What you need to know about Build to Rent (BTR) or Build for Rent (BFR)?
It used to be that residential investors would buy an existing house from another homeowner, then convert a single home to a rental property within a neighborhood of owner occupied housing. Build-to-rent real estate takes rental property investing to the next level by building new homes from the ground-up for the specific purpose of renting to tenants.
Build to Rent (BTR) has been around for a few years now but, in the grand scheme of things, it’s still a relatively new concept.
Build-to-rent projects are large-scale residential developments, almost always suburban sub-divisions, where all the properties are owned and managed by a single entity to be rented out over mid to long-term periods.
The approach is different from the conventional build-to-sell model, where a developer builds residential housing, then sells off each individual home. The end purchaser may be a landlord or owner occupied, but often with a mix.
There are several generally interchangeable terms used to refer to properties such as these:
Some of the most common build-to-rent home types include:
Most real estate experts point to the 2008 housing market crash — and the resulting foreclosure crisis — as the key reason real estate has gone through this transition. With millions of homes in foreclosure, real estate investors started buying them, finishing renovations, and then renting them out or reselling them for a profit.
The rental market, once comprised of landlord-owned single-family homes, has transformed into a professionally managed real estate asset class and has grown rapidly since then.
In 2021, 6% of the homes currently being built in the U.S. are BTRs, and it is estimated that the number of BTRs built annually will double by 2024. (The Wall Street Journal – quoted numbers from Hunter Housing Economics)
It’s probably the strongest asset class in this recession, in 2022 interest rates shoot up like crazy, and inflation is through the roof.
If people end up losing their homes, or if they have to downsize to a smaller home, they will want to move into rental homes.
This is going to benefit the larger owners to have a pool of rental homes because there will be more demand for these homes because of the quality of the property management and the consistency of the home product.
BTR homes are finding renters across all demographics, but especially among millennials. Even with a good job and stable income source, many millennials are saddled with student loans, credit card debt and/or a lack of substantial savings. Even in a two-income household, it’s hard for this generation to save the downpayment on a $500,000 home.
Although 92% of millennials consider homeownership a good investment, 48% of young adults say they will delay buying a home because of their student loans (according to a Unison Home Buyer Survey). Many are still building their career as they work to establish, define or stabilize their secular life, making homeownership impractical or even fiscally impossible.
But young people still have a strong desire for more space and a sense of community. These BTR neighborhoods meet all the requirements of tenants, with privacy, quality, comfort and luxury, (gym, laundry, gardens, etc.), offering them the lifestyle they desire to work, play and live, but without long-term financial burdens.
While financing across all real estate types has been impacted by rising short- and long-term lending rates, the BTR industry is well-positioned to meet these challenges and maintain momentum. Higher construction and financing costs are offset by rising rents, with annual rents rising considerably in many parts of the country.
Developers also have good access to debt and equity. The number of lenders active in this space is increasing as developers enter new markets and continue to demonstrate business models and performance through successful leases and divestitures.
Many lenders (including the Agency Lenders: Freddie Mac and Fannie Mae) have underwritten and approved the product type for loans, the investor community is able to expect more consistency on debt terms and to more easily model a long-term hold period. As an asset class, BTR has seen exit cap rates that compare well with traditional multifamily assets, with cap rates ranging from 4.75% to 5.5%.
Click here to learn more about Arbor’s financing options.
Click here to learn more about Northmarq’s financing options.
Finally, exit options, this is one of the questions we always tell investors to ask themselves, and it’s one of our biggest pieces of advice when it comes to buying.
What is your exit, who is your buyer, and what are you going to do next? There are options, there are always options, but you have to know what they are and be prepared.
Buyers are very eager right now, but if you’re in a distressed situation, your buyer pool is a little bit limited because the bill price is pretty big, we’re talking tens of millions that you need to get out, and it’s not as traditional as other asset classes.
It’s not something like a commercial office building where every type of institutional buyer has a manager who is open to owning that asset class at the right price, with the right location, and the right tenant mix. There are a lot of buyers who will buy the traditional real estate asset class, but build-to-rent while it’s trendy and there seem to be a lot of buyers, it’s relatively new.
It’s new, it’s innovative, so if you build something and a few years from now you want to get out, there may not be as many buyers and you have to convince somebody that they have to prepare and invest in the infrastructure to manage it. Buying and financing are the same currency, so if it’s hard to find buyers, it may also be hard to find financing.
There are plenty of benefits in the build to rent market, we are going to talk about some of the pros this new asset class has, not only for the investors but also for the tenants
Like any other asset class, BTR homes come with their own drawbacks – but depending on your goals and priorities, these might not be deal-breakers:
The 4th edition of the Build To Rent Annual Conference was this 2022 and unlike in previous years, it lasted two days. Providing more dynamic content and facilitating more networking opportunities than ever before.
BTR sector stayed resilient throughout 2020 and continues to be one of the hottest topics within the industry. Every year Bisnow organizes this event where they bring together the biggest power players in the industry to identify opportunities, build networks, and expand their businesses.
The conference theme delves into strategies focused on People, the Planet, and Profit – as ESG remains top of the agenda for investors and developers.
Organized with a large number of speakers and panels, these are some of the highlights of the 2022 program: