Built-to-Rent (BTR) single-family homes are attractive to home builders and developers for multiple reasons. With strong, growing consumer preference from quality tenants, BTR homes are a proven type of investment, offering steady, predictable income. It can be a diversification strategy to offset the ups and downs new construction market. Homes Built-to-Rent, as opposed to sell, can offer significant construction savings. And BTR offers numerous options when it comes time to sell.

Consumer Demand

PEW Research reported that 65% of households headed by people younger than 35 were renting, as were 41% of households headed by someone ages 35-44. Looking at the U.S. population, the greatest growth in the next several years will be people currently in their 20s and 30s (highlighted below.)

Over the next several years, as people now 20 – 40 years old age and have children, the single-family housing option will increasingly be in demand.

Exiting the Great Recession, many builders turned to building larger, more expensive homes due to increased costs for everything, leaving even fewer “affordable” new home options. BTR is one way of addressing the demand for new single-family homes at a monthly payment more households qualify for.

The added space found in three- and four-bedroom single-family houses, rare in the multifamily arena, better suits the needs of growing households. At the same time, as their careers and incomes blossom, these renters are becoming more financially stable and reliable tenants. As compared to multifamily, there’s also less turnover in single-family rentals.

A Solid Investment

Like single-family home buyers, renters are willing to pay a premium for new construction, especially homes with today’s in-demand design and amenities. Since brand-new homes will have minimal maintenance and repair issues for several years (outside of what would be typically covered under the new home first-year warranty), such expenses will be low. And those BTR first-year warranty costs will likely be less, as compared to the warranty expectations of home buyers. 

A scant decade ago, home builders who survived the housing market downturn were just starting to see would-be buyers again. A BTR portfolio of homes may provide the regular income stream needed to help weather the next new home construction downturn. Such a diversification strategy, moving into an adjacent market space as opposed to something entirely different, allows the BTR home builder to capitalize on existing systems, resources, personnel, and know-how.

Single-family BTR homes can start producing income as each home is completed, as compared to multifamily’s longer construction timeframes before realizing revenues. Another strategy, kicking off a brand-new community by selling and then constructing BTR homes to an investor, can generate the needed capital for further development.

Cost Advantages

Build-to-Rent can offer numerous, significant savings over for-sale homes.  Home design costs can be spread among a greater number of homes. Value-engineering can maximize efficiency, while repetitive builds minimize the added costs and potential construction delays for products such as roof trusses. Timely product selections based upon ready availability can eliminate costly setbacks, while buying larger quantities of materials may result in added savings.

Not dealing directly with custom home buyers can shorten building timeframes and allow builders to focus on construction, without interruption. Expensive change orders are mostly eliminated, as is the manpower consumed in pricing the changes. Though at the time this is being written the new home market is red-hot, a return to more typical market conditions brings the financial risks associated with speculative construction.

Future Flexibility

While contracting upfront to Build-to-Rent for investors is one approach, holding a BTR home portfolio produces recurring revenues. Then, when the time is right, the homes can be sold.  Perhaps the existing renter would be interested in purchasing that home. Small investors might want to add a modest number of homes in one community to their rental holdings. Larger investors might be interested in acquiring the entire neighborhood. Regardless of their size, most investors favor newer homes requiring less upkeep, than older homes that may need to be renovated.

Build-to-Rent has become a part of the new construction landscape. The growing preference for renting rather than buying and the opportunity to live in a new single-family home are driving demand. Construction efficiencies coupled with reduced headaches streamline production. Recurring revenues with minimal unexpected expenses create an attractive income stream, and an appreciating asset attractive to numerous buyers makes for a wise investment. Still, the math has to work, beginning with the product to be built. And that starts with homes people aspire to live in. We conclude this series looking at:

Anatomy of a Successful BTR Home Design

With minimal roofline changes, this home can be built with a fourth bedroom.

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Build-To-Rent (BTR) new homes are attracting people away from other housing rental options and from the for-sale home market. The reasons are varied but ultimately fall into the camps of the renter’s lifestyle, preferences and aversions, life stage factors, and of course, the financial aspects.

Lifestyle

As mentioned in our last post, there’s a growing mindset for leasing (paying for the use of) rather than buying (paying to own) from the automotive industry that’s becoming more prevalent in housing. The desire to own your own home is waning a bit, especially with BTR new home neighborhoods offering the new home benefits without the associated ownership obligations. These renters enjoy the sense of community and privacy inherent in single-family neighborhoods while having a landlord take care of the maintenance. BTR is viewed as freedom from the nagging and stress of homeownership upkeep and repairs. Furthermore, renting that brand-new home is immediately gratifying, as opposed to the years required to save up enough money for a purchase down payment!

COVID-19 accelerated consideration of single-family over multi-family housing options, as people sought to distance themselves and their families from the pandemic. Employees and their companies both realized that there were benefits from working from home, at least when those homes had adequate space. Flexibility became paramount, both in the design of their living and working space as well as the flexibility to live where they wanted as opposed to living near the workplace. With only a 1-year lease, renting provides more flexibility to pursue other career opportunities.

