022: Brick by Brick: The Build-to-Rent Strategy
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2020-2021, and, who are we kidding? 2022 as well is just an extension of the past two years. This all still feels like March 2020 for a lot of us. But there has been a lot of change we’ve experienced as a society within that time. Everything, from how we commute, communicate and create income has massively shifted within these changing times. 😔😔
And we have to change with it! Your ancestors did not carry you this far to drop off at the end. We can feel ours staring down on us daily. Are we making them proud⁉️
That’s always the question in the back of our mind. We have to think differently, creatively, a little outside the apartment ‘box’ quote/unquote if you will. If there’s one thing we’ve learned when it comes to real estate and apartment syndication, it’s that the market shows no mercy, and we have to pay attention to other areas in the market as well and see how else we can contribute.
That’s why today’s episode is a little bit more, well, niche. A unique niche, some would say.
But, aren’t all niches…unique?
Today, we’re talking about build-to-rent properties. Which has become increasingly popular with real investors in the past few years as the number of renters has increased since the housing market crash of 2007/2008. Talk about some dark times.
Right! And as we’re on the topic of society shifting with the times, this was a huge event that affected millions. Mainly, millennials. We ❤️ love our millennial friends, and they have been dealt a tough hand. Lagging income, student debt, and owning a home has been increasingly more difficult for them. That’s why a lot of millennials rent rather than own home both based on circumstance and preference, but as they get older and start families of their own it– those apartments can get a little tight.
But, we live in America where there’s never an opportunity we don’t like to capitalize off of, so enter build-to-rent development. These are multifamily apartment complexes that are built from the ground up to rent out with plenty of perks and space.
This is what happens when the perfect storm of rising prices, human behavior, and demand meet. People are changing how they live their lives, literally. Like, in their literal living space, so it means the real estate also has to change physically. The structures people occupy and the market needs to adapt and change. And it’s a little hard to change things that were built 20-30 years ago.
So, if you’re trying to revamp an apartment physically, you’re not going to find the parts for the revamp at yesterday’s prices. And when all that old inventory is sold out, you’re going to see new inventory, new parts, on the market. And who is that going to attract? The new higher-end homeowner.
Simply put 〰️ when you get older, it’s harder to complete. Think of any new car situation. There’s an appreciation for the vintage 1950’s Cadillac. But getting that original chrome? That’s super hard to come by. On the other hand, Tesla owners? They have no problem replacing a part by simply walking into a store. Plus, the bonus of an electric vehicle. Air pollution has definitely changed since years ago.
So when we bring it back to real estate investors, how do you buy old parts and make it make sense from the cash flow perspective? Well, it’s to engineer it. More specifically, you have to reverse engineer it, which means you have to think like a tenant and see the value from their perspective and give them an apartment that matches today’s world. Then you have to think from a landlord/apartment syndicator perspective. Does it make financial sense? 🧐🧐
What we’re seeing is this: when you combine the tenant’s values with the right price point considering the acquisition and the maintenance plus the low-interest rates we’re seeing right now– you have a really unique situation on your hands that we think more people need to start paying attention to.
As real estate investors, we also play the dual role of the weather (wo)man. We’re always looking at the forecast of what’s on the horizon, what new trends we’re seeing and what’s to come. There is a lot of potential out there, but we have to target our focus on the things we think are going to make the most sense. Gone are the days of going to a developer and buying property below the replacement cost. The replacement cost is everything from the construction materials to hiring labor. Only in the end to have some sort of resemblance of profit.
In today’s world, there is no such bargain unless you had a time machine and transported yourself back to the ‘50s or ‘60s.
But, if we were to forecast things out, we see a lot of markets driven higher in residential areas and all of a sudden, a huge demand in the market for housing in certain areas. And we have to jump on those opportunities as real estate investors. Doing our due diligence and making sure the economics and tenant base match up as well, of course!
We have to ask ourselves these questions like 👉 “What does the rental market look like? What’s the durability of rent? Who are these potential tenants?” As times have changed, and people have been feeling the weight of job loss, and certain industries are being hit harder than others, there is still more demand than there is supply.
Is anyone else’s Econ 101 bells going off?
Which means there’s an opportunity, and that is what we are looking for. You’re looking for shifts and trends and we look at them all the time. I guess, in a lot of ways, our fashion background and trend forecasting really did prepare us for this moment.
People have discovered they can work from home, businesses are learning they can lead their teams from their living room, students have withstood being in black boxes over zoom for so long. We know things might change, but regardless, all of these things are affecting how people live their lives.
With all this change, real estate is no different. Enter…
Build-to-Rent
It’s becoming more and more popular these days, and you’ve probably seen them. Apartments are advertised as “luxury living” with the works included. 💦 Pools, a 🐶 dog park, playground and even 🍒🫐🍏 grocery stores all built and located in one building, similar to a gated community vibe.
