rent (BTR or B2R) is a property that is designed and built specifically for long-term renters. Sometimes called build-for-rent, BTR properties are on the rise due to growing demand from long-term renters.
Since the housing collapse of 2007, more Americans have been renting, rather than purchasing homes. This is partially due to home prices outpacing wage growth, and partially due to the burden that student loan debt has added to this generation’s finances. There is also a certain percentage of residents who prefer the freedom and flexibility of renting compared to owning.
In this article, we’ll explore the emerging build-to-rent trend, including:
- How the build-to-rent process works,
- Why build-to-rent development is on the rise,
- The pros and cons of living in BTR communities,
- The pros and cons of BTR investments,
- And how to invest in a build-to-rent project.
Let’s start with a clear definition of a build-to-rent property and a list of the property types that are typically included in BTR developments.
What Is a Build-to-Rent Property?
A build-to-rent property is any property that has been designed specifically for the use of long-term renters. BTR properties can be any of the following:
- Single-family homes (detached residences built for one household)
- Duplexes (a structure with two dwelling units under one roof)
- Townhomes (also called “row homes,” townhomes are built side-by-side with shared walls between units)
- Multi-family homes (apartment buildings that can potentially house dozens or hundreds of households)
It’s also possible for developers to build entire BTR communities. For example, you might find a development of “small lot homes” (also called “horizontal apartments”) in which there are dozens or hundreds of single-family build-to-rent homes clustered on small lots. This type of clustering, as opposed to individual structures scattered throughout a city, makes it easier for property managers to serve the residents and maintain the grounds.
The Build-to-Rent Process Explained
Because there are so many types of BTR properties, the exact build-to-rent process can vary from one development to the next. Having said that, most BTRs follow these steps:
1. Planning and Property Scouting
A real estate investor will need to determine which BTR type works best for them, based on factors like budget and local renter demand. Then the investor will analyze multiple properties, looking for the most promising lot on which to build.
There are many things to consider when buying a rental property, even if you intend to build from the ground up. The “right” property will depend on the size and style of the proposed development. The lot must be zoned to accommodate the BTR project, and it must be in a desirable location. The lot could be undeveloped, or it may have existing structures that can be demolished to make way for the new building(s). During the planning and scouting phase, the investor also needs to arrange any financing needed for the purchase and construction.
2. Buying the Lot
Acquiring the property is a matter of negotiating the purchase price and terms, then navigating the escrow period and all applicable documents, inspections, and appraisals. If purchasing the property requires financing, the loan will need to be secured.
3. Preparing the Lot
Preparing the lot for construction might require the demolition of existing structures or improvements on the lot. Or it might simply be a matter of grading the land for development. This phase may also include obtaining permits from the city, as well as running private roads and utilities to the lot.
When the lot is ready, construction can begin. The timeline depends on the size and scale of the development, as well as waiting time for periodic city inspections and permits as required by the local jurisdiction. The result of the construction phase should be a “turn-key” property, that is ready for new renters to move into.
5. Lease-Up and Stabilization
The investor then needs to find qualified renters to fill the vacant property. This requires marketing the unit(s), showing the property to prospective residents, screening applicants, and signing a lease with the chosen tenant(s).
After these five steps, the development may be held as a long-term rental property, or it could be sold to another investor.
How Popular Is Build-to-Rent?
Build-to-rent is on the rise. In 2022, 5% of all single-family homes built were intended as long-term rentals, according to Census data. This might not sound like much, but it represents an increase from around 3% in 2012. Furthermore, this figure may be underestimating real-world intentions. According to the National Association of Home Builders, around 12% of single-family homes being developed in the third quarter of 2022 were BTRs.
We’re seeing real estate developers building more B2R homes because the existing inventory is performing so well. Around 95% of single-family home rentals were occupied in the fourth quarter of 2022, confirming the high demand for this type of housing from today’s renters.
There are several reasons why build-to-rent is growing in popularity among renters, including
- Amenities. BTR communities can offer common area amenities (like pools, business centers, and clubhouses) that are cost-prohibitive in traditional single-family homes.
- Professional management, including maintenance services. The maintenance responsibilities of homeownership can be a deterrent for would-be buyers. Having a property manager and maintenance team at your service is a serious advantage that renting holds over ownership.
- Lower maintenance costs. Renters don’t need to budget for capital expenditures or field unexpected maintenance expenses when renting a BTR; that cost is handled by the owner.
- Increased stability compared to traditional apartments. Traditional apartments may offer shorter-term leases of as little as one month. The higher turnover cost of a BTR means owners require longer leases, which creates greater stability in the community.
- Tailored design. Units that are built specifically for long-term rentals can be designed to meet tenant needs, creating higher rentability. For example, larger three and four-bedroom homes are attractive for mature renters with families.
- Flexibility. A certain percentage of residents will always prefer the flexibility of renting over the stability of buying. Being able to relocate at the end of a lease term without having to find a buyer as an owner would.
- Accessibility. With fewer Americans having the financial means or the credit history required to purchase a home, BTR homes afford the lifestyle of homeownership without the barriers to entry of buying a property.
Should You Live in a Build-to-Rent Property?
Are you considering moving into a BTR property? There are a few advantages and potential disadvantages to weigh before making your decision.
