Build-to-rent (BTR) communities are a new trend that emerged in the real estate market over recent years, capturing not only investors but also renters. Purpose-built neighborhoods of single-family homes or townhouses made for renting (instead of to be owned by the occupants living in them) are changing the makeup and cost structure of residential real estate. The ongoing growth rates for this sector suggest that there may be an interesting play at these levels for investors looking to hedge against their home, the broader markets, and/or capitalize on changing housing preferences.
What Are Build-to-Rent Communities?
Real build-to-rent communities are just that: thoughtfully built neighborhoods made up completely of rental homes. In contrast to the usual apartment communities, BTR developments are comprised of individually detached single-family homes or townhouses boasting backyards, included garages and similar amenities frequently found in homeownership. These are owned and operated by one private entity, providing a single-family home experience to renters only without the long-term commitment of homeownership.
The Growing Popularity of BTR
What is causing the rise in popularity of build-to-rent communities?
Changing Demographics: Millennials and Gen Z (this generation represents a huge portion of the renter population), tend to prefer renting for flexibility but also want more space and privacy than what typical apartments provide.
Home Prices Are Rising| Affordable homeownership is out of reach for many people in some markets, better it’s a single-family home lifestyle.
The desire for Amenities — A growing number of BTR developments offer appealing, resort-style amenities that attract renters who want extras like pools, fitness centers, and community spaces.
Maintenance-Free Living — For those who prefer the space-type accommodation of a house but are less keen on upkeep, BTR communities offer professional property management and maintenance services.
Pandemic-Influenced Focus: The COVID-19 pandemic has amplified the desire for more living space and a home office nook, which many BTR homes offer.
Investment Potential of Build-to-Rent Communities
BTR communities are an attractive opportunity for real estate investors. Here’s why:
1. Strong Demand and Occupancy Rates
As this housing model grows in popularity, many BTR communities are enjoying high demand and occupancy rates. Investors will, as a result, see steady cash flow.
2. Higher Rents
BTR properties generally carry higher rent bills than traditional apartment units, not least because they are more spacious and therefore suited to a mix of uses; but also, critically, as the laundry rooms are included. This would boost returns to investors.).
3. Lower Turnover Rates
BTR renters generally stay longer than apartment dwellers, which makes property owners more likely to have lower vacancies and turnover costs.
4. Economies of Scale
Operating a community of identical homes creates economies in operation and maintenance, which can reduce costs for the software provider while increasing profitability.
5. Appreciation Potential
The BTR sector is still expanding — albeit tethered to more local constraints — but the rise of this asset class could generate substantial appreciation in values for these properties and communities as it continues to increase market share.
6. Diversification
For property investors, BTR communities represent another way to diversify their portfolios beyond the traditional multifamily or single-family rental properties.
Challenges and Considerations
The investment case for BTR communities is tremendous, but they also come with certain challenges to be aware of:
Large upfront costs: It takes substantial pre-investment of capital to build or buy a BTR community.
Market Saturation: If a market has an overabundance of BTR developments, rents and occupancy may be forced down.
Economic Sensitivity: The broader economic conditions still have an impact on the demand and pricing of BTR communities as with all other forms of real estate.
Regulatory changes: With many BTR communities being a new housing model, there may be evolving regulations that could affect its operations and profit.
The Future of Build-to-Rent
The next era of expansion in build-to-rent is on the horizon. The BTR market is predicted to double over the next 5years according to data from RCLCO Real Estate Consulting. Accordingly, traditional real estate developers are now circling and so too the institutional investors who seek stable long-term returns.
Over time, we could see more efficiencies in design and technology integration as well as better amenities for the community. Sustainability and energy efficiency are likely to develop into significant features of the BTR market, reflecting an upward trend in eco-awareness among renters.
Conclusion
Build-to-rent communities are a new frontier in the pending residential real estate landscape, combining aspects of single-family living with rental flexibility. This is an opportunity for investors to capitalize on evolving housing preferences and potentially earn compelling returns.
However, as they say with any investment you need to do a bit of due diligence. With that said, any potential investor must do their homework before dipping their toes into the BTR market, including market dynamics, location factors, and operational challenges. For the investor with a more passive profile in real estate and willing to take on scale risk, build-to-rent communities could feasibly serve as the anchor asset class within one’s diversified investment holdings.
With the housing market ever changing likely build-to-rent communities will become more relevant to a broader range of modern renters going forward while giving smart investors attractive investment options.