The New Build-To Rent-Trend In Investing

The New Build-To-Rent Trend

My company recently closed on a new type of investment deal that is a trend being set by several large multifamily operators. I'd like to share this to educate others on this concept, in the hopes it will help some people invest safely and wisely in 2021 and beyond.

In December of 2020, Dreamstone Investments and our partners, closed on a 19 unit townhouse-style rental community in Wilson County, a suburb of Nashville, TN. This project was different than purchasing a multifamily property, or building townhouses to be individually sold. because it was a new type of investment model known as Build-To-Rent or BTR. A BTR is a project where a community of townhomes, or SFRs, are built to be held and rented by an investor, rather than sold off to individual owners.

This BTR community we just closed on is designed to serve young families in metro Nashville, who want more privacy and more of a “house-feeling” than an apartment. It is perfect for those who aren’t ready to own a place, but want a place that they would be happy to own.

Location

Location is important. We chose an area that is starting to see expansion and is likely to see much more in the coming years. The city of Nashville is in Davidson County, which just experienced a 34% property tax increase! As a result, people are moving to suburbs, such as Wilson County, where we built Hartsville Pike Townhomes. We like buying in locations that are in the path of progress so we can take advantage of the upside as the area grows.

Win Win

Residents like the BTR product because it offers an alternative to older rental houses for those renters who don’t wish to live in an apartment community. Residents like the idea of living in a new home even if they aren’t yet ready to purchase. The townhouse-style units offer more privacy and personal space than an apartment building, and they feel much more like a single family house, but without the lawn and property maintenance. With this community’s location being a short drive to downtown Nashville, young professionals who work downtown can live in a new home at a fraction of the cost of a place in the city.

Investors like the BTR product because we can take advantage of the economies of scale, cheap Fannie Mae and Freddie Mac agency debt, and competitive building costs to buy a new product that will have low-to-no maintenance costs for several years. Builder warranties and new construction mean the first few years of ownership have much lower expenses than an existing building.

Also, rental demand for BTR units is strong. With millennials reaching prime housing age, while strapped with high levels of student loan debt, renting is their best option.

Lastly, the build-to-rent offers multiple exit options. When it’s time to sell or cash out investors, each unit can be sold individually or the entire community can be sold. If selling individually, a unit can be sold to an existing tenant via a rent-to-own scenario or sold to a traditional buyer, or sold to an investor who buys single rental units. If being sold as a community, the property can be sold to another multifamily investor. Multiple creative solutions are available with this type of asset.

Conclusion

So there you have a high level overview of what BTR is, the type of resident who will demand it, why the residents like it, and why investors like it. We plan to do more of these in the future and believe the market will continue to demand it. We also believe more multifamily operators will add this BTR model to their portfolio. If you're interested in learning more, feel free to reach out to me and I'd be happy to share what my team is learning as we continue forward.