How to Reap Big Benefits From Build-to-Rent Investments

Once upon a time, foreclosures were considered one of the hottest real estate investments you could make. However, over the past several years, inventory has been steadily falling, leading residential realty investors to search for better, more sustainable ways to spend their cash and earn favorable returns.

If you’re an investor anxiously watching the foreclosure market dwindle before your eyes, here’s a market trend that should inform your plans: As owner-occupied housing has steadily declined, rentals have increased to 37 percent of American households.

Buy-to-sell was once all the rage, but now the door’s swinging wide open for the build-to-rent asset class.

Crumbling vs. Current

Foreclosures are often accompanied by a long list of problems. For example, vacant houses often have maintenance issues, rest on grounds that need attention, and belong to neighborhoods on the decline.Run the numbers, and the shortcomings and costs can easily cancel out the returns.

On the other hand, building to rent with a large-scale builder is a way for serious investors to broaden their portfolios and reap serious profits. Large homebuilders target locations suited for future growth, and new homes appreciate at a better rate than existing home stock. Further, large homebuilders often build for less than $70 per square foot — you won’t find any small builder that can match this low number.

Partnering with a large-scale builder also allows you to buy in bulk with a lower initial investment — and realize much better returns. Forget foreclosures, and reap these four big benefits from investing with big builders:

1. Margins. Step one is just doing the math. Profit margins of publicly traded builders — like D. R. Horton, Ryland, and Lennar — can skyrocket into the 20 to 25 percent range. This doesn’t mean you will automatically see similar margins, but given the right situation, builders like these give you the best shot at getting a great deal.

Investors have an easier go at getting financing on the property because it will comp and appraise at a higher value than the building costs. Then, they can turn the home into a rental property and take advantage of the rising rental market. The house pays for itself without the cost of rehabbing or dealing with countless maintenance issues as the builder typically offers good warranties.

2. Financing. In the right situation, big builders will actually finance your build. D.R. Horton, for example, will finance a $400,000 house for as little as $500 upfront — it’s amazing, really. Smaller builders typically require somewhere around 20 percent down or, tougher, all cash upfront.

Because operating on a larger scale drives down their other costs, large builders are afforded certain advantages — such as greater access to credit. And some are beginning to sweeten the deal even more by offering institutional buyers bulk discounts.

3. Diversity. Large builders are already working in multiple established neighborhoods, so they’re essentially a one-stop shop for investors looking to build large, diverse portfolios. Homes can be spread across communities and even different states with the same builder.

4. Know-How. Large builders know what they’re doing. They close on time, their houses are well-built, and their warranties make sense. A small builder won’t have the scale of production to really drive the costs and speed to where they need to be.

Small builders just leave open too many variables. You never know if they’ll close on time, they often run into problems, and they commonly incur cost overruns. Big builders absorb their own cost overrunsand say, “Hey, that’s on us.” Small builders pass those costs along to the investor.

With shrinking foreclosure inventory and growing rental housing rates, the build-to-rent asset class provides a nice shot in the arm to realty investment opportunities. And by partnering with large production builders, investors reap the reward of lower down payments, better margins, volume-based discounts, portfolio diversity, and so much more.

Why continue riding the foreclosure train when you know it’s been slowly coming to its last stop for years? The advantages are obvious: Start anew by becoming a build-to-rent investor.