Build-To-Rent homes: A renter’s and investor’s guide

Build-to-rent (BTR) housing is an expanding asset class in the US residential real estate market, offering purpose-built single-family rental communities with amenities and professional management. According to Yardi, the US saw the construction of BTR homes reach a 10-year high, in particular with popularity in southern urban regions. 

As homeownership affordability decreases amid rising prices and mortgage rates, BTR properties cater to shifting lifestyle preferences and demographics that favor high-quality rentals. Institutional investors are taking note of favorable market fundamentals like lower new housing supply and strong tenant demand drivers like millennials delaying home-buying that underpin future growth in the sector.

This article explores the key characteristics of build-to-rent homes for rent, how they differ from traditional housing options, who is fueling demand, and why investors see long-term value supported by lifestyle changes and limited housing supply.

What defines build-to-rent homes?

Unlike existing homes and rental properties rented by individual landlords, build-to-rent communities share several common traits:

• Newly constructed houses, apartments and townhomes built specifically for long-term rentals rather than purchase.
• Units concentrated together on one site and professionally managed by a single owner or operator.
• Community amenities like gyms, lounges, coworking spaces and outdoor spaces.
• Contemporary size standards and layouts tailored to renters.
• Location priorities include suburban neighborhoods and transport hubs near employment centers.
• Lease terms over six months cater to renters seeking stability and flexibility.

Compared to traditional apartments, BTR offers larger living spaces better suited for couples, families and working from home. Units built to rent out are designed and managed to higher standards given single institutional ownership and emphasis on resident experience to attract and retain tenants long-term.

Who is fueling growth in build-to-rent?

Several factors are driving demand growth from both tenants and investor perspectives:

Renter demand drivers

• Reduced homeownership affordability with high prices and mortgage barriers.
• Young professionals delaying home purchase as lifestyles change.
• Flexibility and amenities appealing to millennial and downsizing demographics.

Investor demand drivers

• Attractive yields and total return profiles relative to multifamily.
• Resilient incomes through cycles offer portfolio diversification.
• Fragmented emerging sector allows growth opportunities.

Build-to-rent uptake has gained momentum in recent years in sync with evolving renter preferences. The United States has a sizable overall stock of single-family rental homes, but the subclass of institutional owned purpose-built communities remains comparatively low. Multiple reports point to newly completed build-to-rent homes across several growth-oriented metros exceeding capacity added over the prior decade. With continued demographic shifts in household formations and lifestyle priorities, promising forecasts predict the still nascent sector maturing to become a notable real estate category.

This rapid growth makes sense given the favorable demand drivers from both changing renter preferences and rising interest rates from investors seeking to capitalize on demographic shifts.

Comparing build-to-rent with traditional rentals

BTR communities differentiate themselves from single family rental homes from existing homes rented by individual landlords in several ways catering to today’s renters.

Property conditions and amenities

• New construction built to modern sustainability and efficiency standards.
• Shared community amenities like gyms, pools, lounge spaces promote resident engagement.
• Smart home technology and high-speed internet connectivity.
• Emphasis on placemaking through interior design and neighborhood planning.

Service and communication

• Professional property management staff available on-site.
• Digital apps for rent payment, repairs, community event booking.
• Regular tenant events and satisfaction surveys.
• Income and background screening streamline application process.

Stability and flexibility

• Longer standard lease terms provide security.
• Options to renew or switch between available units.
• Some family-sized floorplans not readily available elsewhere.

Overall, BTR operators aim to provide exceptional service levels, convenient amenities, and a sense of build to rent community lacking in scattered DIY rentals. These advantages support longer tenancies, relationships and brand loyalty.

Comparing Build-To-Rent with other forms of housing

While there are also other affordable paths to homeownership, people may say that BTR offers advantages including:

• Deferred decision-making if undecided on locations long-term.
• Avoidance of high moving costs during early careers.
• Savings on furniture and amenities costs included.
• Family-sized units available, most shared equity models focus on 1-2 beds.
• Potential for greater community belonging, events and consistency in quality lifestyle.

Of course, owning a home outright offers the future equity upside from ownership. But BTR provides its own financial advantages:

• Predictability in rents allowing easier budgeting, often with caps on increases.
• Lower upfront costs without deposit to secure rental.
• Additional disposable income possible without high mortgage payments.
• Investment returns possible elsewhere with excess savings.

The optimal choice depends on individual financial situations and goals. With affordable home ownership receding, BTR is becoming a more and more popular option of high-quality housing with financial flexibility.

BTR’s role in the real-estate market

Build-to-rent can be part of a more diverse residential real-estate sector, in particular because of:

Speed of delivery

Build-to-rent communities can often be constructed more rapidly than traditional housing developments because they utilize standardized designs, modular components, and institutional investment sources. By taking a consistent product to market, BTR streamlines planning, financing, and construction compared to one-off custom homes.

Housing diversity

While important for these homes fail to meet demand for family-sized rentals, build-to-rent introduces larger and innovative floorplans for multi-generational households, upgraders, and downsizers. 

