Build-To-Rent Homes: A Renter’s And Investor’s Guide To A Hot Real Estate Trend
April 28, 2021
For the past 14 years, the percentage of renters has been rising in the United States. The housing market crash of 2007 is still reverberating, and due to student loan debt and other financial struggles, many millennials do not feel financially ready for homeownership. In response to this trend, a new real estate market trend has emerged: build-to-rent homes. These are homes (or, more often, whole complexes of homes) built specifically for long-term renters.
Whether you’re looking to build one of these homes as an investment, considering investing in build-to-rent via the stock market, or looking to rent one of these properties in lieu of buying a house or renting an apartment, our guide is here to help.
Build-To-Rent, BFR And B2R Defined
“Build-to-rent,” “BFR” and “B2R” are all interchangeable terms for the same idea: detached units built specifically for the purpose of long-term rental. They are typically maintained by large companies, rather than individuals; however, it is possible for individual people seeking passive income through investment property to invest in build-to-rent properties.
What Counts As A Build-To-Rent Home?
A build-to-rent home can look like a traditional, suburban-style family home. It can also encompass a wide range of building plans, including the following:
- Horizontal apartments: This is a term for a tight cluster (generally numbering in the hundreds) of professionally managed, freestanding, single-family residences.
- Duplexes: This describes two living units that are attached to each other.
- Row homes: These are homes built side-by-side, sharing a common wall.
- Small lot homes: These are individual homes built close together. Where a normal home lot will generally be around 5,000 total square feet, including yard, a small lot could be as small as 600 square feet.
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What Percentage Of Property Is Build-To-Rent?
As of 2021, build-to-rent properties make up only 5% of properties, but they are currently on the rise. According to Real Estate Magazine, 50,000 build-to-rent homes were constructed from September 2019 to September 2020. That’s in contrast to a 40-year average of 31,000 a year.
Should You Rent A Build-To-Rent Property?
The decision to rent a home can feel less monumental than the decision to buy one. Nevertheless, it’s still crucial to weigh the many pros and cons thoughtfully. While renting a build-to-rent home may feel like a safer choice, it can come with several financial and lifestyle drawbacks.
The Pros Of Living In A Build-To-Rent Property
- Freedom from maintenance woes: You can experience many of the comforts of homeownership without the stressors of having to make your own repairs and do your own maintenance. You likely won’t even have to shovel your own driveway. Check first, though, and don’t assume!
- Creature comforts: Quality of life in build-to-rent homes is typically high. Many build-to-rent homes come with luxury features including swimming pools and other communal amenities.
- Community: Build-to-rent communities are often more tight-knit and neighborly than apartment complexes.
The Cons Of Living In A Build-To-Rent Property
- Cost relative to renting an apartment: Rents for build-to-rent properties are typically higher, and rise by a greater amount, than rents for apartments.
- Cost relative to homeownership: If you buy a house, your mortgage payments will go toward amortizing your loan. Eventually, you will own a valuable asset outright and will not have to make any further mortgage payments. Although many people consider build-to-rent properties due to the difficulty of saving for a down payment, it may be easier than you think to find a way to save. It’s also worth looking into low or zero down payment options, such as conventional loans requiring only 3% down, VA and FHA loans.
- Small size: Build-to-rent properties can vary widely in style, but they are often smaller than other homes.
- Lack of personalization: Build-to-rent homes can sometimes lack the quirky charm of homes that were built for sale. If you find yourself drawn to the charms of an older home, build-to-rent may be a particularly poor fit for you.
- Lack of freedom to remodel: One of the joys of homeownership can be the freedom to repaint, put in new floors and make other major changes to suit one’s taste and comfort. It is unlikely that the option to make major alterations to your home will be available in the case of a build-to-rent home, though it may be worth discussing with any prospective landlord.
Should You Build A Home To Rent Out?
The current boom in the real estate market has made purchasing rental properties more difficult. Prices and demand are high, and it can be difficult to be sure that you’ll get a good return on investment (ROI). For individuals looking to acquire a rental property, build-to-rent may seem like an attractive option. However, investment through building a build-to-rent property comes with both pros and cons, which must be considered carefully.
Pros Of Building To Rent
- You may be able to ask more in rent: According to a CNBC investigation, rent payments for single-family properties have been growing by 4.5% annually, while rent payments for multifamily apartments are only growing at 3% annually. This means that if you can’t find a pre-existing single-family property to buy and flip, you may be missing out on growth to your passive income unless you build one yourself.
- You will likely experience less tenant turnover: Apartments typically appeal to more temporary renters. If you build a property that people will move into long-term, you may save yourself the stress and hassle of frequently searching for new tenants.
- You may be able to get into the investment game sooner and with less competition: If there simply aren’t enough properties to buy, building one can help you get into the real estate investing game without having to enter into bidding wars at auction or engaging in other competitive struggles that will lower your chances of a good ROI.
- You have more flexibility in where you build: If you want to get in on an up-and-coming real estate market, you may find it easier to build than to find a property that already exists there.
Cons Of Building To Rent
- It can be hard to compete with the big guns: There’s a reason that most build-to-rent properties are built by large-scale operations. Economies of scale work in the favor of these companies and against private individuals. You won’t be able to save money on appliance installations by building extra wide doors, for example.
- Getting a good return on investment (ROI) may be more difficult: Buying a distressed property may be difficult during a housing market boom, but it’s a simple fact that the less you spend, the easier it is to get a good ROI. Investment strategies like the BRRRR method rely on flipping homes and increasing their value in order to keep that initial outlay down.
Can You Invest In A Build-To-Rent Property Without Building One?
Although we’ve only listed two cons, both are major, weighty drawbacks that should be considered carefully. One alternative for those excited about the potential of build-to-rent is buying stock in what is called a “Residential REIT.” Residential REITs specialize in acquiring or developing apartments or single-family homes in order to rent them out. If you feel that build-to-rent properties hold promise for the future, you may want to look into Residential REITs that are actively pursuing this trend. If you buy stock in these companies, you could benefit from their success.
The Bottom Line
Build-to-rent is a hot trend for a reason. For those who don’t feel ready for homeownership or who are struggling to save, build-to-rent homes offer an easy path to comfort and community. For investors, they offer a way out of an overly competitive market.
However, if you are considering build-to-rent as either a renter or a builder, it’s worth weighing all the potential downsides. Conventional homeownership and apartment rental both still hold many advantages, and for individual investors, build-to-rent may simply involve too much risk and too big of an expenditure. Before making a decision, why not use our Learning Center to explore the many topics related to home buying and real estate investment?
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