The surging popularity of new construction build-to-rent properties among individuals and families has opened the financial floodgates for real estate investors. Why is this the case? Well, the BTR market has become the fastest-growing real estate sector, even during this time of economic turbulence that sports high inflation and high interest rates. That certainly says a lot about the stability of this asset type, doesn’t it? With this in mind, we’ll take a deep dive into why this new construction rental space is such a hot market and how investors benefit from it all. But before we get into the fine details, let’s kick things off by answering the question at hand:
Are build-to-rent properties a good investment? BTR properties are a wise investment because they’re in high demand and also require less maintenance, making them more cost-effective. Additionally, tenants are willing to pay higher rents for newly built rentals and tend to stay for the long term, providing a low vacancy rate, steady cash flow, and a high ROI.
What Are Build-to-Rent Properties?
Build-to-rent homes, also referred to as build-for-rent, new construction rentals, horizontal multi-family properties, and purpose-built rental housing, are typically single and multi-family homes, such as duplexes, that are built from the ground up for the specific purpose of being utilized as long-term rentals.
These new homes are generally built by one developer on individual lots situated on large plots of land where many homes can be added, giving it a real sense of community. A BTR property has the look and feel of a built-for-sale home, with all the same amenities – backyard, garage, appliances, and the like, minus all the responsibilities and costs of owning the home.
Why are BTR Homes in High Demand?
The need for build-to-rent properties has exploded over the past few years, and this surge in demand presents the opportunity for investors to build wealth and financial security. But why has there been a rise in interest in this type of rental among those who set out to originally buy a home, especially over the last couple of years? To answer this question, we’ll have to look at the economy and how it’s quickly pushing home buyers into the rental arena.
Home Buyers are Priced Out Making Rental Properties a Better Option
Those dreaming of owning a home have found that with today’s current economic climate, they just can’t afford it. This is because high mortgage rates and high inflation make it impossible for most families to settle into a home they can call their own. Additionally, with inflation soaring, young buyers overburdened by student loan debt are not even contemplating saving for a down payment to purchase their dream home.
What it boils down to is that as inflation soars, so does the cost of a home, and incomes are not catching up with these inflationary prices. This, in turn, keeps interested home buyers out of the market. Then there are the millennials who are now in their home-buying years. However, since there’s been a shift in home-purchase trends due to the economy, we now see many of them transitioning from apartments to affordable single-family rentals. This gives them the home life they’re after without the high mortgage payments that go along with owning a house.
So, it’s obvious that inflation is a negative factor when it comes to home purchases, but not so much when it comes to buying rental real estate. With that said, read our article Why Rental Properties are a Safe Investment During Times of High Inflation to get into the fine details of why this is the case.
To fully understand why families choose to rent over buying a home, take a look at the chart below that displays how home prices have risen from 1999 to 2023 – notice the sharp increase over the past few years that placed pricing at an all-time high.
Home-for-Sale Builders Have Slowed Production Causing a Housing Shortage
With interest rates and inflation as high as they are, along with other factors forcing a great number of people to turn away from home purchases, home-for-sale builders have slowed production way down. This has created a low supply of available homes for sale, pushing the cost of buying a house up even more.
On top of this, existing homeowners who might have otherwise sold their houses are now holding on to them to keep their low mortgage rates locked in, which further keeps the inventory at a low point. This housing shortage has funneled more families into rentals, and this has convinced homebuilders that build-to-rent properties are a hot real estate item, leading them to start building rental properties. The bottom line is that industry professionals are realizing that newly built, family-friendly rental properties are a solution to the current housing crisis.
Renting a Home is the New Normal that Makes the American Dream Possible
It’s fair to say that renting a house is becoming the norm, and it’s making the American Dream achievable for those who can’t afford to buy. A survey completed by Bankrate found that 74 percent of Americans viewed homeownership as one of the main components of achieving the American Dream. It ranked higher than having a successful career, a college degree, or retiring comfortably.
It’s clear that owning a home is a top priority for Americans, but unfortunately, many people don’t have the funds to do so. What are they doing about it? Well, they’re still shooting for the American Dream by living the home life in a newly-built rental property. This equates to the fact that the perception of renting has shifted dramatically, making renting a house equal to living in a purchased home, as far as lifestyle is concerned.
The Renting Arena Has Evolved from Necessity to Choice
With renting a home in place of buying becoming more common these days, families are seeing just how attractive the rental life can be. In the past, renting was mostly a choice made out of necessity, but the market is now a mix of necessity and choice, pushing up the demand for rental properties even more. Tenants are finding that they like renting because it gives them the best of both worlds by providing a real home with all the amenities a purchased home can provide, but without the maintenance, yard work, or mortgage payment.
