Even before the pandemic, the build-to-rent sector was booming, as the overall need for market-rate housing increased in many major markets, with desirable single-family homes in particularly short supply. And now, this type of housing is in higher demand than ever and of commensurately greater interest to real estate investors and developers. Instead of single-family homes being owned and rented by independent owners, a corporate owner will build and lease out an entire community of homes.
What is build-to-rent?
Build-to-rent is a real estate model wherein an investor buys a quantity of homes or lots within a neighborhood with the intention of renting them and having them professionally managed. Unlike traditional single-family rentals, which usually start as owner-occupied and go through multiple buyers -- and potentially foreclosures -- before being resold and rented out, build-to-rent can provide something renters rarely encounter: a new- construction home. And they offer more space and privacy than apartments. Single-family homes are always in high demand, and build-to-rent provides that single-family built environment without a mortgage required.
The build-to-rent business model is larger scale than a traditional single-family rental portfolio in scope: a hybrid of multifamily and the single-family investment property purchase. Several build-to-rent homes are typically located in one tract or neighborhood, and they're purpose-built for rentals. The communities feel like gated communities, complete with amenities and professional management.
With an eventual wave of foreclosures seeming inevitable, institutional investors are looking at build-to-rent as a way of offering space, privacy, and new-construction experience to folks who may be temporarily unable to own. Because of extraordinary circumstances the past year, affordable housing is now a major issue among millions of Americans who were previously secure enough to take out a mortgage and may be again in a few years.
In the meantime, "Affordable private rent homes" is a buzzy phrase among those who seek to predict housing market trends and capitalize them.
There are a number of ways to invest in build-to-rent residential real estate
Even more encouragingly, the level of investment required by individuals to get started can be much less than a single-family or residential multifamily home purchase.
Invest in a REIT
This is a low-cost way to dip a toe into the BTR space. However, before you do, research the few REITs that are focused on building new as well as acquiring distressed properties. American Homes 4 Rent (NYSE: AHM) and Invitation Homes (NYSE: INVH) have both entered the BTR asset class, and their commitment is indicative of an industry trend.
Invest in a publicly traded institutional owner/builder
If you prefer to invest in just one developer -- perhaps because it’s easier to do due diligence on 15 master-planned communities than a portfolio of 15,000 individual units -- look for publicly traded builder/developer brands that have a mix of BTR and homes for sale. Lennar (NYSE:LEN) and Meritage both have a mix of build-to-rent and homes for sale.
Invest via a crowdfunding platform
Since the options for REITS and publicly traded build-to-rent developers are minimal, another good way to get into the space might be through one of the more reputable crowdfunding sites. CrowdStreet has been approving build-to-rent deals since recently, believing it after extensive research to be a reliably profitable asset class with nice tailwinds from recent events.
Look into BTR loans and associated tax credits
If you want to invest directly in BTR, the option may be available, provided you have plenty of equity and a track record. The type of loan you’d get would be build-to-rent financing, similar to a construction loan but with the parameter that you’ll be immediately renting the unit to a tenant and not selling it upon completion. You may be able to participate in the LIHTC, aka the tax credit program, to get 10 years of tax credits on your new-build properties as long as a certain number of units are occupied by low-income renters.
The bottom line
The Great Recession provided a huge opportunity for institutional investors, but it was also exhausting for them to be chasing so many thousands of individual single-family home deals. A decade more experienced and possibly wiser about things like property management and amenities, these real estate investors have realized that new construction in planned communities is actually easier for them as well as renters. And investors of all levels can buy into the asset class when so many others seem to have a rocky few years ahead.