TBT: Positive Trends in Build-to-Rent (BTR) Investment Homes

I wanted to talk about the trends in the BTR or Build-to-Rent space. These are essentially investment homes or rental
that are occupied by tenants owned by investors and in some cases, property managers or investment companies that own a large, large portfolio of these new construction rental homes or investment homes. In the United States, the build to rent or BTR space and the Build-for-Rent, also known as BFR, these are terms that are used somewhat interchangeably, but they have nuanced differences and this is an important thing to note because I’m talking primarily about BTR, Build to Rent. So BTR specifically refers to the development of either attached or detached homes that are intended to be rentals. So you have a tenant and an owner. So often these will have shared amenities, but often and most often will have single ownership. BFR or Build for Rent, however, generally covers a more broader range of commercial real estate projects. And those are intended to be leased rather than sold, but they’re intended to be leased to owner and user occupants when they’re completed. So the build for rent could be a cluster or a community that is owned by a parent holding company, an investment company, even a property management company. What you see with build to rent BTR are properties that are typically owned individuals or small groups. So a build to rent home can look like a traditional home and often does. It’s a suburban style family home. It can encompass a wide range of building plans, but this doesn’t exclude duplexes or row homes or small lot homes or even horizontal apartments. mean, this is a term that’s also used in the industry where you have a tight cluster of professionally managed, freestanding single family residences. Then they call them horizontal apartments. So anything from a single family home, which is the most typical on up to row housing and horizontal apartments qualifies under that build to rent space. And it’s a pretty exciting space. It’s been a growing trend over the last few years to see rental properties come out of this new construction space and investors gobbling them.

So build to rent that industry has been the fastest growing segment of the single family home construction space for a number of years. And if you stop to think about it with mortgage rates now, you know, exceeding six, six and a half percent, just depending on when you listen to this, that compounded by the fact that we have a limited supply of homes. And as I’ve talked about many times, a sustained high demand for new homes, well homes in general, but a sustained high demand for housing, new home buyers would require a six figure income to afford a median priced home around the country. Again, market specific, but this is typically what we’re seeing. So more and more people are moving into this space for home ownership, not specifically as an investment, but just as a place to live. But investors have clued in on this and they are buying these properties year after year because they know that new construction is attractive.

They’re typically in growth markets and in areas that are attractive and have strong rental demand so tenants tend to move into these areas because they can’t afford new housing or housing in general with high interest rates. And they end up renting these new construction homes that feel like they’re in a brand new home, a home of their own. So there’s been some studies done by many different organizations, including fixer, including rent cafe, including the association of new home builders, et cetera, et cetera. And it’s interesting what the findings are that are coming out of this space. So for example, it is estimated that the total number of BTR, build to rent homes, the starts nationwide last year in 2023 was close to 113 ,000 units. That’s an increase compared to 2019 of 102%. So it’s a massive.

And according to experts in this industry that have been interviewed and asked questions about this whole B2R space, 71% of those people that were asked or polled or interviewed have said that home affordability or lack thereof is the main reason behind the demand, strong demand for these build to rent homes. It’s just fewer and fewer people can afford to buy a new home or even an existing home with interest rates as high as they are and the way inflation has been over the last several years. So this space has been growing and it has a strong solid foundation. And in that same polling or that same interview, 5% of those experts are saying that the millennials are one of the main drivers for the demand in this BTR space. And that is actually closely followed behind, interesting to note, by Gen Z.

Gen Z is making up 48% of the demand according to these experts. So the millennials and the younger generation, let’s call them Gen Z, are what’s driving the demand for this. So when we stopped to look just ever so briefly at the build to rent home starts, the number of starts, in 2019, we had about 56 ,000 starts. In 2020, now keep in mind, this is the year that COVID started. We had 78.6 thousand starts in 2021, a little over 91,000 starts. 2022 just shot through the roof. 119 .2 thousand starts. So last year in 2023, there was a 5% decrease. We dropped to 112 .9 thousand starts. But if you look at 2023 versus 2019, it was 102% increase. So in the last five years, we’ve seen massive increases in the number of builders building these new construction homes and communities all over the country, predominantly in the Southern half of the US in the smile States or the sunbelt States, as we call them.

