Build-to-rent, or BTR, is one of the fastest growing sectors in real estate, and build-to-rent real estate funds are a close second. It’s not hard to understand why.
In the fourth quarter of 2021, 26% of properties bought by SFR providers were build-to-rent homes according to the National Rental Home Council. These properties are professionally managed by for-profit companies and offer a wide range of choices in terms of price and location.
Build-to-rent homes take all the best aspects of SFRs (single family residences) and improve on them by developing all homes inside a professionally managed community. The result is a rental housing option that is affordable, convenient, and attractive. Let’s examine the benefits of build-to-rent real estate funds for investors.
What is Build-To-Rent?
Build-To-Rent (BTR) real estate is a type of residential real estate that offers a middle ground between traditional, single-family rentals and site-built communities. It combines the finest aspects of both, with professionally managed properties providing amenities such as pools, tennis courts, and dog parks without HOA costs or mortgage debt.
What is a Real Estate Fund?
Real estate investment funds, including build-to-rent real estate funds, are a way to invest in commercial and residential income properties that are more accessible than buying those properties on your own. These funds allow investors to pool their money together, so they can buy bigger assets than they might otherwise be able to afford.
Real estate private equity funds are partnerships that raise money for real estate development or acquisition opportunities. The partners—a general partner, who acts as the sponsor, and limited partners—provide the bulk of the equity capital, which is then invested along with funds borrowed from banks and other lenders.
The limited partners are usually passive investors who have chosen to invest in an offering presented by the sponsor. They earn an early return on capital and a preferred return on capital invested. The sponsors provide some of the equity capital, secure investment opportunities, manage those opportunities, and earn fees based on their performance.
5 Reasons to Invest in a Build-To-Rent Real Estate Fund
Here are five reasons why many build-to-rent investors choose to invest in a build-to-rent real estate fund:
1. Cash flowing rental properties are becoming harder to find
The real estate market is booming, and it’s more difficult than ever to acquire a rental property. The market is hot, and prices are on the rise, which makes it harder to find high cash flow properties. But there’s a better way: investing in build-to-rent single-family homes for rent.
Build-to-rent real estate funds offers more convenience and long-term profit for individuals looking to acquire a rental property. Build-to-rent offers comfortable, low-risk housing for those who can’t or don’t want to buy; and it offers build to rent investors an opportunity to cash in on the rental housing boom.
In the past, rental markets were concentrated in urban areas like New York City and San Francisco, where young people wanted to live close to work. But many people are now working from home, thanks to recent technological advancements. Companies have realized that their employees remain effective at home, and can save money by renting less office space. This has led to a surge of demand for single-family rentals.
According to Hunter Housing Economics, build to rent institutional investors and individual investors will invest $40 billion in BTR development over the next 18 months. And this is just the beginning! Hunter also predicts that by 2024, the number of BTRs built annually will double.
2. Choosing a real estate fund over a physical property makes it a 100% passive investment
When you invest in a BTR real estate fund, you’re choosing to put money into real estate assets and trust professional managers to manage them for you. These professionals have the experience, knowledge, and time to seek out and evaluate investments that are likely to generate an attractive return.
As an individual investor, you are a limited partner in a partnership-style arrangement. Your role is to invest capital; the general partner is responsible for finding and managing deals aimed at generating a good return. As a passive BTR fund investor, you get the benefit of having these professionals do all the work for you.
Private real estate funds are becoming increasingly popular, and in Q1 of 2022 alone, they raised $22 billion—40% more than they did in the same period last year. That’s because investors are recognizing the benefits of being able to invest in real estate without having to deal with all of the day-to-day management that comes with being a landlord.
3. New Construction creates longer term value
Build-to-rent properties, which are newly constructed homes, eliminate the need for maintenance costs, which can improve your cash flow. Also, a high-end rental property management service is included in the purchase price of these properties, which helps keep up with their maintenance.
By concentrating large numbers of properties in a smaller number of locations, operators can save money on services like property management, maintenance and leasing. By choosing more durable finishes that require less maintenance over time, build to rent developers can extend those savings to the consumer.
The real estate market is constantly changing. BTR operators are able to quickly adapt to these changes and convert empty spaces into new uses. They also offer a wide variety of amenities that are tailored to their customer base’s preferences, which leads to fewer vacancies and higher returns for build to rent investors.
