Mike McMullen is the CEO of Prominence Homes and the author of Build. Rent. Sell. Repeat!
getty
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, this approach to rental property and management 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 and developers construct housing intended for use as a rental property. Some build-to-rent companies construct individual units, while others develop land from the ground up, turning unused space into fully furnished communities. In either case, the basic process and motivation remain the same.
Markets across the southeast have seen a boom in the sector, with Florida forming the latest virgin territory for investment and growth. What is the reason for this boom? Simple math. Build-to-rent can provide more return on investment, a cheaper cost of production and strives to meet increasing consumer demand.
Return On Investment
Build-to-rent tends to be lucrative for a plethora of reasons. Because the communities are meticulously planned with renters in mind, they look more professional than neighborhoods containing a high percentage of individually owned rental properties. Developers often erect build-to-rent communities in close proximity to good schools and allow for ample driveway and garage space, clearing up the road. Once they are completed, owners of these communities often manage landscaping wholesale, producing crisp results at premium rates.
MORE FOR YOU
These disparate elements combine to produce a superior product. In many cases, owners can charge up to 20% more for rent than they might on housing acquired using fix-and-flip methods. Furthermore, should they decide to cash out after a few years in the rental business, owners stand to make more profit on youthful properties. For financial backers, this solid return-on-investment is both enticing and dependable.
Cost Of Production
For builders, time is money, and standardizing the product saves time. Many construction companies adore build-to-rent because of its standardization. They don’t deal with finicky owners. They often don’t need to give each unit custom fixtures or particular tones of paint. Instead, they can focus on what they do best — reliably producing needed products without all of the fuss.
Builders also save money more directly by buying in bulk and fulfilling a smaller number of warranty requests. Though it is still standard practice for builders to provide one-year warranties on a rental property, fewer requests are made because investors are likely to have fewer preferences than private owners.
Rate Of Consumption
Finally, consumers drive the growth of build-to-rent by demanding an increasing supply of middle-range rental properties. Reasons for this market demand are varied but rely on current demographic trends, including millennials maturing, baby boomers moving and more people overall are renting.
Consumers are also demanding 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, the build-to-rent 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 is 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.
Forbes Real Estate Council is an invitation-only community for executives in the real estate industry. Do I qualify?