Build-To-Rent: A Passive Income Builder

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“I’d buy up a couple hundred thousand single-family homes if it were practical to do so.” – Warren Buffet. 

Real estate investors struggle to scale when purchasing single-family homes. Often the houses are dispersed across towns and cities, which can create a logistical challenge as each home needs to be dealt with individually — single roof, single heating/cooling system, specific market rent, remote property management/maintenance, and purchase and sales.

build-to-rent communities

Build-to-Rent (BTR) communities are a relatively new asset class that takes the economy of scale of apartment complexes and brings it to single-family homes. Individual and institutional investors are pouring money into BTR assets as quickly as they can be built.

Build-to-rent investments can offer great returns, tax benefits, and potential appreciation. But, just like any investment, there are risks and rewards. Nevertheless, with the proper knowledge and preparation, build-to-rent can be a great way to build passive income and achieve financial freedom.

What is build-to-rent?

Build-to-rent is a community of single-family homes. They are explicitly developed to target the rental market and are owned and managed similarly to a traditional apartment complex. As a result, tenants benefit from new quality housing in an amenity-rich community that is professionally managed and maintained.

Build-to-rent communities target a broad renter demographic, from young families to seniors. Millennials are in their peak family-building years and seek their own house with a yard but cannot afford a home in today’s market—BTR offers a great compromise.

Seniors are looking to sell their homes, take their equity, and move to a more desirable location. They are either chasing good weather or moving closer to grandkids. BTR homes offer a maintenance-free lifestyle with the freedom to leave for extended periods limiting tenant worries.

Getting Started

If you’re new to multifamily investment opportunities, you may feel you need help figuring out where to start. While there are many great resources online to help you get started, you should also consider getting help from a professional in the industry, and that’s where we come in!

Just like diversifying your paper assets within Wall Street, you can diversify your investments with tangible assets in commercial real estate. However, real estate provides cash flow, tax benefits, and appreciation, unlike your paper assets.

Risks and Rewards

Investing in build-to-rent can be a great way to generate passive income! The tricky part is figuring out where to begin and ensuring you understand the risks and rewards.

Risks:

  • Permits & Construction = Headache & Hassle
    Any new development project brings similar risks: getting the permit to build. This includes entitlements, environmental approvals, rezoning, city approval, engineering approval, and utilities. The risk is the time it takes to get approval may be in the local government’s hands and possibly rejected.

    This is why it’s essential to know the operators you are investing with have this well under control. Or you can choose to invest after the property has already gotten the permit approval.

  • Variable Market Conditions 
    Another factor to consider is the market location, ensuring there is tenant demand for a new asset. The local economy is strong, with diverse businesses creating jobs for the target renter demographic.

    The world economy can throw all sorts of curveballs at business plans. The Covid-19 Pandemic has wreaked havoc on supply chains, the cost of materials, and the workforce. Now we have a potential recession with record inflation. This doesn’t mean the world needs to grind to a halt; it just means the business strategies need to adapt. Ensure that you understand the operator’s contingency plans and exit strategies. Ask how they are conservative in their underwriting and where they see opportunity.

  • Investing with the Wrong Partner
    Investing in a build-to-rent is similar to investing in a commercial business. You must know, like, and trust the operator before placing large amounts of money into a project. Be sure to speak with the operator and check the track record of the operator you will be investing with. It’s always more important to bet on the jockey over the horse. A good jockey can make a bad horse perform, but a bad jockey may fail even with a good horse.

    The most important factor of a successful BTR investment is creating a secure foundation with the right investors and operators.

Rewards:

Growing wealth is ultimately what you’re here for, right? There are many advantages of build-to-rent homes that will help you create passive income.

  • Strong demand for construction 
    Over the next decade, developers need to build 2.5M homes yearly to keep up with the housing demand. According to Hunter Housing Economics, investors will put some $40 billion (paywall) into build-to-rent development in the next 18 months.

  • Better Tenants 
    Tenants that live in a build-to-rent community tend to stay on average 40 months; we call those “Sticky Tenants.” The average tenant length in apartments is around 18 months. BTR tenants are typically higher-income professionals who view the rented house as their home, taking better care of the property.

  • Recession Resistant
    The current real estate market shows fewer people buying houses, creating more demand for high-quality rental units.

  • Protection From Inflation
    Commercial real estate is an excellent inflationary hedge, as rents typically grow with inflation.

  • Lower Maintenance Costs
    New build properties are lower cost to maintain.

  • Profitability (The Most Important Factor)
    And the most important factor… what does this mean for your investment?

    Build-to-rent has a greater Yield-on-Cost (YoC) than purchasing a pre-built property. The property should always sell for more than it costs to build, providing investors with 15% – 25% average annual returns for the project’s life.

    YoC = Net Operating Income/Total Project Cost

Why Vestus Capital?

Whether you’re looking for new build-to-rent communities, value-add apartment complexes, self-storage facilities, or industrial properties—Vestus Capital partners connect you to strong operators across the country with diverse commercial real estate offerings.

The best part? You get to own real estate without the hassle. We deal with the tenants, toilets, and termites, so you don’t have to.

Start here by scheduling a Discovery Call with Vestus Capital, LLC. It’s our job to help you take the guesswork out of it. We’ll discuss your investment goals and priorities while helping you understand the local market. Scheduling a call is a surefire to building your customized investment strategy. Just because we mention build-to-rent here doesn’t mean it’s the best option for you.



If you’re an experienced investor and want to see current and future opportunities, please join the Investor Club with Vestus Capital.

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