Making the Numbers Work for BTR

The build-to-rent (BTR) market is poised to reach new heights, as median single-family rents steadily rise and deliveries near pre-pandemic levels. The sector should continue to thrive due to ongoing demographic shifts, heightened barriers to homeownership, and greater numbers of people working remotely.

For the growing number of renters by choice and would-be homebuyers deterred by elevated interest rates, BTR communities offer the same comfort and privacy as purchased homes but with fewer headaches. For example, consider cost alone. Even at the higher-middle end of the BTR market, where median rent prices rise above $3,000 a month, the rent is substantially lower than paying a home mortgage, insurance, and taxes in any major metro area.

Single-family rent growth, overall, increased 2.8% year-over-year in December 2023 with some of the biggest gains seen among lower-middle priced and higher-middle priced rental homes, according to CoreLogic’s February 2024 Single-Family Rent Index. In major metros around the country, the increases are even greater—far surpassing average multifamily rent growth.

Lument and its predecessor companies have been involved in BTR transactions since the 2000s, even before BTR became an established category. According to February 2024 Yardi Matrix data, Lument continues to lead the pack on these unique financing deals and has worked with valued borrower partners to close 81 BTR loans, totaling more than $1 billion, within the past four years alone.

Such transactions require lenders to have a clear understanding of the agencies’ criteria and those of the U.S. Department of Housing and Urban Development (HUD). In addition, there are important construction considerations that investors should be aware of that can mean the difference between the numbers working or not working.

Based on our experience, here are some reminders for BTR developers and buyers looking to maximize their gross rental yields with strategic investment plans.

Land Matters But So Does Layout

Given the relatively higher construction costs of BTR compared to traditional multifamily, successful construction and take-out financing is tied to well-managed development and careful use of space.

Most BTR communities contain 50 or more single-family rental homes. While these homes can be detached or connected and sit on one or more land parcels, they do not share a common space or hallway and typically include private garages and yards. This calls for careful attention to everything from land elevation levels to average lot sizes.

Further, fair housing laws governing accessibility apply given that every unit is accessible to the ground floor. Developers must have in-depth knowledge of how these laws impact construction and use of space from the very start. Those who are not used to the BTR product can be easily tripped up by unit inaccessibility, inaccessible sidewalks, or other missteps. This can lead to expensive remediation for developers before they can take their construction loans to the permanent markets. It can also lead to flags with Fannie Mae and Freddie Mac.

With so many unique considerations, it is no surprise that misjudged construction costs and timeframes and underutilization of space often negatively impact the overall cost and availability of financing at today’s interest rates.

Optimizing BTR Growth Opportunities

BTR developers and owners who tap into the right markets, while optimizing their space usage and keeping their costs down, are well-positioned to capitalize on rent growth and increased property values over time. Location is everything.

There are currently nearly 100,000 additional units planned or under construction, according to Yardi Matrix’s February 2024 Single-Family Rentals in Build-to-Rent Communities report. Right now, the most popular cities for BTR development– cities with the largest supply pipelines as of January 2024–include Huntsville, Orlando, Jacksonville, and Savannah.

Developers might also focus on locations with substantial rent growth. Annual single-family rent growth is projected to remain in the 2% to 4% range in 2024, per CoreLogic. The markets seeing robust BTR rent increases include Raleigh, Charlotte, Nashville, Tennessee, and Atlanta, Major gateway cities, including Los Angeles and Boston, are also seeing strong rent growth.

There is also ample opportunity in the Midwest, where BTR communities have performed incredibly well, and rents are projected to further increase. The Midwest market offers other advantages for developers, including parcels that trade at lower costs than the coastal regions.

Lument’s 15-year relationship with Redwood Living, a pioneering developer in the BTR market, has offered us a unique perspective on where the upsides lie. Ohio-based Redwood has kept a strong foothold in the Midwest, while branching out to the Carolinas, where growth opportunities are also ripening. The company has developed and manages more than 16,000 apartment homes in more than 150 neighborhoods near major metro areas.

The upsides for Redwood flow from a commitment to the build-to-rent product type, which the company has perfected after decades of experience. Their focus is on doing one thing exceptionally well and holding long-term, which has allowed for the burnishing of the Redwood brand.

Andy Warnock is a senior managing director at Lument, responsible for the origination of Fannie Mae DUS, Freddie Mac, agency small balance, FHA/HUD, and balance sheet loans for market-rate multifamily housing. 

Multifamily Spring:

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