Build-to-Rent Communities: What Investors Should Know

Right now, renters are ditching apartments with paper-thin walls and noisy upstairs neighbors for single-family rentals that offer more space and privacy, and investors are cashing in. This shift has caught the eye of real estate investors, who are kickstarting the build-to-rent boom. Before getting in on this trend while it's hot, you'll probably find yourself asking: is this investment trend worth your time and money?

This article covers build-to-rent communities and why they're on investors' radars. We'll break down the economics, from higher rents to economies of scale, and look at where these communities are popping up across the US. Plus, we'll cover some tools that help manage you these investments.

For investors and real estate enthusiasts alike, this is your guide to the build-to-rent phenomenon.

Defining built-to-rent communities

Built-to-rent (BTR) refers to single-family homes created specifically for renting. Developers create BTR communities specifically for renters who aren't interested in or ready for home ownership. The goal is to appeal to these long-term renters with new homes that have the latest features and amenities. Some perks you might find in these rental communities include:

• Fitness centers
• Dining and social areas
• Communal gardens
• Walking trails
• Dog parks
• Coworking spaces

Build-to-rent homes

BTR homes are single-family rental properties like individual homes, townhouses, duplexes, small-lot homes, or row homes. These communities don't include apartment buildings, as the whole concept focuses on single-family rentals. A build-to-rent home typically has open floor plans, modern finishes, and more thoughtful layouts than your average rental.

Benefits of build-to-rent homes for investors

Build-to-rent communities are taking off — since 2019, these developments have grown by 270%. What makes these properties so exciting to investors?

Renter trends and demand

Single-family homes have mass appeal, but many Americans aren't in a financial position to purchase a home. This creates a demand for rental houses, and investors are jumping on it. The demographics interested in build-to-rent properties include:

• Millennials: This group is struggling to buy homes in today's market. High house prices due to low supply, along with rising interest rates, have made homeownership tougher in recent years. However, millennials still crave the space and privacy of houses. As the largest demographic in the US, their desire for single-family living is driving demand for build-to-rent developments.
• Blue collar workers: Affordable housing has been challenging to find for several years now, and recent economic changes have only made things harder. These circumstances created an opportunity for developers to create affordable build-to-rent homes.
• Baby boomers: This demographic represents the second largest population group, and by 2030, they'll all be 65 or older. As their kids move out, they're looking to downsize. They don't want to live in apartment complexes, but they want the freedom of a single-family home without the hassle of maintenance. A build-to-rent community checks all these boxes for them.

These demographics indicate a nationwide demand for BTR communities, but much of its development occurs in states with warm climates. In 2023, 5 markets led the pack for new BTR homes:

1. Phoenix, Arizona
2. Dallas, Texas
3. Atlanta, Georgia
4. Austin, Texas
5. Charlotte, North Carolina

Higher rental income

A build-to-rent property brings in higher rent than an apartment unit. Tenants have always been willing to pay extra for their own space and the perks that come with it, like yards, privacy, and more elbow room. For real estate investors, this means a bigger ROI from day one.

Lower vacancy rates

These rental properties have fewer empty units and less tenant turnover than apartments. People living in a build-to-rent community tend to get involved and make friends, which means they're more likely to renew their leases than tenants in apartment buildings.

Investors love this dynamic: less turnover and fewer vacancies mean lower costs. You don't have to spend as much on cleaning, painting, or fixing units between tenants. Plus, you save on marketing, ads, and the hassle of showing units and screening new tenants all the time. All of this leads to more money in your pocket.

Economies of scale

Multi-family investors always brag about their economies of scale over single-family homes. They talk about how having all their units in one location leads to more profit and lower management costs. Well, guess what? Build-to-rent communities get those same benefits. Here's how:

• Centralized property managers: You can have onsite teams to help renters, show properties, and work with maintenance crews all from one place. No more driving all over town between scattered single-family rentals.
• Maintenance teams: With all your properties clustered together, you can hire your own maintenance crews for repairs and upkeep. This can save on costs compared to paying outside companies for every little job.
• Marketing: Instead of creating a new listing for each house, you can reuse the same few listings for different layouts. This means you don't have to spend hours on photos and write-ups for every single property or pay for many individual listings on rental sites. With build-to-rent communities, you can make a few solid listings and use them over and over.

The drawbacks of build-to-rent homes for investors

While build-to-rent properties offer many benefits, they're not a slam dunk for every real estate investor. Here are some challenges to consider:

High capital investment

Build-to-rent projects demand much more capital than buying individual homes. You're not just purchasing one property, you're developing a whole community. Banks won't even consider lending unless you've got solid development experience under your belt. That's why many build-to-rent developers turn to funding sources like syndication or crowdfunding to raise the capital they need.

Market saturation risk

Build-to-rent communities have been popping up everywhere lately, with more in the pipeline. Yes, they're targeting some of the biggest population groups in the US, but there's also a risk of this concept creeping into overkill territory.

If too many of these single-family residences pop up, we might end up with more supply than demand. When that happens, these communities start competing with each other and even with multi-family structures to attract tenants. Too much supply also means rents start dropping. You'll see property management operators offering deals and specials just to fill empty units.

Long development timelines

Building a BTR community isn't a quick process. If you want to create 100 build-to-rent homes, for instance, you're looking at several years of development before they're ready for tenants.

Think about all the steps: buying land, getting permits, dealing with utility companies, and building each house from scratch, then marketing the properties and reviewing applications. It's a lengthy ordeal.

Now, compare that to buying 100 existing homes. Sure, you need to inspect each property and do your homework, but if you hustle and spot good deals, you could be closing on houses in 90 days.

Tools for managing build-to-rent properties

If you decide that build-to-rent properties are right for you, and you're looking to squeeze every penny of profit from your investment, check out Azibo's property management software. It automates many of your operational processes to help boost your profits. Here's how:

• Online applications: Tenants can apply from anywhere, anytime. You don't need paper forms or in-person meetings to get an application.
• Tenant screening: Run background and credit checks with a click. Get the details you need to pick reliable tenants without the hassle.
• Electronic state-specific leases: Say goodbye to printing, signing, and scanning. Send, sign, and store leases digitally. It's faster and keeps everything organized.
• Rent collection: Set up automatic rent payments. No more chasing checks or dealing with cash. Money hits your account on time, every time.
• Maintenance: Tenants can report issues through the app. Assign tasks to your team or contractors, track progress, and keep everyone in the loop.
• Accounting: Keep all your financial data in one place. Track income and expenses and generate reports with a few clicks, making reporting much easier come tax time.
• Financial management: Get a clear view of your cash flow. See payment status, who's late, and how your properties perform financially.

Built-for-rent homes: A fad or a lasting trend?

Build-to-rent communities are reshaping the rental market, offering a fresh take on single-family living for tenants and a new investment avenue for real estate players. The potential for higher returns and steady demand is attractive, but investors need to weigh the risks of market saturation and lengthy development timelines.

As this trend continues to evolve, staying updated and leveraging the right management tools will be key to success. Whether you're considering jumping into the BTR market or just keeping an eye on real estate trends, it's clear that build-to-rent is leaving its mark on the housing industry. As always, in real estate, the secret to success is to do your homework, crunch the numbers, and make data-driven decisions.

Build-to-rent communities FAQs

Is building rentals a good investment?

Building rentals can be a good investment due to their potential to offer stable income, high demand, and long-term capital appreciation. However, like any real estate investment, you should do research and due diligence before diving into this investment.

What is the difference between BTR and BFR?

Build to rent (BTR) and Build for rent (BFR) essentially mean the same thing: communities built specifically for rental purposes.