Home prices keep rising and inventory is tight. Build to rent homes — and entire build to rent communities — help meet the demand.
Build to rent homes made up over 6 percent of new U.S. home construction in 2021, reports Hunter Housing Economics. The firm projects the number of build-to-rent homes constructed annually will double by 2024.
What are build to rent homes?
The terms “build to rent," “built to rent," “BFR" and “B2R" are interchangeable. They all refer to properties constructed as long-term rentals. Owners build these homes specifically for tenants instead of purchasing them from other owners.
Some of these homes are owned by individuals, others are built and managed by companies. That's especially true of homes within build-to-rent communities. Build to rent homes can include a variety of home types.
- A single-family home: A free-standing unit on a standard size lot
- Small lot homes: Individual homes built closer together
- A duplex: Two attached units with a shared wall
- A triplex: Three attached units with a common wall
- Row homes: Several side-by-side houses that share a common wall.
Why demand for build to rent homes is increasing
The demand for build-to-rent homes comes tied to several factors, including strong demand for homes, a limited supply of houses and record home prices. Build to rent homes are an attractive option for would-be homeowners who get priced out of the market or can't afford a down payment.
Housing demand is high, but supply is low
The National Association of Realtors (NAR) reported that median housing prices hit an all-time high in June 2021. Prices will likely keep rising. The same report notes that housing prices for single-family homes, townhomes, condominiums and co-ops increased year over year for 112 straight months.
At the same time, housing inventory is very low. The National Association of Realtors and the Rosen Consulting Group report revealed that the U.S. has had an "underbuilding gap" of around 6 million housing units since 2021.
The housing crash in 2007 and 2008 devastated the building industry and made the problem worse. When demand began to build again, many construction workers had found new jobs. Pandemic-related safety measures and supply chain issues challenged new construction in 2020 and 2021, even though consumer demand was strong.
"At a broad level, home prices are in no danger of a decline due to tight inventory conditions," said Lawrence Yun, NAR's chief economist. "Ideally, the costs for a home would rise roughly in line with income growth, which is likely to happen in 2022 as more listings and new construction become available."
Home prices outpaced earnings
The problem is, home prices aren't rising roughly in line with income growth. The Economic Policy Institute says nominal wage growth has been well below growth targets since 2009. Pandemic-related job losses and underemployment will delay recovery.
American workers are already feeling the hardship. Average wage earners in 55 percent of U.S. counties couldn't afford to own a home in 2021, according to Attom Data Solutions. That's up from 43 percent in 2020.
High demand for homes and limited supply creates a highly competitive housing market that favors sellers, not buyers. Build to rent homes give renters the chance to enjoy some of the perks of living in a home without going over budget.
“Many first-time and aspiring homeowners are seeking more space, privacy and a backyard without all of the responsibilities that come with homeownership," says a statement from ERC Homebuilders, a build to rent specialist in Florida. “Additionally, build-to-rent homes make the dream of living in a single-family home a possibility for many people unable to purchase a home due to the financial pressures of a large down payment and student loans."
The pros of living in a build to rent property
Financial concerns are just one reason people rent a house instead of buying a home. Extra space, top-of-the-line amenities and the freedom of renting are key benefits.
Many renters choose a build to rent a house instead of an apartment so they can enjoy extra indoor and outdoor space. Many build-to-rent homes (even the ones on small lots) offer a yard so renters can spend time outside. Renters can consult with the landlord to put in a garden or create a patio area.
Homes are newer
Build to rent homes are new construction, so that means some tenants will be the very first people to live there. Landlords offer longer leases on these home types, so tenant turnover is lower than in apartment buildings.
Renters can experience the comfort of a home without the stress of maintenance. Landlords and property owners handle repairs, pest control and replacement requests. They often coordinate lawn care and snow removal too. However, renters should ask detailed questions for clarity about their responsibilities.
Landlords and developers want to lure renters away from apartments, so they pack build-to-rent homes with the amenities renters want. These include kitchens with new appliances and washers and dryers for doing laundry at home. Security cameras and SmartHome features like Ring doorbells and Nest thermostats make life safer and more convenient for residents.
Residents won't need to use a parking garage in a build to rent home. Most of these homes have garages (either attached or unattached) or reserved parking close to the house.
Build-to-rent communities often feature gathering places like swimming pools, walking trails, playgrounds, fitness centers and outdoor patios. Since leases are longer and turnover is lower than in apartments, many residents get to know their neighbors in these communal spaces.
Try before you buy
Renters can experience living in a house before committing to homeownership. A build-to-rent home also gives residents a chance to experience a particular neighborhood before making a long-term commitment to a location.
When deciding whether to rent or buy, renting is the more flexible option. Experts say homeowners will need to stay in their homes for three to five years to break even on their mortgages. People buying in today's competitive market will likely have to stay put even longer to see a return on their investment, even with the current low mortgage interest rates.
The cons of living in a build to rent home
There are benefits and drawbacks to every type of rental home. Renters should do their homework and analyze their budget, goals and desired amenities to make sure a build to rent home is the best fit.
All those amenities, conveniences and smart home technologies add up. Tim Sullivan, senior managing principal at housing market research firm Zonda, reports that owners of new build-to-rent homes can (and do) charge a premium of 10 to 20 percent — or more.
A standard look
People who love historic homes or a quirky design features aren't a good fit for build-to-rent homes, which are contemporary and not built with originality in mind. Homes in build-to-rent communities look similar to each other and get built around the same time, which provides a sense of visual continuity that not all renters love.
Developers and property owners build in markets where land costs are low. So certain neighborhoods and ZIP codes will be off-limits to renters.
Renters can't remodel
A build-to-rent home is still a rental. Renters can dress it up to suit their style, but they can't remodel it or make significant changes. People who dream of home improvement projects will feel frustrated with this type of house because it won't need any updates for years.
Renting doesn't build wealth
Mortgage payments go toward eventually owning a major asset — a home — outright. Rent is an expense for the renter, but an investment for the owner.
Is a build-to-rent home right for you?
As demand for homes surges and supply remains low, build to rent homes will step into the gap. A build-to-rent home gives renters a chance to enjoy the extra space and comfortable amenities of a home as well as the freedom of renting.