Aug. 16, 2022
Build-to-Rent Homes: Everything You Need to Know
Renting is quickly becoming a much more popular option for people priced out of the current real estate market. Home prices are higher than ever, and the effects of inflation are felt in the housing market in the form of higher interest rates and low housing inventory.
With renting being the choice for potential home buyers in many different locations, investors are starting to shift to meet the demand for housing from those that can't afford to buy.
This is where build-to-rent homes (BTR) come into play. This relatively new type of housing is on the rise and is designed specifically for long-term renters who want the benefits of renting along with the perks of living in a single-family home or apartment.
This article discusses the basics of build-to-rent homes, their pros and cons, and whether or not you should invest in this potentially lucrative business model in the Silicon Valley area.
What is a Build-To-Rent Home?
Most developers build properties for people to purchase once they're completed. However, build-to-rent homes are made with the intention of renting them out to long-term tenants.
Planned communities of build-to-rent homes may have a different set-up than homes meant for purchase, such as the home design and amenities for residents.
These homes are typically part of a community managed by professional property management companies instead of traditional homes managed by a private landlord. Professional property management has many benefits, including high-quality maintenance services for residents, high-end amenities like pools and lounges, and enhanced security for residents.
Build-to-rent homes are challenging to create and manage for a new investor, so these projects are usually undertaken only by specialized build-to-rent developers.
Why are Build-To-Rent Homes Becoming Popular?
While the concept of build-to-rent homes started in the 1980s, the business model didn't become popular until the 2008 financial crisis, when the housing market took a big hit, and the economy went into a tailspin.
Build-to-rent homes became a viable option for builders and investors since most people during the Great Recession didn't have the means for a down payment on a new home. They were forced to resort to long-term rentals, and builders, developers, and investors were there to meet the demand.
Today, homeownership in the United States is under 66%. Experts believe this number will continue to decline over the next decade, presenting a strong outlook for build-to-rent housing.
Build-to-rent homes provide benefits including:
Professional property management. Most BTR communities have a professional property management company managing the day-to-day operations, giving residents better maintenance services and a well-kept community.
Flexibility. Instead of buying a home and taking out a 30-year mortgage like most homeowners, those living in a build-to-rent community have the flexibility to move once their lease term is up. This gives digital nomads and remote workers the mobility they want to get up and go whenever they choose.
No large down payment. Conventional mortgages want to see a 20 percent down payment if you want to avoid paying private mortgage insurance; this is not feasible for many people today. Renting in a build-to-rent community doesn't require a large down payment.
Pros and Cons of Build-To-Rent Homes
Build-to-rent homes provide plenty of benefits, but they're certainly not the best choice for everyone. Below are some pros and cons of investing or living in a build-to-rent home.
No need to worry about maintenance issues. Single-family homeowners are responsible for landscaping and ensuring their property is clean enough to meet the standards of the homeowners association (HOA). Build-to-rent communities often have a robust system for maintenance issues that residents don't need to get bogged down in.
No traditional costs of owning a home. Some costs traditional homeowners incur include; paying for repairs, property taxes, and HOA dues. Build-to-rent homes don't require any of the conventional costs of homeownership.
Sense of community. You may find that build-to-rent communities are more neighborly than other developments.
You're unable to build equity in a rental. The biggest downside to build-to-rent homes is that you can't build equity like you would in a house with a mortgage. Instead, your monthly rent goes towards your housing and pays for the maintenance and amenities of the community.
Not as much space. Build-to-rent homes are often smaller than others, meaning you'll have less space which makes it difficult if you have children.
Limited options for personalization. Homeowners enjoy being able to repaint and customize their homes to their personality and style. Build-to-rent homes often have terms that limit your ability to personalize the home.
- Difficult to Compete: Most build-to-rent homes are built and owned by large corporate-style companies that can scale easily. This can be hard to compete with as an individual.
We were selected by Redfin as a top build-to-rent expert! See the article we were featured in: Build-To-Rent Homes: What You Need to Know About the Future of Single-Family Rentals
How to Invest in Build-To-Rent Homes
Investing in a build-to-rent home or community may seem like an attractive idea. However, there are some aspects of BTR homes you should be familiar with before you decide to invest.
BTR homes have significant economies of scale, making it difficult for new investors to break into. Those currently investing in BTR homes are large-scale operations and have the backing of professional developers and property management.
An alternative to building your own BTR home is to invest in a real estate investment trust (REIT). A REIT is an investment of stock in a public company that develops BTR and traditional homes. When the REIT does well, your stock value increases without worrying about the major headaches of property management.
How to Make Your Home a Rental Unit
While building and investing in your own BTR community may not be feasible for ordinary homeowners and investors, there are ways you can make your home a rental unit that generates consistent income each month.
Airbnb remains a great way to do this. Homes in desirable areas near the beach, sports arenas, or tourist attractions can command high prices for short-term rentals.
An extra bedroom in your home can also be used for a long-term rental from a tenant you find and screen on your own.