If you look at an analysis done by the US census Bureau and you pull US census data. The National Association of Home Builders, NAHB as they’re known, they reported that 75 ,000 build to rent were started in 2023. Now there’s some slight differences between numbers from different sources, but they’re all pretty consistent. But this also doesn’t include about another 38 ,000 units that were started by different studies, including one from Fixer that are showing that there’s almost 113 ,000 build to rent home starts nationwide. Think about that 113 ,000 build to rent home starts nationwide last year. That’s a lot. So what are the factors that are contributing most of this growth? Like I said, number one, 7 % of them are being driven by home affordability. But what’s number two, number two, surprising or not, 36% of that growth factor is real estate investment. Meaning that individuals like you and I, mom and pop investors, as well as small companies, small groups, small institutions, and even larger institutions are wanting to buy these build to rent products. Those are the key factors, home affordability and real estate investment. makes up the bulk of it. Much, much, much smaller on this scale has to do with suburban demand, baby boomers downsizing, or just living in a community that has access to all kinds of amenities. I mean, that’s a factor, but the biggest ones are real estate investment and home affordability.

So in percentage terms, the build to rent space is the fastest growing sector with a very long runway ahead. This is not something that is a trend that’s phasing out anytime soon. It is something that is going to be here for a while. So it’s something to keep an eye on, take note of, and if it’s something that is on your radar or something you would consider as a real estate investor, it’s something you should look at . Now at Norada Real Estate Investments , we have been moving this BTR or build to rent product for many years now. In fact, if I’m not mistaken, I think it started somewhere in 2018, maybe 2019. So we’ve had a fair amount of interest and the demand has increased and the volume of inventory in that space has increased. And one of the biggest factors for us on the real estate sales side of the equation is that the amount of available inventory in the resale market product that we’ve been selling since 2004, which is newly refurbished existing homes, what we call resale product, or I mean, our criteria labels it as turnkey investment property because it has to meet a certain criteria. But that turnkey rental property, which is refurbished homes in the resale market has been diminishing for many years now. And inventory has been very, very tight to the point of it being very scarce. So we had to shift to this new construction product.

But according to 71% of those experts, like I said, you know, home affordability was the number one leading reason followed by investment. So, you know, as I was reading one of the reports, one of the things that complicates this situation, if you will, is the Harvard university’s joint center for housing studies. They have tons of great content and information and research reports, but one of their reports stated that even though renting is cheaper than buying in the US about a quarter of the cost burden renters spend, it’s more than 50% of their income on housing. It used to be around 30% according to the National Foundation of Credit Counseling. You know, that was the original ratio and even still to this day, a lot of lenders use a qualification criteria of 30% of your gross income as one of the qualifying criteria for you to qualify for a mortgage loan. But now today with prices having gone up so much the real estate space for housing around the country, both rental and in terms of purchasing and incomes not scaling as much or as fast as the price of housing has gone up. A lot of people are now spending upwards of 50% of their income on housing, which is crazy, which means that affordability has gone down and it’s less likely that people and more people are going to be able to afford real estate as a home.

So in real estate investment now is the second biggest reason for that increase in the B2R space. And I’m actually reading a quote here. Forgot who actually quoted this, but builders who sold solely to buyers five years ago now have the option to sell to property management companies. And this creates a much wider market for builders to sell to. So think about that. Builders around the country are now selling more and more to institutions, property management companies.

And institutional buyers that are essentially funds that raise capital, aggregate that capital, and then buy housing. I mean, BlackRock is probably the granddaddy of all those investing in the housing market around the country. Anyway, who do you think is driving this demand? Like I said, millennials make up about 55% of the driving force, according to experts that were interviewed. And then 48% are Gen Z. So 55% of experts who were interviewed say millennials drive the demand in the B2R space.

Gen Z is following close behind by 47.5%. Besides the fact that fewer households can afford to buy a home, this is what’s driving that whole space. And the other thing too, if you think about renting in general, it provides a lot of flexibility to people who are looking to live in one place and then maybe move in the near future somewhere else, whether in the same city or another market. Some people are renters purely by choice. And this is good for us as real estate investors because we want these types of people. They don’t want to be tied down to a house. They don’t want to be tied to a mortgage. They want to have the flexibility to be able to move anywhere they want at any time they want. This group is sometimes referred to as Dinks. Yes, Dinks, double income, no kids, D -I -N -K. And this correlates well with the rise of digital. You know, we refer to a lot of these people who work in the, intellectual space, if you will, not so much the physical labor space as digital nomads and nomadism has become pretty much mainstream. I mean, think about it you’ve heard the terms like the gig economy people, you know, work small gigs, part -time, full -time, whatever it may be, but supposedly 17 .3 million Americans who work describe themselves as digital nomads. And this number is a staggering 137% increase since 2019. So in just five years, there’s been a massive increase in the people who are essentially digital nomads. And 58% of digital nomads come from the Gen Z and the millennial generations. Gen Z makes up 21% of these digital nomads and the millennials, surprising or not, makes up 37%, a very high percentage.

