By Mike McMullen, CEO of Prominence Homes and author of Build. Rent. Sell. Repeat!
The Build to Rent sector gathers steam each day and shows no sign of slacking off. But many people misunderstand the inner workings of the market and fail to see what sets it apart. This article will demystify Build to Rent for the average investor. In short, Build to Rent is successful because of concrete math – not flippant fads.
What is Build to Rent?
Sometimes abbreviated B2R, BTR or BFR, Build to Rent is exactly what it sounds like: a real estate model where builders construct housing intended for use as rental property. Some Build to Rent companies construct individual units, while others build entire rental communities. In either case, the basic process and motivation remain the same.
Markets across the southeast and Sunbelt states have seen a boom in the sector due to simple underlying math. Build to Rent can provide a solid return on investment, a cheaper cost of production and strives to meet increasing consumer demand.
Return on investment
Build to Rent is attractive for a plethora of reasons. New rental properties typically have extremely low maintenance costs through the first several years, which helps improve net cash flow. These properties also generally lease at a higher rent level and when located in low property tax states, like Alabama, the ROI can be very strong.
Furthermore, should they decide to pull cash out after a few years in the rental business, they can easily refinance or sell off individual properties – which can be a huge advantage over multifamily investing. For Build to Rent real estate investors, this solid return-on-investment is both enticing and dependable.
Cost of production
For builders, time is money, and standardising the product saves time. Many construction companies appreciate Build to Rent because of its standardisation. They don’t deal with emotional buyers. They typically don’t need to give each unit custom fixtures or deal with change orders.
Builders also save money more directly by buying in bulk and fulfilling a smaller number of warranty requests. They can focus on what they do best – reliably producing needed products without all of the fuss.
Rate of consumption
Finally, consumers drive the growth of Build to Rent by demanding an increasing supply of middle-range rental property. Reasons for this market demand are varied but rely on current demographic trends: millennials are maturing, baby boomers are moving and more people are renting.
Consumers also demand single-family rental housing at higher rates than ever before. Single-family rental properties are 5.6% more occupied than they were in 2007 and the percentage continues to grow. So long as demand outpaces supply, this sector will continue to boom.
The future of Build to Rent
A person cannot step into the same river twice, neither can they invest in the same market. By the time this article is published, the market will have changed. But Build to Rent is more than a fad. Like a house hefted on a slab, Build to Rent is supported by concrete math. It’s a relatively new model, but one that has battled through the trial period and emerged as a strong contender.
Build to Rent may be going places, but it isn’t going away anytime soon.