Build-to-Rent is Giving Investors a Creative Way to Grow Profit
Investors, Developers, and Builders Grow Profit thanks to Build-to-Rent Demand
Build-to-rent real estate development has been one of the fastest growing trends in the real estate rental market for several years, and the boom hit high gear last year. Nationally, build-to-rent single-family properties have increased 27% from 2019 to 2020.
Prior to the pandemic, build-to-rent was already booming. Post-COVID, the demand is even higher. Tight housing inventory and increasing home prices have caused real estate investors to try new approaches in adding to their portfolios. Plus, with financing so cheap, the value proposition on build-to-rent is too attractive when compared with other types of investments like building to sell, flipping existing properties, or buying existing home stock to build rental portfolios.
With low inventory, many investors are building homes with the express intention of holding them in their portfolio. Obviously, investors need different expertise to build a home than to manage a portfolio. These two strategies use different property financing structures as well — interest-only short-term loans for the construction period, and then long-term financing for the hold portion. So it’s important for investors to know exactly how to profit from build-to-rent developments in order to succeed with both halves of the transaction.
What is Build-to-Rent?
Build-to-rent isn’t a new concept. It’s been a staple of the real estate market for a while in the form of small multifamily properties like duplexes and triplexes. Now, the concept of building to rent is being used for single-family homes and SFR developments.
The single-family rental market continues to boom. The growth started when the SFR market first emerged during the Great Recession of 2008 — referred to then as Foreclosure-to-Rental. But when home prices recovered, investors who wanted to start or continue growing portfolios had trouble finding deals that penciled out. One solution they found was in building rental homes or even entire communities of new homes. The build-to-rent boom was born.
Build-to-Rent’s Growing Popularity
The real estate market has been red hot across the country, and it’s only getting hotter with moves to the suburbs and to a preference for homes instead of apartments emerging as trends in 2020.
Nearly 2 million people have opted to rent instead buying a home. The demand for single-family rentals has prompted investors to get creative so they can provide desirable housing options for those in the market to rent. That has accelerated the development of build-to-rent homes and neighborhoods.
Build-to-rent appeals to multiple demographics: families with young children, single parents, millennials saddled with student loan debt, young professionals who primarily work from home, divorced people, and people with dogs.
Economic strength and growth, coupled with low supply and high demand, make certain areas of the country like Boise, Raleigh-Durham, Phoenix, and Austin especially ripe for build-to-rent development. Build-to-rent homes provide access to single-family home living to those who want or need a home with a yard but can’t afford to buy, particularly in areas where entry-level homes are still in short supply and home prices are growing rapidly.
2020’s mass exodus from urban areas to the suburbs created a demand for build-to-rent single-family housing, which is exactly where the concept works best. One big example of this is happening in Atlanta’s south suburbs, which provide some of the best county-specific atmospheres for build-to-rent investment anywhere in the country.
Nearly 45% of millennials are saddled with student loan debt. They’re getting older which means they’re looking to leave apartment life behind in exchange for more space in the suburbs, but they often can’t afford the down payment for a new home at current market prices.
The ideal tenants for build-to-rent homes are households making $100,000 or less annually. That’s not the case everywhere; in Los Angeles nearly 1/3 of residents with incomes over $100,000 rent instead of own.
Pre-COVID, single-family rentals had a turnover rate of about 30% compared to a 50% turnover rate typical of apartments. This means fewer months with unrented units. For build-to-rent investors, the upgraded potential tenant pool helps qualify more people who are eligible to rent the homes, which results in less risk and the possibility of more profits.
Investors typically have very low maintenance costs for the first several years on new a build, which helps to improve their net cash flow. Build-to-rent properties also tend to rent at a higher rate than older homes.
After a few years, if an investor decides to do a cash-out refinance, they can easily refinance to put leverage back to work or sell individual properties in a cross-collateralized portfolio, which can be a huge advantage over multifamily investing.
The combination of solid profits and maximum flexibility means that build-to-rent is set up to provide ROI that is both solid and dependable for real estate investors.
Single-family renters are often willing to pay higher rents for homes than they would for apartments because of the extra space and amenities that an apartment doesn’t have. And because they’re likely to stay longer, real estate investors benefit from reduced turnover costs and from lower risk of repeated bad tenants.
There are advantages for builders and developers as well. With greater control over the end result, projects go up faster and more efficiently. Builders can eliminate the usual headaches and delays of buyers making choices to personalize their homes, resulting in faster construction times for build-to-rent.
What’s Next for Build-to-Rent?
The single-family build-to-rent market is one of the fastest growing in real estate. Billions of dollars are being funneled into the build-to-rent market. Experts expect the demand for single-family rentals and rental communities to grow.
Build-to-rent single-family rentals posted a year-over-year increase in Q3 2020. There were roughly 14,000 build-to-rent starts during Q3 2020, according to NAHB’s analysis of Census Bureau data. From Q3 2019 through Q3 2020, 42,000 build-to-rent single-family rentals were built.
Builders and developers are struggling to build homes fast enough to keep up with demand. Their number one issue is finding land. The housing market is hot, and the homebuilding business is booming, leaving investors to compete with major homebuilders to find land. That’s hard to do when the market is this hot.
Another issue is lumber prices, which are sky high post-COVID. This provides an X-factor that investors must include in their numbers to ensure they are still set up for profit.
With a market this hot, the last thing you want to do is miss out on a profitable investment opportunity. You need a lender that works as efficiently as you do. Whether you’re looking at your first build-to-rent investment or you’re interested in purchasing multiple lots in a new subdivision, Blue Sky Capital Advisors has the loan options you’re looking for. We offer the industry’s best new construction financing and most flexible suite of rental loans. When it’s time to fund your next build-to-rent project, let Blue Sky Capital Advisors and Dominick Prevete help you. Get started today.
