Real Estate Concepts - September 10, 2023

Build to Rent Investing: an Accredited Investor’s Guide

September 10, 2023

Abby Blumenfeld
By Abby Blumenfeld

Build to Rent Investing Definition

Build to rent properties are freestanding homes that are planned and developed for renters, as opposed to for immediate sale. Investors in build to rent properties and communities seek to capture positive rental cashflow by delivering unique, in-demand housing supply in target markets.

Built to rent is one of the most significant “niche” asset classes to emerge in real estate investing in recent years. The real estate investing landscape is constantly evolving in response to demographic trends and shifting tenant preferences. Build to rent (BTR) homes are a relatively new concept for renters and investors alike. This innovative approach to real estate development caters to the growing demand for rental properties that offer the amenities and lifestyle of a traditional home without the commitment of ownership. 

As an accredited investor, understanding the nuances of build to rent can unlock new opportunities for diversification and growth in your investment portfolio. The build to rent asset class is an intriguing subset of residential real estate, alongside multifamily, student housing, senior living, manufactured housing, and other models. This article takes a look at build to rent through the lends of an individual accredited investor seeking to build a more diversified portfolio. 

What is Build to Rent Investing?

Build to rent refers to the practice of constructing single-family homes or communities with the sole purpose of renting them out. Unlike traditional rental properties, which may have been previously owned or occupied, BTR homes are designed from the ground up to meet the needs of modern renters. These properties often feature contemporary designs, community amenities, and professional management, providing a high-quality living experience that appeals to a broad demographic, from millennials to small families.

To illustrate, consider a BTR community in Austin, Texas, where each home features smart home technology, energy-efficient appliances, and a shared community space with a pool and fitness center. The development caters to tech-savvy professionals who value sustainability and community engagement but are not yet ready to purchase a home.

Why is build to rent Gaining Popularity?

Several factors are driving the demand for build to rent homes. For one, the financial landscape has shifted, with many potential homeowners facing obstacles such as student debt, rising home prices, elevated mortgage rates, and the desire for more flexible living arrangements. BTR properties offer a solution by providing the benefits of a single-family home—such as space, privacy, and community—without the financial burdens of a mortgage and maintenance.

The burgeoning BTR sector is a response to the acute affordable housing crisis, particularly in high-cost urban and suburban regions. As per the National Low Income Housing Coalition, the U.S. faces a shortfall of over 7 million affordable and accessible rental homes for low-income renters. BTR homes, by offering cost-effective living solutions, address this gap. This model may uniquely address the housing shortfall among millennials: a high-population generation that is renting later in life, even as they form larger households and have children.   

Moreover, the shift towards remote work has altered the traditional dynamics of urban living. People are seeking more comfortable and spacious environments that can accommodate home offices and outdoor activities, which build to rent properties can offer.

For example, a recent survey by the National Association of Realtors found that over 30% of millennials prioritize home office space in their housing decisions, a need that BTR properties are well-positioned to fulfill.

The Investor’s Perspective on Build to Rent

From an investment standpoint, BTR properties present several advantages:

  • Stable Cash Flow: BTR properties tend to attract long-term tenants, leading to lower turnover rates and consistent rental income. For instance, a BTR development in Charlotte, North Carolina, reported an average tenancy of three years, significantly higher than the local average for traditional rentals.
  • Market Resilience: The rental market has historically been less volatile than the asset market, providing a buffer during economic downturns. Data from the 2008 financial crisis showed that while home sales plummeted, rental demand remained relatively stable.
  • Scalability: Investors can participate in build to rent projects at various levels, from individual properties to entire communities, allowing for portfolio diversification. A case study of a BTR fund in Florida demonstrated a 12% annual return over five years, showcasing the scalability and profitability of such investments.

In sum, build to rent investments offer many of the same potential benefits as multifamily: an irreplaceable tangible asset, stable cash flow, and the ability to tap into economies of scale. However, build to rent homes and communities tailor to a slightly different renter profile. Hence, build to rent investments may offer further diversification for an investor already allocated to multifamily assets. 

build to rent homes

Key Success Factors for BTR Operators, Sponsors, and Investors

Like any CRE asset class, build to rent strategy carries its own nuances and success criteria. 

Operational Excellence:

Successful BTR operators and sponsors differentiate themselves through operational excellence. This includes efficient property management, tenant satisfaction, and maintenance, ensuring high occupancy rates and tenant retention. Effective management is critical in fostering a community-centric environment, which is a core appeal of BTR homes.

Many build to rent properties and communities are advertised as having dedicated, on-site management. Being able to market and deliver on these benefits in a cost-efficient manner is key to successful build to rent investing. 

Strategic Location and Community Development:

The choice of location and the development of community amenities play a crucial role in the success of build to rent investments. Proximity to key amenities, such as schools, shopping centers, and public transport, combined with in-community facilities like parks and recreational areas, enhances the attractiveness of BTR homes. 

This largely comes down to understanding the target tenant profile and demographics of the market or submarket. As such, operators with more boots-on-the-ground presence and experience in a given market may be best positioned to deliver a quality product and strong returns.