Typically, when you hear build-to-rent homes, most people think of single-family homes that are built with a specific intention of renting them. However, you’ll see more trends that apartment syndicators are getting into, which is build-to-rent for apartment complexes– built from the ground up development, rent the units, execute the business plans, and operate it like any other apartment syndication. ✅
Seems simple enough right? “If you build it, they will come” kind of mentality? Well, in a lot of cases this can be true, but because of the significant up-front investment, build-to-rent apartments are normally built by a group of real estate companies, not by individual people. However, you don’t have to let the suits get you down, there are plenty of ways for individual investors, like you, to get in on the action of these high-in-demand build-to-rent apartments.
Build-to-Rent Apartment Complexes
What we’re talking about in regards to rental properties, that’s nothing new. People have been living in large, multifamily apartment complexes for as long as cities have been in existence. Duplexes, triplexes and other buildings similar are as old as the Hollywood Hills that exist nearby. A modern, build-to-rent neighborhood is built with one goal in mind from the very beginning: to be rented. 😎😎 As a result, all your neighbors have one thing in common from the start: you’re all renting.
Millennials Making Moves
Okay, so if apartments and multifamily units have been in existence forever, where’s the big demand for build-to-rent apartments coming from? Well, we can look to the next generation. Millennials are at the place of building their careers and earning more income. They’re no longer the younger brothers and sisters we fondly remember eating lunchables and watching TRL after school.
And they are paying a substantial portion of their paycheck in their student loans. This makes it hard to save the traditional 20% down payment on a house that costs $300,000 or more. As a result, millennial homeowners are a rare find.
At the same time, millennials also want a home with key features like safety and a sense of community. In a build-to-rent neighborhood they have access to things like pools and luxury gyms. And don’t forget the dog park for the pets they have in lieu of kids.
And there are other reasons as well for the in-demand build-to-rent neighborhood.
Renters 4 Life
It’s not a surprise that younger people have made up more of the renter market. Maybe you remember it for yourself, many years ago, getting out on your own, your first “big girl or boy” job and then finding the perfect place. In hindsight, you realized that the carpet smelled and you’re pretty sure that there was black mold in the ceiling towards the end of your time. Yeah. We’ve all been there. 🤓
Then, when you got old enough, you saved more money and put a downpayment on a house and moved out to the suburbs.
Ah yes, the American Dream.
Nowadays, things simply aren’t that easy. Anyone who’s read a news headline lately will tell you house prices are higher than ever with little evidence of them leveling out, which makes it harder to save. That, paired with crippling student loan debt, it makes sense that the renter demographic is getting older and older. These are people with more money to spend on rent, who want an authentic suburban experience. All the perks of a perfectly mowed lawn, without, ya know, actually having to mow it.
Millennial Cohort Rejects Home Ownership in Favor of Becoming Lifelong Renters. This article does an excellent job of outlining all the reasons why trends in renting have significantly increased.
Property ownership isn’t everyone’s goal, especially for people under 40. For them, the benefits of renting are now more attractive and it’s something to be embraced rather than endured. They have seen their parents bear the weight of financial struggles in owning a home, especially if they were victims of the ‘08 crash. For them, abandoning home ownership and remaining long-term renters is the new ☁️ American Dream.
In addition to that, we can’t forget our baby boomers. Their kids are out of the house and grown, and now they’re looking to downsize and live in a home easy to manage and take care of. The article sums it up beautifully from the perspective of the Boomers, with one of them quoted saying “Instead, they’re opting to rent in urban environments that offer greater flexibility for travel and the option to leverage the equity in their homes.”
From Apartment Space to Office Space
Most of the rental market has been located in urban areas, big cities where people move to for even bigger opportunities. But, that’s slowly changing. When the pandemic hit, most people started working from those city apartments, and then eventually just moved back home. Companies quickly realized that their employees remained effective at home and they could save money by renting less office space. This, along with changing demographics, has led to the surge of demand for rentals.
So, What Does this Mean for You?
With sky-high housing prices, it’s getting more expensive to buy a single-family home. And from an investment perspective, it’s becoming less attractive since it’s going to take you longer to earn back your investment.
However, the price of construction has remained relatively stable for new housing. This makes build-to-rent that much more attractive as an option. Remember, as investors in the real estate world, a lot of our job is like forecasting the weather. Noticing the changes, and reporting on what’s most likely to happen.
100% chance of making you money. 💰
Exactly. Build-to-rent means we’re able to capture the massive upside that normally would be passed through to the apartment syndicator since we’re already doing all the hard work upfront, it stands to reason that we should also receive the huge upside as well.
Let’s lay out the details of the pros and cons.
Apartments with Benefits
We’re all about engineering the next great opportunity to work in our favor and that’s especially true for when it benefits both sides of the marketplace. This is where interest rates will allow it for you, as the investor to invest and buy new property while picking up tax breaks.
There are other benefits as well, such as zero maintenance since they’re brand NEW. You do not have to worry about deferred maintenance or give the tenants what they want so they’re willing to pay a premium. Just imagine, not one leaky sink for them to complain about. 🤗🤗
You have a longer asset life with a new property. The age life methodology of appraisal tells us that at some point, homes wear out and they’re no longer viable. There’s always some sort of builder warranty with a new house and it typically homes with some sort of builder warranty. Even a home 40 years old still has some life in it, and that’s true in multifamily apartments as well.
