The traditional way of buying up real estate rental properties is to buy an existing piece of real estate, fix it up and rent it out. But a new trend is emerging: Investors are building new properties with an eye on renting out completely fresh homes for investment income.
In the United Kingdom, for example, build-to-rent (BTR) is up 39% over the same period just two years ago. The trend is also seeing success in the United States, where the lack of housing supply is forcing real estate investors to look for new opportunities to acquire rental property.
Why build-to-rent is emerging as the latest real estate trend
Why the new trend? National Real Estate Investor finds that the recent seller’s market — thanks to scarcity in the availability of homes compared to the demand for these homes — has forced real estate investors to look elsewhere. One solution: building your own rental property.
That means that build-to-rent could simply be an extension of the consistently higher prices in real estate we’ve seen since the 2008 financial crisis and housing market crash. A “seller’s market” puts sellers in the driver’s seat, which in turn makes it difficult for real estate investors to find deals that allow them to build a significant amount of cash flow…unless they sometimes build the homes themselves.
The Guardian also reports that today’s generation — the millennials — are happy to rent. That allows home builders and real estate investors to access a larger market of renters. In the UK, the Guardian reports, the trend is expended to grow by 180% over the next six years.
Between the scarcity when it comes to available, affordable rental property and a generation that’s perfectly happy to rent, we’re seeing both elements in supply and demand at play here.
How real estate investors can capitalize on build-to-rent
Using a build-to-rent (BTR) model is perfectly viable; the numbers we’re seeing with this trend attest to that. But what about the individual investor? How can they optimize their chances at a successful BTR project that immediately shows returns on investment?
Location. One of the issues with BTR is that many of the best locations are already purchased up and capitalized. But for those who see fresh locations in upcoming neighborhoods as opportunities for BTR, there are still locations that will likely create immediate cash flow. It comes down to research and a knowledge of real estate in the area in which you’re building.
Financial planning. Knowing just how much home you can afford to build is integral to avoid letting the project get away from you. Forbes provides three essential questions you should ask yourself before BTR.
If you feel that you have these nailed down, then it’s time to consider the advantages and disadvantages of this strategy:
Pros and cons of building-to-rent
Like any investment strategy, BTR has both positives and negatives. Understanding these pros and cons will be fundamental to your approach:
The pros of BTR:
Control. Deciding just how much you’re going to spend on a new build leaves more control for the investor. Although building isn’t always that predictable, it does allow individual investors to get more specific about the kinds of housing they want to build. You can also put many of the transactions of building a house on a cash-back credit card to get extra value on top of each dollar spent.
Stability and predictability. A new home build is generally going to be more stable and predictable when it comes to maintenance and repairs. However, buying an older property means you’ll be liable if there are sudden repairs needed.
The cons of BTR:
Planning. It’s not always difficult to buy up a good property and rent it out quickly, especially if all the inspections make this possible. However, planning a new property build can be a complicated process and is especially challenging for those new to building property.
Uncertain real estate dynamics. While the property itself will be “predictable” when it comes to quality, the dynamics surrounding the property may not be so easy to predict. If you aren’t sure that you have a great location, it can undermine any BTR project, no matter how high quality the build itself may be.
Getting the most out of BTR
The BTR boom appears to have legs. Investors are looking to boost their returns, and finding a way into the real estate rental market is one of the quickest ways to ensure that kind of financial security. But like any investment, BTR requires diligence when it comes to your homework. It’s not a guarantee of returns — but done properly, BTR can be a great way to break into a hot real estate market and establish a more predictable cash flow.