Strong Architectural Planning

If you are interesting in a BTR fund, community, or portfolio, you’ll want to ensure that the manager is equipped with a strong and scalable architectural plan for delivering on quality build to rent properties at scale. 

When investing passively in build to rent homes or communities, you won’t have to contend with these challenges. Still, it pays to understand the sponsor’s track record and experience with executing on build to rent investments.  

How to Invest in build to rent Properties

Accredited investors have multiple avenues to explore BTR investments:

  1. Direct Ownership: Purchase BTR properties outright, either individually or as part of a development project. This approach allows for complete control over the investment but requires significant capital and active management.
  2. Real Estate Investment Trusts (REITs): Invest in publicly-traded or private REITs that specialize in BTR properties. REITs offer liquidity and diversification, with some focusing exclusively on BTR developments, such as the XYZ BTR REIT, which has a portfolio spanning multiple states.
  3. Online Investment Platforms: Utilize platforms like EquityMultiple invest fractionally in vetted build to rent properties, communities, or portfolios. EquityMultiple provides streamlined access to diverse real estate assets, like build to rent, allowing for smaller capital contributions and diversification across projects.
  4. Private Equity Funds: Join private equity funds that focus on BTR developments, offering potential for higher returns. These funds often have a minimum investment threshold and target large-scale projects with significant growth potential.

EquityMultiple allows you to invest passively and easily in innovative commercial real estate strategies like build to rent alongside experienced sponsors.

Navigating the BTR Market with EquityMultiple

EquityMultiple stands out as a platform that simplifies the process of investing in BTR and other real estate opportunities. With a focus on due diligence, industry knowledge, and a curated selection of investments, EquityMultiple enables investors to confidently enter the BTR market. The platform’s educational resources and support system guide investors through their real estate investment journey, making it an ideal choice for those new to BTR investing.

Why Does EquityMultiple Like the Build to Rent Asset Class Now? 

Market Expansion and Continued Growth:

The BTR market is poised for continued growth, driven by demographic shifts, changing consumer preferences, and the persistent shortfall of quality rental housing in the U.S. The trend towards flexible, community-oriented living and the challenges in homeownership are expected to sustain the demand for BTR homes.

Up until mid-2022, major institutional investors, including Blackrock, heavily allocated resources to the BTR sector. This trend underscored the market’s confidence in BTR homes as a stable and lucrative investment avenue.

The recent pull-back by large institutional players like Blackrock from heavy BTR investment has opened the market for middle-market sponsors and operators. This shift creates a unique opportunity for these players to capitalize on the growing demand for BTR homes, filling the gap left by larger investors.

The retreat of major institutional investors paves the way for more dynamic and flexible investment strategies by middle-market entities. These players can adapt quickly to market changes and tenant preferences, potentially leading to innovative BTR projects that cater to specific market niches. EquityMultiple’s focus is on working with experienced middle-market sponsors and operators who can move nimbly to take advantage of demand drivers in markets across the U.S.

Conclusion

Build to rent investing represents a strategic shift in the real estate market, aligning with contemporary housing trends and investor preferences. As the market continues to grow, accredited investors should consider the potential of BTR properties to enhance their portfolios and capitalize on the changing real estate landscape.

As recently as several years ago, the build to rent asset class was dominated by institutional asset managers like Blackstone. Now, through platforms like EquityMultiple, individual investors may be able to participate.

If you have questions about build to rent investing, or any other real estate asset class, don’t hesitate to reach out to ir@equitymultiple.com.

FAQs on build to rent Investing

Q: What makes build to rent properties attractive to renters?

A: BTR properties offer the space and privacy of a single-family home, along with amenities and professional management, without the long-term commitment and financial responsibilities of homeownership.

Q: Can build to rent properties be a hedge against market volatility?

A: Yes, the rental market often shows resilience during economic downturns, providing a stable income stream for investors.

Q: Are there tax benefits associated with investing in build to rent properties?

A: Investors may benefit from various tax deductions related to property depreciation, maintenance expenses, and mortgage interest, subject to individual circumstances and tax laws.

Q: How does EquityMultiple support investors interested in build to rent?

A: EquityMultiple offers a platform with vetted investment opportunities, extensive educational resources, and a support system to guide investors through the nuances of BTR investing.

Q: Is build to rent investing suitable for all accredited investors?

A: While BTR can be an excellent addition to a diversified portfolio, it’s essential for investors to assess their risk tolerance, investment goals, and financial situation before committing to any real estate investment.

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Abby Blumenfeld
Abby Blumenfeld
Abby Blumenfeld is the Senior Investor Relations Analyst at EquityMultiple. Originally from Massachusetts and a graduate of Quinnipiac University, Abby has an extensive background in both commercial and residential real estate. Before joining EquityMultiple, she gained experience working with commercial properties at Cushman and Wakefield. Her experience includes both the New York City and Boston real estate markets. At EquityMultiple, Abby is responsible for developing relationships with prospective investors, ensuring clear communication, and serving as the primary point of contact for investors. If you reach out to EquityMultiple, there’s a good chance you’ll interact with Abby during your journey. Outside of work, Abby enjoys playing pickleball, tennis, and traveling.

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