According to Jean Gillen, a successful builder in Florida, the insurance premiums are way lower in a home. Why? Because they’re built with the weather in mind. WE know there are a lot of jokes about Florida, but this one seems to make sense.
Another benefit is the less turnover in tenants. When tenants are living in something newer and in nicer neighborhoods that attract better tenants overall, you have a longer tenancy and that’s just simply good business. Plus, you can also ask for more rent since it’s a brand new, class-A building.
Build-to-rent could give you the biggest return in your investment to date. There are so many upsides. The significant value in the future, ground up development, to selling of the apartment complexes. Plus, you can still take advantage of the massive tax benefits in apartment complexes once the buildings are completed. 😘😘
We’ve never experienced a perfect living situation, but we think build-to-rent comes pretty close. The property works and all things are equal, the neighborhood is idyllic and sought after, the rental range works in that area in terms of demand and the cherry on top is that they are brand new homes which is not only engineered from a financial perspective, but that’s actually generally engineered from a durability and and usability perspective.
Face it, you’ve walked into those model single-family homes with perfectly hung modern art on the walls, all white kitchen, and not a stain on the carpet. A total dream. Renters are also looking for these same attractive amenities. Renters can experience the comforts of homeownership without the stress of having to make their own repairs and maintenance. A huge bonus to anyone who’s lived in a home and paid more than $200 to a plumber only to tell you there’s something wrong with your leaky sink.
Millennials are growing families, and they want to live in a community that is also going through something similar. That’s why tight-knit communities that build-to-rent apartment complexes offer are ideal.
Plus, as an investor, you might be able to get into the game sooner and with less competition. ✨ If there aren’t enough properties to buy, investing a build-to-rent apartment can help you get into the real estate game without having to enter into bidding wars at auctions or engaging in other competitive struggles that will lower your chances of a good ROI.
And if you invest in the right area, as in a market that is up and coming, you might find it easier to build than to find an apartment that already exists there and just waiting for investors.
Let’s Bring It Back
Some of the things to consider are lack of liquidity. Just like any other apartment syndication, your money is liquid for 5 years or so. And instead of the typical 3-5 years hold period you would have on already built apartments, the timeline would move up to a 5-7 year hold as the apartment is being, well, built. It’s simply the development of the property from scratch.
There’s also the issue of no control. Yep, you heard that right. As a truly passive investor, you won’t have control over day to day decisions, as those will be taken care of by mostly general partners and syndicators. That is why apartment investing is perfect for high-level entrepreneurs, but also something to think twice about if you want a more hands on approach.
This isn’t your typical J.O.B‼️
And lastly, the market is a little sensitive. Much like your cat when you catch her in a bad mood, you just don’t know which way it’ll swing. Real estate, like anything else, can be affected by market cycles– however, keep in mind that apartment buildings historically perform better than other real estate types, making it a more risk-adjusted investment. Apartments move with the times.
Okay, We Think You Might Be Ready
So maybe you’re sitting there weighing the pros and cons and are thinking, so, how do I get in on the action? So glad you asked. Here are some tips to help you out.
- Through REIT’s. REIT’s stand for Residential Real Estate Investment Trust. By investing in a publicly traded REIT, you can earn money on all of the properties. That said, different REIT’s have different specializations. Make sure to do your research and invest in a REIT with build-to-rent properties. We think you’re REIT-y! 😉😌
- Publicly Traded Institutional Owner/Builder. By investing in a publicly-traded property developer, you can perform better due diligence than you can on a REIT with thousands of smaller holdings. If that’s more your speed, there are plenty of good options, like builders such as Meritage and Lennar.
- Crowdfunding Platforms. If you’d rather not invest in a REIT or a publicly-traded company, you can always raise your own money. On a crowdfunding site like CrowdStreet, you can garner your investors, and build your development from scratch. Just keep in mind that you’ll need to have your own business plan, which requires a lot of legwork. But, if up for the challenge, this is an amazing option. Plus, you’re like building your own team!
- Apartment Syndication. Hey, that’s us! In the upcoming LIVE webinar on March 16th, 2022 we will be sharing The 411 on the Build-to-Rent Strategy. Click here to snag your seat right here, right now. And since our investment opportunities is a 506(b) offering, exclusively to the investors in our Kitti Freedom Club, we must have a pre-existing relationship for you to be able to participate. If you would like to ride this wave of ground-up development and invest alongside us, be sure to join the Kitti Freedom Club now. See? Told you we’d be with you every step of the way. Or in this case, brick by brick? 🥰🥰
We’ll end with this: Today’s economy presents so many opportunities for investors in build-to-rent apartment complexes. There is so much opportunity to pivot into the next thing, and whether that’s through REITs or with us, build-to-rent homes can be a valuable part of your portfolio. Get in on the action and make it happen, your future self with thank you.
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