Build-to-rent (BTR) homes, also known as “B2R” and “build-for-rent (BFR),” are real-estate properties specifically built to be rented. These can include small lot homes, two-story houses converted into duplexes, expansive horizontal apartments, and various rentals in between.
BTR properties are increasingly popular with savvy investors in the real estate market. They comprised about 6% of the new homes built between 2021 and 2022 — a 42% increase from prior years. However, this BTR boom has made the current economic climate more challenging for builders, renters, and property owners alike. Builders struggle to move inventory, and many independent landlords can’t guarantee a return on investment (ROI).
Nevertheless, countless opportunities exist for smart investors with solid business models that can keep up with the times. Check out these three growth strategies for build-to-rent properties in 2024.
1. Market Saturated? Consider Secondary and Tertiary Markets
A broad spectrum of investors jumped on the BTR bandwagon to take advantage of the low-interest rate environment. Unfortunately, interest and refinance rates rose in 2022 and 2023 and made building, renting, and owning unaffordable for many people.
Fewer buyers and more properties have caused many markets to become oversaturated — but not all of them. Much of the current competition and saturation is driven by larger building companies that make it harder for smaller builders and independent landlords to get involved. Fortunately, many markets, such as those in small towns, don’t have this level of competition.
2024 is the perfect year to expand into your secondary and tertiary markets, especially if your primary market is too competitive. Though some mortgage rates have dropped since the beginning of the year, larger markets most likely won’t change for some time. So, use this time to branch out and focus on high-potential locations and fix-and-flip loans you previously ignored.
2. Having Trouble Scaling? Consider Partnering With a National/Regional Builder
Expanding your operations and resources is a critical aspect of built-to-rent real estate to guarantee you keep growing and can adjust to market shifts. This is becoming more challenging for smaller builders and property owners, especially those just getting started. This is because larger businesses can access more resources at usually cheaper costs.
The most reliable solution in these circumstances is often to partner with national and regional builders. Established construction companies should already have the resources and inventory to survive the current market. For example, they can usually obtain building materials faster and cheaper, reducing costs per square foot and time lost from inventory issues.
As the old saying goes, “If you can’t beat ’em, join ’em.” Combined with debt-service coverage ratio (DSCR) rental loans, national and regional builders can help you guarantee a more immediate ROI.
3. Trouble Making The Numbers Work? Be an Agile Operator
Most build-to-rent properties take a long time to develop — the approval process alone can last up to three years. Many variables outside of your control may change during these broad timeframes, making your ROI unreliable.
Be aware of the following factors and variables when developing BTR properties:
- Refinance rates
- Local mortgage rates
- Builder and construction rates
- Building permits
- Supply costs
- Foundation, framing, and roofing costs
- Plumbing, HVAC, and electrical costs
- Rental demands
- Finishing costs
- Accommodation costs for tenants when expanding a lived-in property
Almost all of us have penciled a deal that later fell through, whether from rising costs or investment concerns. Situations can change from when you start building to when you have a finished product. As such, a vital aspect of smart operations is preparing exit strategies for multiple scenarios. For example, you may want to invest in cheaper HVAC systems if your budget is slashed early into construction. Alternatively, you may only need to revise your ground-up construction loan.
Depending on the current refinance rates, you shouldn’t be afraid to pivot to a built-to-sell (BTS) strategy instead. Selling at the end of construction may not give you the total ROI you hoped for, but it may be the only way to profit or break even if your investment is threatened. In fact, you may even make more from a BTS strategy in a sales-focused economy.
Grow Your Build-to-Rent Business With Dominion Financial
To become an agile build-to-rent investor, you need a lender that can pivot and adapt to your business needs. Whether you’re looking for a multifamily bridge or a take-out loan, Dominion Financial Services has the best-in-class products with the industry’s lowest rates in all 50 states. Contact Dominion Financial today to learn more about our BTR loan programs.
