What’s The Deal With Build To Rent?

 
 

For my business, Self Storage, Light Industrial, Single & Multifamily properties have been the “go to” asset investment classes that repeatedly deliver predictable tax advantaged returns for investors.

Keeping an eye on adjacent investment opportunities I’ve noticed a recurrent market need over last several quarters:

  1. Higher interest rates & inflation, have pushed a growing number of would-be home buyers out of the market forcing them to rent.

  2. “Rent-by choice” cohorts like young professionals and empty nesters that don’t want the hassles of home ownership but don’t want to live in an apartment and share walls with other residents.

. . . Here’s where Build-To-Rent investing comes in.

BTR has been gaining significant traction in recent years. This 7 point guide will provide an in-depth understanding of BTR, its unique attributes, and the potential it holds for passive investors.

1. Understanding Build-to-Rent (BTR)

Build-to-Rent (BTR) refers to properties that are specifically designed and constructed for rental purposes, rather than being sold to homeowners. These are typically single-family or multi-family homes within a larger community or complex, providing a unique blend of the privacy of a single-family home with the convenience and amenities of an apartment complex.

BTR properties are managed by a property management company, eliminating the need for individual landlords to handle maintenance and tenant issues. This, coupled with the growing demand for rental properties, makes BTR an attractive investment opportunity.

2. The Growth of BTR

The BTR sector has experienced substantial growth over the past decade, driven by a combination of demographic shifts, market dynamics, and investment trends. Among them, the millennial generation's inclination towards rentals over homeownership due to financial constraints like student loan debt, rising home prices, and changing lifestyle preferences have played a significant role in the rise of BTR.

 
 

This trend towards renting rather than owning has resulted in a steady increase in the number of renters in the U.S. The emergence of remote work due to the COVID-19 pandemic has further amplified this trend, as people seek out more spacious and comfortable living environments without the financial & maintenance commitments of homeownership.

3. The Attraction of BTR as an Investment

  • Consistent Cash Flow

  • Lower Competition

    Unlike traditional real estate investments where competition for properties can be fierce, BTR investments typically face lower competition as they involve the construction of new properties rather than bidding for existing ones.

  • Diversification

    Investing in BTR properties offers diversification benefits, as they generally have a low correlation with other types of investments.

  • Capital Appreciation

    Organic appreciation driven by local market capitalization rates

    Increased NOI (net operating income) fueled by:

    • Optimized operations to lower costs

    • Keeping occupancy high & rent rates at market levels

  • Accelerated Depreciation

Cost segregations studies allow non-structural components ( flooring, cabinets, fixtures, etc . . ) to have accelerated depreciation time frames that can increase investor level tax write-offs

4. Evaluating BTR Investment Opportunities

Just like any other investment, BTR investments need to be evaluated carefully.

Here are some key factors to consider:

Location

The location of the BTR development is a crucial factor that can significantly impact the investment's success. Emerging BTR markets like Texas, Florida & Arizona for example, offer promising prospects due to their rapid growth and lower land prices.

Developer's Experience

The developer's track record and expertise are critical. It's important to ensure that they have successfully completed similar projects in the past and have a deep understanding of the local market.

Market Demand

Understanding the rental market trends and demands in the targeted location is essential. For instance, there is a growing demand for single-family rentals and BTR communities in several underserved sunbelt markets.

Construction Timeline

The construction timeline can significantly impact the return on investment. Delays in construction can prolong the time taken to start earning rental income, thereby affecting the investment's profitability.

5. Managing Risks in BTR Investments

While BTR investments offer considerable potential, they are not without risks. Some of the common risks associated with BTR investments include construction delays or cost overruns, changes in market conditions, regulatory changes, and potential difficulties in attracting and retaining tenants.

However, these risks can be mitigated through careful due diligence, prudent project management, and strategic planning.

 
 

6. Participating in BTR Investments

For individual investors interested in participating in BTR investments, there are several avenues available. These include investing in a Residential Real Estate Investment Trust (REIT) that focuses on BTR, investing in publicly-traded institutional builders focused on BTR, and various crowdfunding platforms. The benefit here is that these publicly traded vehicles offer an element of liquidity since the shares can be sold at any time. The trade off is that individual investors generally can’t participate in the tax write-offs since they don’t have direct ownership of the property.

My investors typically prefer the private placement route because:

  1. They can direct their investment into a specific property

  2. Receive the tax benefits of depreciation to offset passive gains

  3. Participate in profits at sale

  4. Flexibility of re-investing via1031 exchange at exit

7. Is Build-To-Rent Right For You?

BTR represents a compelling investment opportunity in the evolving real estate landscape. With its potential for consistent cash flow, capital appreciation, and diversification benefits, it offers an interesting avenue for your consideration. However, like any other investment, it requires careful evaluation.

Here are 3 recent news stories on how Build To Rent communities are playing a role in filling the needs for folks who want the benefits of home ownership without the financial or maintenance hassle:

If you are interested in learning more about Build-To-Rent or would like to be added to our “Deal Alert” list & receive new investment opportunities as they launch, just email me at mitch@back9investments.com

 

*Real estate investing comes with a variety of risks including rising interest rates, lower than expected occupancy and the operator’s failure to execute the renovation and rental increase business plan. Real estate investments are also illiquid which means there is no readily available market for an investor to sell their interest in a real estate syndication. Investors are also typically required to be deemed an accredited investor. As with any investment, there is the risk the entire investment may be lost.

mitch berke