What is build-to-rent?
Build-to-rent is a new construction rental housing communities designed to be held by investors long-term. They range from duplexes, fourplexes to over 250+ unit communities. The large communities usually have the same amenities as upscale apartments and management on-site.
All build-to-rent projects are focused on maximizing rental income and minimizing vacancies.
This BTR trend is driven by demographic changes, affordability, limited rental units supply, and high housing prices. People want more choices and flexibility.
The benefits to investors are clear, build-to-rent offers more choices, savings on insurance and maintenance, instant equity, and better in-house management for the larger communities.
How can you invest in Build-to-Rent?
Individual real estate investors can invest in REITs like Invitation Homes and American Homes 4 Rent or a builder who has build-to-rent units, for example, Lennar Homes and Taylor Morrison.
If you want to choose the projects and the locations of the build-to-rent projects, a crowdfunding platform like CrowdStreet may be a good choice.
Of course, developing your own project is an option. You can start with a duplex or fourplex and get your feet wet doing small-scale build-to-rent properties.
Buying infill lots and building a couple of units is probably the most underutilized way to immediately gain equity and get started in today’s competitive market. You can search for lots that can be subdivided without getting a special use permit.
There is nothing difficult about finding and building a duplex or fourplex as long as you don’t have to change the use of the land or rezone it.
Where should you look for opportunities? Work with wholesalers and realtors or identify the neighborhoods in your city where lots like this are located and make offers.
Here are the steps to build a duplex, triplex, or fourplex rental.
- Find the right lot – network with realtors and wholesalers to find the right lot. You don’t have to do all the work.
- Due Diligence – contact your zoning department, even better go in person and ask them what can you build on the lot without having to ask for special use and or rezoning. Contact the Natural Resources in your county and ask them for any environmental and soil concerns that will prevent you to build. You will be surprised what can come up so don’t miss this during your due diligence process.
- Find financing and or partners – If you don’t have the cash to buy the land you can find partners if you have a good deal.
- Close on the land after the due diligence is done – You should know exactly what you are allowed to build before finalizing the deal.
- Finalize the design – Every lot will have different requirements so it’s best to finalize the design after purchasing the lot
- Subdivide the lot or get a special use permit.
- Get bids based on your final design.
- Get permits to line up construction and financing.
- Close on the loan
- When the rental is almost ready, prelease the units.
- Convert to permanent financing with the newly leased rentals.
If you are not ready to build, you can find land opportunities for other investors until you have enough cash. You will build not only your cash reserves but also your knowledge of the area.
The Future of Build-to-Rent
I remember when Invitation Homes and other corporate landlords started to buy single-family homes to rent after the Great Recession, I didn’t think it will work. I thought that property management of such a diverse portfolio will be impossible. They have proven me wrong.
Today, I hear the same talk about build-to-rent communities. It doesn’t matter if we think this trend is a good thing or a bad thing. These communities are here to stay.
They were born out of necessity during the Great Recession when builders and developers couldn’t sell at the right price and had to find a different exit strategy. BTR 2.0 is different.
Walk around one of Christopher Todd’s communities in Arizona or Texas and you will see the future of BTR.
Management Office next to the entrance and staged show home which doubles as office and storage for maintenance, access technology – no keys.
Homes look beautiful but they are built with durable materials to minimize maintenance costs. For example, notice that the refrigerators are stainless steel but they lack ice makers. No carpet in the units, just vinyl plank flooring.
Everything is built to minimize maintenance costs and appeal to tenants.
The rent that’s achieved in these communities is equal to the rent for a smaller single-family home but the maintenance costs are much lower.
Tenants live in a modern, brand new home with all the amenities of an upscale community without the Home Owner’s Association Fees and all the headaches that come with that.
The benefits for the investors are many.
It’s important to note that these Rent-to-Build properties are not affordable housing, they are highly amenitized communities for renters who value low maintenance life.
Additional resident services like dog walking, cleaning, plant watering, parcel delivery can be added to increase the value and the profit from each unit.
Build-to-rent is not the end of homeownership but it’s another investment class that’s growing and gaining popularity not only in the US but also internationally.