More 50+ Individuals are Entering the Rental Market
We mentioned that millennials are flooding the rental market for their own reasons, but there’s another group that’s choosing to leave homeownership behind to rent, and they are individuals who are 50+. New construction rentals are becoming the preferred option for retired seniors who want to avoid the hassle of maintenance and property taxes. This also applies to empty nesters who would like to downsize.
Why are Build-to-Rent Properties a Good Investment?
Now that you can clearly see how renting a home is a hot market and the reasons why, it’s time to piece everything together to see all the elements that make build-to-rent real estate a wise investment.
Built from the Ground Up Rentals are More Cost-Effective
If your goal is to keep as much rental income as possible, then a build-to-rent property is a wise investment choice. It will allow you to avoid constantly funneling money into a massive repair fund. And if you have ever invested in an older, distressed property in the past, then you know exactly what I’m talking about.
A substantial amount of money is typically placed into older properties just to get them in shape to rent out. Then, after a tenant is in place, more money goes into maintaining the old components over the years to come. It just goes with the territory of renting out a used home that was built many years ago, and we’re going to dive into this a bit further below.
Old Rentals Drain Money from Your Savings
When a previously built property is bought and rented out, it’s common for big repairs to pop up. For instance, two years into it, the roof starts leaking and needs to be replaced. Or, at some point, you get a call from your renter stating that there’s a plumbing issue, only to find that the corroded pipes need to be completely replaced.
This happened to a friend of mine not too long ago – just a few years after fixing and renting his property out, one that was built in the 1960s, he was slapped with a $17,000 bill to replace the plumbing. In the meantime, he also paid the hotel bill for the family while the repairs were taking place. With that said, you can learn about other issues that investors run into when renting out an older home by heading over to our article – Why Flipping Houses is a Bad Idea When Time and Money Matter.
BFR Properties Bring in Higher Rents
Along with less maintenance and repair costs, brand-new rentals equal higher rent because tenants are willing to pay more for a nice place to live – this increases your rental income, making build-to-rent properties a good investment as far as ROI is concerned. On top of being able to ask tenants for more money for a new construction rental, rent prices in general have been rising, which secures an even higher asking price.
Take a look at the chart below that reveals how rent prices have steadily increased since 1999:
Purpose-Built Rental Housing Provides a Steady Cash Flow & Passive Income Stream
Tenants who choose to live in a newly built single or multi-family rental typically plan on making it their home. This means they will become long-term renters, which, in turn, will bring in a steady cash flow that can bulk up their wealth.
Rental properties are known to be the number one way to build wealth, not just because of the continual cash flow, but also because investors make passive income in the process. This means the investor can just sit back as the rent checks arrive each month; all the while, a property manager takes care of every detail pertaining to the rental and the tenant – basically, it’s a hands-off approach to investing. Of course, you can be involved in the process if this is your preference, but most just leave it to the property manager, which frees up valuable time.
A New Construction Cost Segregation Study Can Save You Thousands in Taxes
New construction build-to-rent properties are a good investment for many reasons, and one that most people don’t know about is the substantial tax savings that they offer. Rental real estate, in general, is a huge tax shelter, sometimes reducing an investor’s tax burden down to zero. You can read the following article to learn more about how you can save on your taxes – Tax Shelters for Real Estate Investors. But for now, in keeping with the topic, we’re going to focus on the tax advantages that are available for most new construction, built-to-rent properties, in the form of a cost segregation analysis.
So, what exactly is a new construction cost segregation analysis? It’s something that can supercharge your tax depreciation. Let’s break this down a bit – basic depreciation will allow the investor to depreciate an equal percentage of the building as a whole. To do this, they would depreciate a percentage of the building each year over the lifetime of the property, which is typically 27.5 years. To supercharge this, a cost segregation study accelerates this depreciation by breaking down the non-structural elements of the property, such as the roof, cabinets, plumbing, driveway, and the like.
These non-structural items are placed in new accelerated depreciation timeframes of 5, 7, or 15 years, instead of a straight 27.5. All this allows the investor to speed up depreciation deductions on personal property and land improvements, which can save them thousands of dollars early on in the game. This can free up more money to pay your property off sooner, invest in an additional property, or build up a larger nest egg for you and your family.
If you find the topic of cost segregation interesting, then take a look at some real-world examples of what can be depreciated in the video below, or check out our article on the topic – The Power of a New Construction Cost Segregation Study Can Save You Thousands.
If you’d like to go all out by learning what other legal tax strategies you can use to hold on to more of your wealth instead of sending it off to the government, then be sure to head over to our page titled Lower Taxes, where you’ll see that we’ve partnered with our friend Tom Wheelwright, CPA, to give you access to his WealthAbility program. This program includes financial education and tax strategies that can save you 10-40 percent on your taxes in a short period of time.
We also suggest diving into Tom’s book that you can grab from Amazon – Tax-Free Wealth. I’ve actually read it several times and put many strategies into place that saved us a substantial amount of money.
