VALUED INSIGHTS

Invaluable Valuation Knowledge for the Real Estate Stakeholder

SERIES:
Opportunities And Challenges
In The U.S. Multifamily Market
CHAPTER
  1. Supply And Demand In The Rental Market
    (Published: July 22, 2024)

  2. Understanding Multi-Family Housing Metrics (Available: July 29, 2024)

  3. Key Supply and Demand Indicators for Apartment Investors
    (Available: August 5, 2024)

  4. The Economics of Build-to-Rent Projects
    (Available:August 12, 2024)

  5. Analyzing Regional Apartment Market Trends (Available: August 19, 2024)

  6. Forecasting Demand for Multi-Family Units (Available: August 26, 2024)

  7. The Impact of Economic Cycles on Apartment Markets (Available: September 2, 2024)

  8. Assessing the Supply of Affordable Housing: A Comprehensive Analysis
    (Available: September 9, 2024)

  9. Strategies for Investing in Build-to-Rent Properties  (Available: September 16, 2024)

SERIES:
Opportunities And Challenges
In The U.S. Multifamily Market
CHAPTER:

Strategies for Investing in Build-to-Rent Properties

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Author: Jason D. Beakley, Certified General Appraiser
Published: September 16, 2024

In the ever-evolving landscape of real estate investment, the build-to-rent (BTR) sector has emerged as a compelling frontier, offering a unique blend of steady cash flow and long-term appreciation potential. As urban landscapes shift and housing preferences evolve, BTR properties have captured the attention of savvy investors looking to capitalize on changing demographics and lifestyle trends.

The allure of BTR investments is not hard to understand. In an era where homeownership remains out of reach for many, particularly millennials and young families, the demand for high-quality rental properties has surged. BTR communities offer a solution that bridges the gap between traditional apartment living and single-family homeownership, providing tenants with the space and amenities of a house without the long-term commitment and financial burden of purchasing.

Jason D. Beakley
CERTIFIED GENERAL APPRAISER
Director
+1-480-440-2842 EXT 09

For investors, the BTR model presents an opportunity to tap into this growing demand while potentially enjoying more stable returns compared to traditional multifamily investments. However, as with any investment strategy, success in the BTR space requires a nuanced understanding of the market, careful planning, and a willingness to adapt to changing conditions.

The Rise of Build-to-Rent: A Market in Motion

Before delving into specific investment strategies, it’s crucial to understand the forces driving the BTR boom. The sector’s growth is not merely a reaction to current market conditions but a response to deeper societal shifts.

Demographic changes play a significant role. Millennials, now well into their 30s and starting families, often find themselves priced out of the housing market in desirable urban and suburban areas. Many in this generation, having come of age during the 2008 financial crisis, view homeownership with a degree of skepticism. They value flexibility and are willing to pay a premium for well-maintained, amenity-rich rental properties that offer a lifestyle similar to homeownership without the long-term commitment.

At the same time, baby boomers entering retirement are increasingly looking to downsize, seeking low-maintenance living options that still offer the space and privacy of a single-family home. BTR communities, with their professional management and often robust amenity packages, appeal to this demographic as well.

The COVID-19 pandemic has further accelerated these trends. The shift towards remote work has led many to seek larger living spaces, often in suburban or exurban areas where traditional apartment stock is limited. BTR developments, often located in these areas, are well-positioned to meet this demand.

From an investment perspective, the BTR sector offers several attractive characteristics. Unlike traditional apartment complexes, BTR communities often see lower turnover rates, as tenants tend to view these properties as longer-term homes rather than temporary living situations. This can lead to more stable cash flows and reduced operational costs over time.

Additionally, the purpose-built nature of BTR developments allows for optimized designs that cater specifically to the needs of long-term renters. Features like ample storage, home office spaces, and private outdoor areas are becoming standard in many BTR communities, differentiating them from converted single-family rentals or traditional apartment complexes.

Strategies for BTR Investment: A Spectrum of Approaches

As the BTR market matures, a range of investment strategies has emerged, each with its own risk-reward profile and capital requirements. Let’s explore these strategies in depth, considering their potential benefits and challenges.

Direct Development: The Ground-Up Approach

For investors with significant capital and a high risk tolerance, direct development of BTR communities can offer the greatest potential for returns. This strategy involves acquiring land, navigating the entitlement process, and overseeing construction from start to finish.

The advantages of this approach are clear. By controlling the entire development process, investors can tailor every aspect of the project to current market demands. This might mean incorporating the latest smart home technologies, designing floor plans that cater to remote workers, or creating community spaces that foster a sense of belonging among residents.

Moreover, in a market where existing BTR inventory is limited, creating new supply can position investors to capture pent-up demand, potentially leading to rapid lease-up and strong initial returns.

However, the challenges of direct development should not be underestimated. The process requires substantial upfront capital, expertise in real estate development, and the ability to navigate complex regulatory environments. Delays in construction or unexpected costs can significantly impact returns, and investors must be prepared for an extended period without cash flow as the project moves from conception to completion.