Pros of Living in a Build-to-Rent Property
The primary benefits of living in a BTR property include
- Maintenance services. When the inevitable maintenance issue comes up, you can simply call your property manager to arrange for service. The cost of labor and materials is covered by the property owner (assuming the tenant was not at-fault for the issue).
- Luxury comforts. BTR homes are often built with higher-quality finishes than traditional apartments. They also often include community amenities like pool areas or playgrounds on-site.
- Sense of community. With BTRs focused on long-term renters, the population is more stable than in traditional apartment rentals, creating greater opportunities to form relationships with your neighbors.
- Freedom from typical homeownership costs. BTR renters are not responsible for standard maintenance costs, repair expenses, property taxes, or property insurance (although renter’s insurance is a good idea).
Cons of Living in a Build-to-Rent Property
The possible downsides to living in a BTR home include
- Lack of personalization potential. Residents may be limited in how they can decorate the property. For example, you might not be allowed to fly your sports team’s flag in your yard or replace fixtures that don’t suit your taste.
- Potentially smaller homes and lots. BTR homes may be built with less square footage than homes intended for owner occupancy. However, BTR homes may have more square footage than units in traditional apartment buildings.
- Rents may be higher than standard apartments. Because of the perceived quality of life increase in BTR homes over standard apartments, the rental rates will likely be higher.
- Lack of equity in the property. Unlike homeownership, where each mortgage payment brings you a step closer to owning the property free and clear, renting does not earn you equity in the property.
Should You Invest in a Build-to-Rent Property?
With the BTR industry on the rise, you may be more interested in investing in a build-to-rent property than in renting one.
Investing in rental property comes with many benefits (like passive income, appreciation, and tax breaks), as well as a few drawbacks (like upfront expenses and ongoing maintenance). But let’s focus specifically on the pros and cons of investing in BTR as compared to general rental property investments.
Pros of Investing in Build-to-Rent
The advantages of investing in BTR, compared to investing in traditional apartments, include
- Less tenant turnover. Residents who rent a home are more likely to settle into that home and remain for longer periods than apartment renters.
- Higher rental rates. Residents are willing to pay more for BTRs than traditional apartment units.
- More options. When you get in at the ground floor of a real estate development, you can decide where and how to build, rather than limiting yourself to the existing inventory on the market.
- Value-add advantage. By building a property from the ground up, you are 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.
Cons of Investing in Build-to-Rent
The potential downsides of investing in build-to-rent include
- Competition from established developers. Established developers have a network of industry connections to help make their builds go more smoothly. They also have the advantage of completing a higher volume of projects; through economies of scale, this gives the big players access to bulk-value deals from suppliers.
- High upfront expenses. The costs of purchasing a property, preparing the lot, and building a structure are substantial.
How to Invest in Build-to-Rent
One of the greatest advantages of real estate is that the industry is full of real estate investment strategies to serve any investor. And build-to-rent is no exception. You’ll find multiple options for investing in BTR, depending on your current resources and goals.
Option 1: Do It Yourself
Developing your own BTR home is entirely possible. But it requires local rental market knowledge, large capital outlays, and construction expertise. As well as the time and desire to manage a complex project.
You’ll need to find a property, handle any demolition of existing structures and preparation of the lot, oversee the construction of the new structure(s), and find qualified renters to lease the unit(s).
Naturally, building your own BTR home is simpler than developing your own BTR community. If you are new to build-to-rent but want to complete a project yourself, stick with a single-family home or duplex. And leave the community development to established developers with the resources to handle a project of that magnitude.
Option 2: Invest in a REIT
Real estate investment trusts (REITs) are companies that invest in income-producing real estate. Individual real estate investors can buy shares of these companies and earn a portion of the proceeds in the form of dividends.
Many REITs specialize in a specific type of real estate. For example, a REIT might focus on residential real estate, including BTR homes.
By buying shares of a residential-focused REIT, you can share in the profitability of the BTR trend without the hassle or expense of building your own project.
The primary downside of REIT investing is the lack of control. REITs invest in portfolios of properties, and investors have no voice in choosing which projects to include in the portfolios. In fact, REITs might not even disclose the properties included in the portfolios.
Option 3: Partner with a Real Estate Syndication Company
If you want the ease, limited risk, and lower upfront investment of a REIT, but you want to choose the specific project(s) you’ll invest in, real estate syndication could be your best option for investing in build-to-rent.
Syndication is similar to crowdfunding, in that it pools funds from multiple investors to finance a real estate project. This allows investors to choose the specific property (or properties) they wish to invest in. The syndication company will then handle the build and lease-up from start to finish, giving investors purely passive income!
Investing in syndication is simply a matter of choosing a syndication company you’re comfortable with, then selecting your investment(s) from that company’s open offerings.
The primary drawback of syndication is that it is typically only available to accredited investors. You will likely need to complete an application to confirm your qualification before investing.
Multi-Family Build-to-Rent Investment Opportunities with Gatsby Investment
If real estate syndication sounds like a good fit for you, consider joining the 8,500+ real estate investors who have already chosen to invest over $65 million with Gatsby Investments.
With our stellar track record of successful real estate developments and our innovative online platform that makes it easy to build a real estate portfolio, we are excited to bring new, expertly-vetted BTR deals to our network of investors.
Learn more about our build-to-rent investment opportunities today!