The Rise of Build-to-Rent

The build-to-rent real estate investment approach has undergone a dramatic resurgence over the past few years. Its popularity is on par with the likes of multifamily development and single-family rehab rental conversions and the market dynamics fueling their effectiveness are similar to other expanding rental sectors.

Poised for Continual Growth

Here’s a snapshot of some key reasons why the build-to-rent model is primed for continued success well into the future:

1. The price of real property is increasing on a nationwide basis. Accordingly, a significant percentage of aspiring homeowners have been priced out of the market and forced to put their homebuying plans on hold. This has prompted thousands of individuals to resort to renting until they can afford to purchase a home.
2. Inventory levels are severely reduced across the country. The simple truth is that there is currently an inadequate housing supply to meet the persistent demand. This has forced buyers to wait, and in the meantime property prices continue to skyrocket—making rental options an increasingly incentivizing option.
3. There are a number of potential perks that single-family property rentals that apartments simply cannot match. Amenities such as a yard for pets and enhanced privacy make the build-to-rent model an ideal fit for families looking for flexible accommodations.
4. The management aspect of build-to-rent property assets is more streamlined. Landlords of single-family rental units are forced to oversee several geographically dispersed properties. On the other hand, the build-to-rent approach enables owners to keep tabs on a compact portfolio of properties in the same development—making it more affordable and less time-consuming to manage.
5. The rental market is performing optimally in nearly every local market in the U.S. Single-family rentals and build-to-rent projects are on the rise because they offer the benefits of homeownership without the astronomical costs.
6. The rise of telework in the wake of COVID-19 has given tenants more flexibility as to where they live. Workers are fleeing the urban sprawl in search of a better cost of living and more space.

Developers are breaking ground on build-to-rent projects in markets across the U.S., meaning there is an abundance of investment opportunities offering consistent cash flow, optimal credit ratings and a viable strategy. There are several key factors that real estate experts are projecting build-to-rent to be a strong performing sector for the foreseeable future, including:

• High occupancy rates for single-family housing units
• Demand for rental housing options is steadily increasing
• Property values for single-family housing options are trending upwards
• Loan-to-value (LTV) ratios are declining
• Mortgage default rates in the single-family residential market are falling

Build-to-Rent Upside for Lenders

The build-to-rent model also presents a great opportunity for lenders. Lenders can provide modest, short-term loans to complete single-family rental projects, with these types of properties being preferred by the fix-and-flip industry. Alternatively, build-to-rent involves projects with a bigger scale and the funding necessarily is extended over a longer period. This translates into increased earnings for the lending entity.

In the majority of build-to-rent transactions, lenders are cooperating with experienced builders to structure a viable commercial loan as opposed to a young first-time residential homebuyer on a relatively straightforward mortgage. That is a plus from a lender’s perspective as commercial loan packages generally carry higher interest rates compared to residential loan options—meaning higher profits for lenders at the end of the day.

An additional bonus for lenders is that build-to-rent tenants typically have more of an ability to afford premium rent prices as opposed to multi-family tenants. Families are usually willing to pay substantially higher rents for the numerous amenities build-to-rent communities have to offer such as public parks, recreational areas, more square footage and enhanced curb appeal. Many of these developments are walkable and gated, offering a better daily quality of life to residents.

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