A Complete Guide On Build-to-Rent Homes
The real estate market is continuously evolving to meet shifting demands. A newer concept that has gained incredible momentum is build-to-rent homes. Unlike traditional single-family developments, build-to-rent communities are constructed with the intent of renting homes out long-term rather than selling them. This alternative asset class represents upcoming change with prospects of stable cash flow for investors. As interest piques, understanding the core elements of build-to-rent is prudent for all real estate professionals and renters to grasp. This guide unpacks the fundamentals of this emerging model comprehensively.
Table of ContentsToggle
What Are Build-To-Rent Homes?
Build-to-rent refers to the development of single-family structures or small multi-family properties with the sole objective of renting residences on the long haul instead of promulgating. Rather than develop and quickly sell, build-to-rent projects are built, owned, and managed as a rental portfolio by institutional investors and operators. Home property rentals are handled by specialized management teams skilled in serving renter populations with a panoply of residential services. Build-to-rent aligns with the rising preference among many for rental living with the feel of ownership.
The Build-To-Rent Business Model
Build-to-rent ventures operate as a corporate landlord business over conventional single-building rentals. Large-scale projects of often 100 homes or more are constructed in a single phase. This allows streamlined property management. Institutional capital sources including pension funds, REITs, and foreign investors back developments for big box rental living. Projects emphasize resort-style amenities, maintenance, and a renter experience comparable or superior to traditional ownership. Management provides flexible lease terms and a live-in staff for assistance. Operations aim to produce high occupancies and stable cash flows through rental income over resale flipping.
Target Renter Demographic
While appealing to any renter, build-to-rent primarily targets millennials, young professionals, and families who favor a rental lifestyle. Amenity-rich complexes set in master-planned communities address rental preferences skewed towards low-maintenance living, contemporary features, and ample common areas. On-site management and maintenance teams eliminate much of the hassle associated with individually owned rentals. Additional value comes through flexible leases allowing mobility as life stages change personal housing needs. Proximity to employment hubs strengthens the case for rental versus owning a home far from cities for work.
What are the build-to-rent pros and cons? While the build-to-rent model offers stable income potential for investors and a quality rental product, there are some drawbacks to consider such as lack of tax advantages and difficulty exiting the investment market. Rent growth is also limited versus appreciation seen in for-sale homes. Tenants may perceive less stake in a community compared to owner-occupants as well. However, strong market fundamentals and demand point to build-to-rent filling an important niche.
Financing Build-To-Rent Developments
Unlike residential projects built for resale, build-to-rent requires customized capital strategies suited to their long-term income generation. Permanent financing typically comes from life insurance companies, commercial mortgage-backed securities (CMBS), and institutional lenders. Bridge loans are utilized during construction phases. Capital stacks might merge preferred equity with senior bank loans then mezzanine financing on top. REIT and fund vehicles also facilitate development financing for qualified sponsors with experience operating rental communities at scale. Investor and lender appetites have grown significantly as build-to-rent proves its merits.
Competitive Advantages Fuel Growth
Multiple market forces converge to cultivate the success of build-to-rent. Shifting generational preferences away from ownership complements foreseeable demand increases as millennials become more established. Tighter ownership underwriting amid pricier listings renders more renters long-term. Build-to-rent also avoids the volatility of ownership resales relying instead on consistent rental income streams. Returns to investors remain attractive relative to risk profiles versus commercial real estate sectors. With the constant availability of capital to seed new ground-up build-to-rent projects, expect considerable future growth as the asset class gains recognition and depth.