Geographic flexibility

Build-to-rent sites are increasingly located near suburban transportation hubs, employment centers, and lifestyle amenities rather than solely within city centers. Tailoring the locations to jobs and amenities makes BTR attractive for commuters and those less tied to urban cores. Spotlighting specific transport corridors aligns planning aims around 15-30 minute neighborhoods.

How does build-to-rent compare to other housing?

Given its increasing scale on the rental market, build-to-rent occupies an interesting middle ground between apartments and single-family rentals:

Vs. Apartments

Btr floorplans

Build-to-rent communities typically provide more space with floorplans better suited for families and households seeking private outdoor space. Large units with 2-4 bedrooms and additional dens cater to changing living patterns after the pandemic. Developers emphasize these usable layouts aligned with renter requirements rather than maximizing unit density.

Locations

Residents often benefit from open green space and landscaping in more suburban build-to-rent locations connected to public transport, dog parks and area attractions. These communities aim to replicate neighborhood appeal rather than concentrating units in busy urban centers. Renters gain access to the entire metro while still enjoying quiet residential settings.

Community orientation

Build-to-rent properties focus less on scale efficiencies and more on shared amenities and facilities that bring residents together. Landscaped grounds, clubhouses, coworking lounges, swimming pools and outdoor spaces encourage community building. Operators recognize this resident experience supports long tenancies and brand reputation.

Long-term ownership

Institutional investors manage build-to-rent developments with a longer investment horizon than typical rental landlords. By taking stakes in hundreds of units at a time, BTR providers can cater to tenant retention and satisfaction across housing market cycles. This long view leads to higher service levels.

Vs. Houses

Quality and consistency

Compared to one-off single family rentals, build-to-rent communities offer consistent quality and amenities optimized for rental living across all units. Centralized ownership and professional management also increase accountability for maintenance issues. Renters enjoy assurance that their BTR home meets the same modern standards as their neighbors.

Amenities and sustainability

New purpose-built rentals incorporate cutting-edge amenities, smart home technologies, EV charging, and sustainability features that individually owned existing stock lacks. Open green spaces, shared community facilities, and amenities all enhance quality of life. Build-to-rent also tend to lead ESG principles as well in terms of community impact.

Professional management

The centralized and institutional ownership structure of BTR allows for dedicated on-site staff responsible for community upkeep and coordinating resident needs. Having this professional management maximizes efficiency. It also enables regular community events and peer networking unmatched by single-family rentals.

Events and social offerings

Programming like holiday events for families, fitness classes, cooking lessons etc. help build connections between BTR residents that individually owned units single family homes could never match. Dedicated staff plan, market and facilitate regular social events further strengthening community spirit. These offerings address isolation issues during the pandemic.

Why are institutions investing in build-to-rent?

According to Cushman & Wakefield, the BTR Sales volumes have grown nearly 8-fold between 2013 and 2022, reaching a peak of just under $3bn that year. 

Institutional capital flowing into the BTR sector recognizes it offers several valuable investment characteristics:

1. Through Cycles BTR yields have shown greater resilience through downturns than other property types, enabled by long-term tenant demand.
2. Returns may have lower correlations to traditional property and financial markets.
3. Total return prospects may be robust even as banks tighten mortgage lending.
4. The supply-demand imbalance promises rental growth as demand outpaces new housing.

As major investment banks, property companies and institutional investors increase BTR allocation, the sector is at an inflection point to account for an increasingly important proportion of new housing to come.

Build-to-rent financial model — a fictional example

• 200-unit single-family build-to-rent community development.
• Total project cost of $40 million ($200,000 per door).
• Mix of 3-4 bedroom homes.
• Located in a fast-growing suburb with strong demand.
• Institutional joint venture partnership for development.
• $2 million annual net operating income.
• $40 million total cost.
• Institutions may fund 20-40% of costs as equity.
• Remainder obtained via construction financing.

By securing backing from an institutional investment joint venture under favorable yield parameters, the full-service rental property could stabilize by Year 2 producing $2 million in annual income, reflecting a 5% capitalization rate on total cost. 

Over a 10-year hold, the asset could yield up to 10% IRR to the equity partners depending on the committed equity, cost of debt and level of rent growth headroom and expense leverage, achieving a notable return if robust housing demand persists.

Build to rent loans 

Specialized build-to-rent loans have emerged in recent years catering to the growth of large-scale single-family rental developments. These BTR loans provide capital for property acquisition, vertical construction, and renovation for projects typically consisting of at least 50 units. 

Terms usually cover the entire project life cycle with flexibility. Loan qualification factors in location attractiveness, architectural plans, and managerial expertise in assessing likely performance. 

Additionally, these balances may be packaged as credit tenant loans (CTLs) generating interest streams for third party investor capital. Compared to small balance single-family financing needing individual approval, BTR loans can fuel the proliferation of professionally managed communities with favorable financing aligned to business plan timelines. 

Conclusion

In summary, build-to-rent homes serve a growing purpose-built rental housing market supported by favorable lifestyle shifts, demographics, urbanization and housing undersupply. 

Investors recognize BTR properties as a differentiated emerging asset class providing portfolio diversification, inflation-hedging income resilience and long-term growth potential. The scale and sophistication of the BTR market will continue maturing in lockstep with tenant demand as perspectives on renting itself transform across generations.