Why Build-to-Rent Loans Have Strong Upside Potential
A nationwide housing shortage of rental homes, coupled with the rising costs of homeownership, has fueled the popularity of high-quality, affordable single-family rental (SFR)/build-to-rent (BTR) homes. In recent years, SFR/BTR construction starts have consistently reached new highs. In today’s economic environment, where mortgage payments are more expensive than rent payments in many markets, prospective owners of SFR/BTR communities foresee build-to-rent loans as an alternative investments strategy – if they can access leverage and construct their capital stacks accordingly.
What Are Build-to-Rent Homes?
Build-to-rent homes are detached, single-family units built explicitly for long-term rental tenants and often look like traditional, suburban-style homes. BTR homes can be duplexes, condos, and row homes and tend to have many of the same amenities as owned homes, such as green space, larger floorplans, and garages. More than 14,500 BTR homes were completed across the country in 2022, a 466% increase from 2013, according to a RentCafe analysis.
Five Reasons to Consider BTR Investing
As inflationary pressures remain high, more renters are searching for high-quality rental homes and providing upward pressure on rents, making build-to-rent loans an attractive option for investors right now. Let’s look more closely at five specific contributing factors:
1) Affordability for tenants
Rents for build-to-rent homes run slightly higher than those for traditional multifamily apartments, but they are still usually more affordable than a residential mortgage. BTR homes have become more popular because they provide tenants with a taste of homeownership without added costs such as property taxes or homeowners’ association fees. When tenants leave, owners are also more likely to find new tenants quickly because of the value many renters see in BTR homes.
2) Low tenant turnover
These types of rental homes typically have lower tenant turnover and repair and maintenance expenses since these are newer properties. Tenants want to stay longer because BTR homes are typically high quality, newly constructed, and include on-site maintenance staff, accommodations for pets, a community mindset, parks, and more incentives.
3) Appealing design
BTR homes are designed with the needs and preferences of renters in mind. Developers and investors often conduct market research to understand the demands of the local rental market, allowing them to create properties that meet the expectations of potential tenants and quickly lease units. BTR design often offers a variety of floor plans with multifunctional space, as well as highly-desirable backyards. Many even include smart home technology, such as smart thermostats and energy-efficient appliances that appeal to millennial and Generation Z renters.
4) Long-term profit
BTR investing can provide consistent rental income now, plus the potential for substantial property value appreciation over time. Because many of these developments are new, investors can initially save on maintenance costs, potentially leading to better cash flow. Professional property management companies oversee many BTR communities and know which local vendors offer the best pricing, which can save investors time and money in the long run. There may be significant tax benefits inherent in owning a BTR property, some tied to cost segregation and depreciation schedules, but this of course varies based on state and local markets and on the borrower’s individual circumstances.
Build-to-rent loan can be used to add to the diversification of a commercial real estate portfolio. BTR homes, which typically have high occupancy rates and significant rent growth potential, are an attractive alternative asset class right now.
What Kinds of Build-to-Rent Loans Are Available?
Arbor offers flexible loan solutions customized for your ground-up construction financing needs. Build-to-rent loans are typically floating-rate with terms of 18 to 36 months, with recourse and non-recourse options available. The minimum loan amount is $20 million, and the maximum loan-to-cost is 75%.
Explore Arbor’s customized SFR/BTR loan solutions.
An Experienced Build-to-Rent Loans Partner Makes the Difference
Arbor has decades of experience in SFR/BTR, and our close-knit team of expert originators, screeners, and underwriters has closed more than $1 billion in SFR and build-to-rent loans. As robust rent collections and rent growth for lease renewals have outpaced historical averages, the build-to-rent sub-sector has proven itself a strong asset class and demonstrated continued resiliency amid economic uncertainty. Contact Arbor to learn how our team can connect you to the customized financing you need to start your next commercial real estate project.
Interested in the multifamily real estate investment market? Contact Arbor today to learn about our array of multifamily, single-family rental, and affordable housing financing options and view our other market research and multifamily posts in our research section.