New-Build Single-Family & Duplex Rentals Have a Lower Risk of Vacancy
One thing that real estate investors fear most is having a vacancy. This word goes hand in hand with a loss of income – the longer the property is vacant, the more money you lose. This is the case because if a tenant is not paying for your mortgage and expenses, it means you are. With that in mind, every precaution must be taken to avoid vacancy and high turnover rates.
Older Rentals Have a Higher Turnover Rate Compared to BTR Homes
One way to lower your risk of vacancy is to invest in build-to-rent properties because they typically sport high occupancy rates. This is due to the long-term nature of new construction single-family and duplex rentals. On the other side of the fence is an older home that was renovated but holds many of the original components, as we discussed earlier. An aged-out home can be a headache for both the landlord and the tenant. Many families may eventually look for a better place when they tire of constantly calling for maintenance repairs.
Newly built rentals also differ from apartments when it comes to vacancies. Apartments, also referred to as vertical housing, generally don’t have a yard, and, in many cases, the only place for children to play is a parking lot. Additionally, the square footage is normally small, and the turnover rate is sky-high.
In contrast, put a family in a newly-built rental that has a yard where children can play, more space, new home appliances, and only occasional general repairs needed, and it will become a place they can call home, somewhere they won’t want to leave. This scenario has a low risk of vacancy and a high lease renewal rate.
If you’re interested in investing in a duplex, we recommend reading our latest post on the topic – Is Buying a Duplex a Good Investment?
Helpful Rental Real Estate Resources & Programs
Knowledge is power, and we’re here to arm you with all the information you would ever need to become a successful real estate investor. Take a look at the resources and programs below to see if any of them spark your interest:
Financial Freedom Educational Resources
If you live overseas, than you’ll want to head over to our article on buying U.S. real estate as a foreign investor to get the best strategies for buying rental real estate in America.
Suggested Resource for Those Who Don’t Have Enough Funds to Invest in a BTR Property
We recently partnered with a company called Connect Invest because a lot of people were coming to us asking how they could start investing in new construction properties when they only have $5,000 to $10,000, and, in many cases, only $500. These are people who didn’t have the $40,000 to $50,000 that’s typically required for a down payment to purchase a property.
Connect Invest provides a great way to begin investing when you’re just not financially ready to buy your own rental. Many of our staff members have even taken advantage of this and started investing with a minimum of $500. If you would like to check this option out, just head over to Connect Invest’s website where they have a quick video that can give you an overview.
Programs for Real Estate Investors
We also offer several programs that can help you achieve your goal of owning a BTR new construction home, as seen below. If you’re interested in learning more about any of them, please feel free to book a call with one of our team members, or you can find an overview of each program on the following page – Morris Invest & SDIRA Program Overview.
- Self-Directed IRA Program
- 1031 Exchange Program
- Real Estate Portfolio Program
- Freedom Number Program
The Build-to-Rent Space is Exploding Providing an Opportunity to Grow Your Wealth!
We hope that after diving into our article, you now have a clear understanding of how the economic landscape has changed, causing families to focus more on renting a new home instead of taking on home ownership. This, along with the other aspects of purpose-built housing, further validates that build-to-rent properties are a good investment. With that in mind, investors who have been on the fence about moving forward would be wise to jump on the bandwagon of owning a lucrative rental property that can protect their wealth.
How to Invest in a Built-to-Rent Property
Morris Invest specializes in providing new construction properties to investors who would like to grow their wealth with a secure asset. Our team builds properties in the best rental markets with proven returns (18-20+% IRR), in areas that are considered recession-proof, offer low crime rates, have good school districts, and a prosperous economy. Here’s an article that provides one example of Morris Invest’s market research paying off – Lubbock Recognized as Recession-Proof City and Maintained a Strong Rental Market Throughout Pandemic.
We not only provide a solid performing asset to you in a great location, but also take care of all the details to make it happen. Morris Invest places a tenant and a professional property manager for you, assists in finding the appropriate funding, as well as everything else, big and small, that needs to be completed before we hand you the keys to your brand-new property. Additionally, many of our rental properties have financing built right in, and when appropriate, a new construction cost segregation analysis is built in as well, so you save a substantial amount of money on your taxes right off the bat.
Because rentals are in such high demand right now, we have a waiting list started, so be sure to schedule a call with one of our team members if you feel you would like to move forward with owning a high-quality, new construction BTF property that can offer a great return on your investment.
Behind the Scenes of New Construction Rental Homes
Before you go, I’d like to take you behind the scenes of our new construction rentals that show how build-to-rent properties are a good Investment. The video below has some great footage from our team in Texas, which will walk you through the five stages of new construction, and what the final product looks like. So, grab a cup of coffee and enjoy the tour.
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