A case in point is the experience of Redwood Living, a BTR developer that has successfully navigated these challenges. By focusing on suburban markets with strong job growth and limited rental options, Redwood has been able to create communities that command premium rents while maintaining high occupancy rates. Their success underscores the importance of thorough market research and a deep understanding of local dynamics in the direct development approach.

Acquisition of Existing BTR Communities: The Turnkey Solution

For those seeking a more immediate entry into the BTR market, acquiring existing communities can be an attractive option. This strategy allows investors to begin generating cash flow immediately while still benefiting from the long-term appreciation potential of the BTR sector.

The key advantage here is reduced development risk. By purchasing a stabilized or near-stabilized property, investors can avoid the uncertainties associated with construction and lease-up. This can be particularly appealing in markets where the entitlement process is lengthy or where construction costs are volatile.

However, this approach is not without its challenges. Competition for quality BTR assets is fierce, often leading to premium pricing. Investors must be diligent in their underwriting, carefully assessing current operations and identifying opportunities for value creation through improved management or strategic renovations.

A prime example of successful BTR acquisition can be seen in the strategy employed by Invitation Homes, one of the largest players in the single-family rental space. While not exclusively focused on purpose-built BTR communities, their approach of acquiring and professionally managing portfolios of rental homes demonstrates the potential of the acquisition strategy when executed at scale.

Partnering with Developers: The Best of Both Worlds

For investors looking to balance the potential upside of development with a more manageable risk profile, partnering with established BTR developers can be an effective middle ground. This approach allows investors to leverage the expertise and track record of experienced developers while still maintaining a significant stake in the project’s success.

These partnerships can take various forms, from joint ventures on individual projects to programmatic relationships that span multiple developments. The key is to find a partner whose vision and operational approach align with the investor’s goals and risk tolerance.

The advantages of this strategy are numerous. Investors can benefit from the developer’s market knowledge, relationships with local officials, and operational expertise. This can lead to smoother execution and potentially higher returns compared to going it alone.

However, successful partnerships require clear communication and aligned incentives. Investors should carefully vet potential partners, examining their track record not just in development but in ongoing management of BTR communities.

The partnership between American Homes 4 Rent and J.P. Morgan Asset Management serves as a compelling example of this strategy in action. By combining American Homes 4 Rent’s operational expertise with J.P. Morgan’s capital resources, the joint venture has been able to rapidly scale its BTR development pipeline, creating communities tailored to local market demands.

Indirect Investment: REITs and Funds

For investors seeking exposure to the BTR sector without the operational responsibilities of direct ownership, Real Estate Investment Trusts (REITs) and private equity funds focused on BTR can provide an attractive entry point.

This approach offers several advantages:

  • Professional management and diversification across multiple properties and markets
  • Lower capital requirements compared to direct investment
  • Potential for liquidity, especially with publicly traded REITs

However, indirect investment also means giving up a degree of control over investment decisions and potentially accepting lower returns in exchange for reduced risk and operational burden.

The emergence of BTR-focused REITs like American Homes 4 Rent (AMH) has provided investors with a way to gain exposure to this sector through public markets. These vehicles offer the advantage of professional management and scale, but investors should carefully consider the specific strategy and market focus of any REIT or fund before investing.

Key Considerations for BTR Investment Success

Regardless of the specific investment strategy chosen, several key factors should guide decision-making in the BTR space:

  1. Location, Location, Location: The old real estate adage holds especially true in BTR. Successful communities are typically located in areas with strong job growth, good schools, and amenities that appeal to long-term renters. Suburban locations near major employment centers have proven particularly attractive for BTR developments.
  2. Design for the Long-Term Renter: BTR properties should be designed with the needs of long-term residents in mind. This means durable finishes, flexible spaces that can adapt to changing needs, and community amenities that foster a sense of belonging.
  3. Operational Excellence: Professional, technology-enabled property management is crucial for maintaining resident satisfaction and maximizing returns. Investors should prioritize operational efficiency and customer service to minimize turnover and maintain strong occupancy rates.
  4. Financial Structure: Careful consideration of financing options is essential. While traditional mortgage financing is available for stabilized BTR properties, construction financing for new developments may require more creative approaches, including joint ventures or mezzanine debt.
  5. Exit Strategy: While many BTR investors plan to hold properties for the long term, having a clear exit strategy is important. This might involve selling to institutional investors, converting units to individual ownership, or refinancing to extract equity.

 The Road Ahead: Challenges and Opportunities

As the BTR sector continues to evolve, investors will need to navigate both challenges and opportunities. Rising construction costs and potential overbuilding in some markets present risks that must be carefully managed. Additionally, as the sector matures, competition for prime development sites and stabilized assets is likely to intensify.

However, the fundamental drivers of BTR demand – changing demographics, shifting lifestyle preferences, and the ongoing challenge of housing affordability – remain strong. Investors who can adapt to changing market conditions, leverage technology to improve operations, and create communities that truly meet the needs of long-term renters will be well-positioned to succeed in this dynamic sector.

In conclusion, the build-to-rent market represents a compelling opportunity for real estate investors willing to embrace innovation and take a long-term view. By carefully considering the various investment strategies available and focusing on creating value for both residents and investors, BTR can offer a path to stable returns and long-term appreciation in an evolving housing landscape.