Getting what they want, avoiding what they don’t want

Choosing where to live is highly emotional, and people aspire to live in a new construction home!  There’s something unique and special about being the first person to get to enjoy the home when everything’s sparkling new.  Then there’s status.  What does living in a brand-new home say about that person, and how does it make them feel about themselves? Perhaps the only thing that was “new” in their present home was the paint on the walls. Having everything new in the BTR home is exciting for the new tenants. 

Choosing a BTR new home may match the school district they want to live in. They may not have had the security and convenience of a garage previously or even a convenient parking space. Even simply having a backyard can make an enormous difference. Now they can host the backyard celebration and do the grilling (their apartment didn’t allow grills due to the fire hazard.) Plus there’s the convenience of being able to let the dogs out without having to leash them up – if the apartment allowed dogs at all.

As much as they’re looking forward to the BTR home benefits, they may be even more anxious to be done with the drawbacks of their current home.  It might be eliminating the noise from neighbors above and below. Or the crowded, noisy hallways with other residents coming and going at all times of the day. It may be the dated design and finishes of the house they’re currently in. Perhaps they would rather sell their current house and rent a new one, avoiding the costly repairs their current home needs.

Lifestage

Compared to multifamily tenants, single-family home renters tend to be older and are considerably more likely to have children present in the home. While they come from all demographic groups, a disproportionate share are Millennials, who in 2021 are 25-40 years old. Many have come to realize a single-family home’s size and amenities would better suit their household than multifamily units. The emergence of BTR homes may provide this generation the opportunity to bypass the traditional (used) starter home entirely and move into what may be considered a first-time move-up home.

Add to this group Gen Xers (now 41-56 years old) and Baby Boomers (age 57-75), for which the available multi-family options fail to inspire. Some are tired of the headaches that come with maintaining older homes. Others can’t imagine giving up the single-family housing lifestyle. Empty-nesters may be looking to downsize, sell their current home and enjoy a maintenance-free lifestyle.

Financial Considerations

Renters are committing to a predictable payment. Though home buyers may enjoy a fixed mortgage payment, property taxes and homeowners’ insurance rates tend to spiral upward, while maintenance and needed repairs can be monthly budget-busters. Then there’s the Tax Cuts and Jobs Act of 2017, which increased the standard married couples income tax deduction to $25,100 (2021), mostly canceling out any mortgage interest deduction on their federal tax returns.  

BTR tenants tend to have good jobs and steady, if not stellar, incomes. But even with two incomes, for many, saving up for the down payment has been the major obstacle to purchasing a home. 2021’s meteoric rise in home prices has escalated required down payment amounts, further frustrating Gen Z and Millennials who find themselves further from their needed down payment amount while burdened with student loan repayment. Choosing to rent rather than purchase means those down payment savings can be channeled into paying off credit cards and other debt, or even invested.

Fresh home designs with today’s most-wanted amenities

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Did you know more rental residents live in single-family homes than in apartments, according to the National Multifamily Housing Council? Historically, real estate investors would buy houses and turn them into rental properties. Those houses, scattered throughout communities, often have “mom and pop” landlords. But now, a significant trend has emerged – building brand new homes, often entire neighborhoods of brand-new homes, expressly to rent the houses.

BTR already accounts for 4% of single-family housing starts, and is growing

As opposed to individual infill BTR opportunities, Build-to-Rent neighborhoods typically offer amenities on par with what new home buyers find in comparable for-sale communities. Such amenities, coupled with the desire for more space, attached garages, and no overhead neighbors, are attracting a cross-section of households. Childless renters are more found in multifamily dwellings, whereas families with children are much more likely to rent single-family homes. The realities COVID-19 ushered in for working from home liberated many people from the necessity to work in traditional office buildings. And the idea of leasing, paying for the use of (rather than owning) “new” made popular in automotive circles, has become a mindset for many

An alternate layout (included) provides secondary bedroom walk-in closets instead of the ½-bath and walk-up closets.

Economics plays a key factor in the viability of BTR neighborhoods. While new for-sale homes come in all sizes and price points, there is a much more defined ceiling in terms of what most renters can afford.  Currently, value-engineered, three-bedroom homes, approximately 2,000 square feet or less are most popular for BTR, and typically 45-feet wide or narrower. Buyers and renters alike are attracted to many of the same home design features and solutions. But interestingly, product selections differ somewhat in BTR houses. Exterior products, from roofing to siding to decks, as well as interior choices of flooring and other surfaces are looked at with an eye towards both increased longevity and lower maintenance in new BTR homes.

In our next newsletter, we dive into why renters prefer new BTR homes, followed by part 3 of this series, BTR advantages for home builders.

• For more resources on thoughtful design:

  • Visit our blog
  • Browse selected B2R housepPlans
  • Thoughtful Design Concepts

Photo: <a href=’https://www.freepik.com/photos/people’>People photo created by yanalya – www.freepik.com</a>