So what are the biggest metros where we are finding build to rent or B2R housing completions? These are where builders are building this type of product and selling them to whoever they sell them to. Could be you and I, mom and pop investors. Areas of the highest population growth and migration account for the largest part of the growth in the build to rent market. And a lot of that are in the smile States, basically the Southern States that form the smile of a face on a map of the United States. Now there are markets in the North such as Columbus, Ohio, Akron, Ohio, even Indianapolis, Indiana as part of the Midwest. But if you look at the largest markets that have the largest amount of construction going on, Phoenix, Arizona is by far the top of the list. It’s, it leads the build to rent market and has for many years. So Phoenix, Arizona is basically top of that heap.

I’m trying to see here how many housing starts there were. There were over 4 ,000 completions in 2023. So that is a very large number. Second would be Dallas, Texas. And third would be Atlanta, Georgia. Those are about 2 ,700 for Dallas. Housing starts and almost 2 ,000 completions in Atlanta, Georgia. And again, that’s for last year in 2023. Other notable metros are Myrtle beach in South Carolina, Pensacola, Florida. Even Orlando, Florida, you know, has been on fire in terms of the number of housing starts in this specifically in this B2R space. So that’s some of the metros where we’re seeing a lot of this construction, but yeah, definitely the Southern States are highly represented here. So what is the future of the build to rent market look like when we ask people in the industry, there’s almost a near even split in what people say as far as their predictions going forward in terms of demand for these build to rent single family housing projects. It’s almost split 50 50. It’s very, very close, but the general consensus is that if interest rates go down, more people will buy homes and be homeowners, which will cause the B2R space or that industry to slow down. How much? I don’t know. It’s to be determined.

But if interest rates don’t change much this year, and even into next year, they remain stable or they increase, then the whole BTR, the build to rent industry will continue to grow. It just has to because affordability will not be there. So, you know, when you look at the future of the build to rent market, we see continued rising demand, which is good in many ways because we need housing, we need affordable housing, and as real estate investors, we want to be able to provide good quality product and product types that meet that demand. The household demand for BTR will continue to rise. And I believe that’s going to be the trend for the next couple of years, probably two, three years for sure. Even though I believe mortgage rates and interest rates will slowly decrease, I just don’t see them decreasing fast enough and soon enough to address the affordability issue. And then, other benefits to the BTR communities include the fact that you have these spacious homes that are being build, many of them are pet friendly environments. This is very attractive to tenants and people in general. They’re also more tech friendly, I guess. I mean, there’s more tech that is being build into these new homes and that is a draw for the younger generations, especially millennials and Gen Z. So the fact that these are more outfitted with smart devices and more high tech features, they definitely attract the younger generations. And of course there is high demand for community living too, know, and shared amenities. Some of the experts that were surveyed were saying, and this is 43 % of them say that they noticed a higher demand for community living in terms of all sales, shared amenities like pools and recreation areas become locations where neighbors, tend to aggregate and meet, build relationships. So it’s this sense of community.

That’s essential for a lot of families, especially young families with new children or children that are coming in the years to come. But interestingly enough, this is also very important and attractive to older, more active adults. know, they want these community living environments and shared amenities. So I guess what else can I tell you about this? These are specialized sectors. You know, the specialized sectors of the BTR industry cater to specific demographics.

You know, and they offer Taylor amenities to each group. There’s housing for aging adults, especially those that require healthcare facilities. And then, you know, there’s areas that are focused on students, you know, student accommodations. You know, these are all, all rentals as well, but they’re geared towards student accommodations with communal spaces, study areas, recreational facilities. And, you know, this is also an interesting trend too, but some experts are concerned that the supply of the build to rent housing will not keep up with demand, especially in the short term. And a big factor of this is inflation. That’s one of the biggest enemies, but the growth is healthy and it is filling an increasing need. And if this is something that interests you as a real estate investor, it’s something to definitely keep a look at. Bottom line is this build to rent industry meets the country’s need for housing options. It’s growth is based on more than financial reasons. We see young professionals who want the lifestyle afforded by homeownership without the responsibilities.

