Rents and property values continue to rise in many markets. As a result, build-to-rent is gaining popularity as one of the hottest and smartest real estate investment strategies. It is different from flipping properties or dealing with the headaches of managing tenants. You can leverage your capital and develop an income-generating rental housing project from the ground up.
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As both an investor and a landlord, build-to-rent combines the best features of each while minimizing the frustrations. There is no need to deal with renovations or problematic tenants. Yet, you can still benefit from rising rents and grow a diversified portfolio of rental housing units in a single project. Read on and let’s explore some of the benefits of build-to-rent investments.
What is Build-to-Rent?
Build-to-rent refers to purpose-built rental housing projects that are designed and constructed from the ground up to operate as rental communities. This differs from the traditional landlord model where investors and landlords purchase existing housing units or duplexes to rent out.
With build-to-rent, developers and investors identify promising housing markets and sites for new developments. Instead of building condos or single-family homes to sell, they construct multi-family properties with the intention of keeping the units to rent out.
These build-to-rent communities share some similarities with apartment buildings, but they are typically higher-quality buildings with more amenities on-site. Many provide features you find at luxury apartments like fitness centers, swimming pools, clubhouses, etc. The units themselves also often have higher-end finishes, similar to those of new condo projects. However, avoid investment mistakes by working with a reliable rental manager in Northern Virginia to handle the day-to-day operations of your property.
The key thing that distinguishes a build-to-rent development is that the entire property was custom-built with the rental market and managing tenants in mind from day one. This allows for a more efficient operation over the long run.
How Do Build-to-Rent Investments Provide Consistent Rental Income?
Build-to-rent investments are structured to maximize rental income stability for investors through longer-term leases, low vacancy rates, and efficient property operations. Research other real estate investment facts that you can use as a reference before deciding to expand your portfolio. By designing purpose-built rental communities, build-to-rent provides much more predictable and consistent cash flows compared to traditional buy-to-rent investments.
Longer-Term Leases Reduce Turnover
A major advantage of build-to-rent properties is the ability to sign tenants to longer initial lease terms of 2-3 years. Traditional rental properties typically utilize 1-year leases that then continue month-to-month unless renewed for another full year.
With leases lasting only a year or reverting to month-to-month status, there is constant tenant turnover in many rental properties. Tenants move out, units sit vacant for repairs and maintenance, and new tenants move in. This churn costs landlords time and money.
By starting new tenants on multi-year leases, build-to-rent communities lock in rental income and avoid constant turnover costs. There is much greater visibility into future earnings once units fill up for investors. Professional property managers can also focus more on optimizing operations than on perpetual leasing duties.
Low Vacancy Rates Keep Units Occupied
Being known for tenant-friendly amenities, responsive maintenance, and desirable new construction, build-to-rent communities experience extremely low vacancy rates, generally ranging from 3-5%.
The on-site property management works diligently to market and fill any openings in a timely manner. With traditional scattered-site rentals, an ill-equipped landlord may struggle for months to re-tenant and start recouping rents after a vacancy.
By maintaining high occupancy rates through efficient leasing, build-to-rent investors continue collecting stable rents with minimal gaps.
Optimized Property Operations Reduce Costs
In addition to leveraging economies of scale for initial construction, build-to-rent communities manage contained rental properties for maximum efficiency. With hundreds of units on connected sites or in the same buildings, it is easier to reduce operating costs for landscaping, maintenance, staffing, insurance, etc.
These cost savings mean higher profit margins on rental income and better returns for investors. Traditional landlords with scattered site units face much higher relative property management costs, eating into returns.
Importance of Location in Build-to-Rent Investments
In real estate investing, the mantra remains true—location, location, location. Where a build-to-rent community is situated can impact its appeal to renters and its potential to appreciate substantially in value over decades of long-term ownership.
Value Growth in Desirable Areas
Build-to-rent developments located near major employment hubs, transportation access, cultural attractions, retail, and entertainment can command higher rents and maintain lower vacancy rates. Tenants are drawn to the convenience and lifestyle offered in such areas.
As demand rises faster than new housing inventory in high-growth regions like tech and job centers, rents increase sharply for both build-to-rent projects and traditional housing. However, while an individual landlord may be reluctant to raise rents and risk vacancies, a build-to-rent operator simply increases asking rents uniformly across its hundred-plus units.
Locations adjacent to vibrant, walkable urban areas often experience a desirable cycle of rising demand, enabling maximum rental rate increases year after year for build-to-rent owners.
In addition, the build-to-rent asset itself appreciates substantially in such high-demand markets over time. Investors can expect healthy property valuation growth in addition to collecting increasing rental income.
Stability Through Market Volatility
Locations situated in less flashy but very stable suburban family markets can also prove smart targets for build-to-rent projects. Think of expanding smaller metro areas seeing steady population growth or suburbs with sustained appeal to middle-class households.
These bread-and-butter markets may not fuel dramatic rent hikes. However, they provide durable demand and occupancy rates with a much lower risk of the extreme highs and lows suffered in trendier locations. Build-to-rent investors here give up some rent upside for rock-solid stability.
Much like bonds balance more aggressive stock allocations, the blend of urban mixed-use developments and suburban family housing within a portfolio can provide appealing risk-adjusted returns for build-to-rent investors over full market cycles.
Final Words
For real estate investors and landlords alike, build-to-rent communities represent one of the most appealing emerging property sectors. By providing the income stability of multi-family paired with operational efficiencies and strong tenant demand, build-to-rent leverages the best aspects of rental housing ownership. Hence, this is one of the best investment strategies available for any investor to consider.