4. Great for creating a balanced, risk-adjusted portfolio
When you invest in an LLC or limited partnership, your entire investment cannot be lost if one of its properties fails to generate income. This is because the real estate fund will own multiple properties, so if one property fails, there are other properties that can help offset that loss.
The more properties a fund owns, the less likely you are to be negatively affected by market forces and events. For example, if there is a natural disaster or a recession that affects one area but not another, then your investment will be protected because it is spread across multiple areas.
Private equity funds are a great option for investors looking to diversify their portfolios and balance risk. Unlike other types of investments, private equity funds acquire multiple assets, potentially in several geographic regions, rather than just one property in a single location. If the underlying properties don’t perform well, the fund will not be adversely affected by the failure of any one asset.
5. Build-to-rent real estate is recession-resistant
Build-to-rent housing provides a basic human need—shelter—and is considered a safe haven for investors when other sectors of the economy are struggling.
In an interview with CNBC in February 2012, Warren Buffett claimed that if he could find single-family homes concentrated in a few cities, he would buy up hundreds of thousands of them.
Two months later, private equity firm Blackstone began spending $100 million a month on single-family homes, building an enormous portfolio that would later prove to be as lucrative as Buffett predicted. By 2017, other investment firms inspired by Buffett began to realize the true potential of SFRs, buying up thousands of single-family rental properties across America.
The single-family rental market has seen tremendous growth over the last decade and a half. From 2005 to 2017, SFRs grew an astonishing 36% while owner-occupied, single-family homes increased at a much slower 4.7% rate.
Additionally, the vacancy rate for SFRs remained stable during the Great Recession, and it has been lower than that of all rental types since 2006. In the first quarter of 2006, the SFR vacancy rate was just under 10%, and it stayed under that mark during 2008 and 2009, according to a report from the Joint Center for Housing Studies of Harvard University.
So Should You Invest in a Build-to-Rent Fund?
This is a big question: Should you invest in a build-to-rent real estate fund? And the answer is yes, absolutely. Here’s why.
First off, new construction gives build to rent investors instant equity in their properties and reduces potential overhead from maintenance. It also means that investors don’t have to pay for land acquisition or rehab costs on existing properties—an expense that can run into the millions of dollars.
Second, in many cities, the demand for rental housing outstrips the supply. In fact, some markets are so tight that even people who make six figures can’t afford to buy a home! Due to the shortage of rental housing, opportunities exist for build-to-rent investors and developers.
Real estate syndication and crowdfunding have flipped the script for real estate investors. Not so long ago, you needed to be a millionaire to buy a multifamily or commercial property and beg your bank to finance it. Nowadays, through a real estate fund, you can enjoy the benefits of real estate ownership without having to actively manage the properties or invest large amounts of capital.
What To Look for in a Build-to-Rent Fund
But here are three things to look for when considering a build-to-rent real estate fund:
1. Proven track record
The best sponsors have extensive experience, a consistently positive track record, and a comprehensive knowledge of the local market. Arabella Capital is a real estate investment and development company that has focused on build-to-rent communities throughout the Southeast since 2009. Our partners are operating executives who have substantial market knowledge and a demonstrated track record.
2. Concrete strategy
When it comes to investing in real estate, there are a lot of factors that go into the decision-making process. But one of the most important factors is risk and return.
As an investor, you should understand the risk-return trade-off of an investment.
Arabella’s multifamily housing track record is a result of its disciplined investment approach, experienced development team, and proven in-house property management group.
Arabella’s portfolio is diverse and multifaceted, consisting of ground-up development of build-to-rent single-family communities, multifamily properties, and acquisitions of value-add multifamily assets, self-storage facilities and highly-profitable short term vacation rentals.
3. Experienced management team
The key to a successful build-to-rent investment is to find the right markets with strong growth potential.
Arabella’s asset management team includes operators with 48 years of experience in the Southeast, who help Arabella find the best real estate opportunities.
Analytics and reports help the management team make informed decisions on which properties to acquire and how to maintain their value over time.
If you’re looking to invest in build-to-rent and want a fully passive investment opportunity, then Arabella Capital is here for you. Sign up to get the PPM presentation!