They just don’t see a home as an asset like their parents did or other generations, older generations do. They don’t have the same attachment to housing and property and they don’t consider it necessarily an asset or even a piggy bank, you know, that grows over time. They just want to invest in different ways and elsewhere and be nomads, not tethered to a house and be able to freely move around the country whenever they want or the city or the Metro, whatever it may be. So it’s an interesting area to watch for sure. But you know, as an investor and looking at it from an investing perspective, you know, there are pros and cons. You know, I wanted to talk about the trends here today and there’s definitely positive trends. And as a real estate investor, whether you’re looking at that space or you’re already in the BTR space, it’s definitely a lot of tailwind and I don’t really see a lot of headwind, but you the pros of building to rent is you may be able to ask more in rent. You will likely experience less tenant turnover. know, apartments typically see a lot more temporary tenants and the higher turnover. We don’t see that as much with single family homes because of the privacy and the pride of ownership, even without the ownership. You may be able to get into the investment game sooner and with less complication or competition investing in new construction homes, especially if they are build to rent homes.

You may have more flexibility in where you build, you know, you’re not the builder necessarily, but if you work with builders in different markets, as we do, you have a choice of, you know, what type of metro area and state you want to be in. far as cons, I can’t think of too many other than you definitely are competing against, you know, the big boys that are, taking down these properties by the dozens, hundreds, and sometimes thousands around a state or country.

But you know, if you’re in the right area and you’ve got a similar or competitive product and you’re competitively priced, it’s not a question of if your property will stay leased. It’s really just, you know, when, you know, you will have less turnover and longer term, good quality tenants. And then, you know, this is one I think about often is getting a good cap rate or a cash on cash return, or even just an overall return on investment might be more difficult. You know, when you’re buying a distressed property, it can be difficult because of the lack of inventory and sometimes it’s just hard to find a good deal, but it’s a simple fact that, you know, the less you spend, the easier it is to get a good ROI, but that’s not necessarily a good thing either because you don’t want to compromise the type of neighborhood or market that you’re in, especially the neighborhood. Cause I put a lot of weight in the neighborhood that the property is in, not as much in the market itself. But there’s all kinds of investment strategies when it comes to existing resale homes. You can buy, fix and refinance, buy, fix and flip. can buy, cosmetic repairs, hold long -term. You can use the burr method. can, there’s just, you know, there’s different ways to go about that, but it’s highly competitive and there’s not a lot of inventory. And sometimes the numbers don’t make as much sense in that space. You really just have to compare one deal to another, to another. But if you like something that is really turnkey, maybe the numbers aren’t as sexy or attractive from a cashflow perspective initially, but has potentially higher appreciation potential, then it’s worth looking at new construction and these BTR, build to rent homes in markets that make sense and in neighborhoods that really make sense. So that’s kind of where I see this space and the trends in the space of build to rent. I think it makes a lot of sense. It’s something to seriously consider. You know, the price ranges on these properties vary quite dramatically based on market, but generally speaking, they can range from about 200,000 and sometimes less in less expensive Metro areas, but 200 ,000 to 300 ,000 could be more, could be less, but that’s pretty much what you’re looking at. If you’re to look at many of the markets that we’ve been looking at, and especially in your upper B class neighborhoods.

So anyway, I just wanted to share my thoughts about the build  to rent space. It’s definitely a booming area has been for the last five years. It’s definitely a strong growth trend. And I don’t see that slowing down all that much over the next few years as we still have high interest rates, strong demand for housing, low affordability and not a lot of resale inventory out there.

If you have questions about that, talk to my team of investment counselors at Norada Real Estate. We’re here to help you and answer questions and point you in the right direction. We have a lot of contacts for you in terms of housing inventory in the BTR space, as well as financing options, property management and all that stuff. I mean, that’s basically what we’re here for and we want to help you do. So I hope you enjoyed this week’s throwback Thursday episode. If you haven’t already, remember to subscribe so you don’t miss out on a single episode.  If you have a question about real estate investing or finance, simply go to passiverealestateinvesting.com and click the Ask Marco button. I read all of them, I reply to many of them, and sometimes I cover them on the show. Lastly, help us share the show with other like-minded people that you know who can benefit from it as well. Just visit us on your platform. Most of you are on iTunes and leave us a rating and review. I would greatly appreciate it. I read them all and I will thank you in advance. And that is it for today. Thanks for listening. I will see you on our next episode.

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