Built-to-Rent is Poised to Soar

January 28, 2022

In recent years, the built-to-rent model has taken over as a legitimate real estate investing strategy. What makes built-to-rent so great?

The cost of rent is rising higher and higher in the U.S. While real estate investors are netting higher returns from their rental income, they are expanding. Investors are building more homes just to rent them out, which is tinkering with the housing demand. Let’s talk about why the built-to-rent model is thriving in the housing market and what it means for the future of real estate.

What are built-to-rent homes?

In the past, an investor would purchase property from a homeowner and convert it into a rental. On the other side of things, developers have always built houses with the intent to sell them. While the housing market gets shaken up all the time, rental properties have evolved too.

During the pandemic, unemployment rates jumped through the roof. In April 2020, the rates were nearly 15% which was the highest that we’ve seen since 1948. There was less of a demand to live in cities for millennials. Plenty of people were not working while others were working from home. Demand shifted to buying and renting single-family homes in areas with more space such as the outskirts of popular cities.

Now, real estate investors are building single family houses specifically designed as rental properties. Both small and larger investors with cash on hand are buying up land for built-to-rent development because it appeals to certain demographics. Built-to-rent caters to Millennials who are either outpriced in their market, want more space, or like low maintenance taken care of by landlords. Since built-to-rent properties are new, it gives Millennials a turnkey solution with open concepts and modern features.

What’s driving built-to-rent homes?

Now that yields for rental properties are strengthening the position of investors, they don’t want to stop here. These yields allow them to outfit homebuilders which is increasing competition. Furthermore, buying open land is getting even more difficult to buy because others have immediate development plans as soon as they win their bid.

The national median rent rose to $1,302 in September 2021, a 15% increase from the previous year according to CNN. These figures are much higher than they were from 2017 to 2019 right before the pandemic which showed around a 3.5% raise. When the pandemic hit, rents fell, but it was met with an immediate rebound in 2021. Not to mention, the increased built-to-rent demand is happening in emerging relocation destinations.

High demand in Sunbelt cities

The demand to rent surged in Sunbelt cities where populations increased. The climate has a wider range than other regions but it’s typically warmer. These cities are currently growing larger and they draw in younger generations for residence. It’s an attractive region since investors take advantage of more flexible purchasing options, affordability, and even lower taxes. Large metro areas that make up a good portion of the booming Sunbelt area include:

  • Houston
  • Austin
  • Dallas
  • Charlotte
  • Orlando
  • Tampa

Half of the nation’s population growth between 2010 and 2016 happened in Sunbelt metro areas. Investors are targeting the Sunbelt cities which is increasing the average price of homes to buy. Those shying away from paying a premium price to own a home see renting as a viable option. It offers the benefits of no state income taxes in states like Florida and Texas as well as a lower cost of living in the Sunbelt area. Areas with strong job markets such as Austin or Charlotte also give Millennials reason to move.

Occupancy

Single-family rentals have been in a long term positive demand trend. According to Roofstock, single-family rentals had an occupancy rate of 94.5% during the first quarter in 2021. Renters are paying more as they compete for places to live that offer more space without the cost of home ownership.

National rent growth

Rents are rising across the country according to the Zumper National Rent Report. Single-family homes are now a main target for residents in fast growing metro areas. Now that investors are developing single-family homes for rent, the housing market sees this as an exceptional option rather than renting a traditional apartment. Single-family homes provide more space for those who want to raise a family. On the other hand, renters enjoy the benefits of living in a home with more space and in neighborhoods.

Is the built-to-rent trend here to stay?

There’s no doubt that investors are doubling down on built-to-rent homes. New build permit filings are soaring to 2006 levels, but it’s unlike that this will cause over saturation in the short term. The demand for single family housing will remain high as they enter the market because a sizable amount of will become rental properties.

Those who want a house, but are getting outbid will turn to built-to-rent.

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