Three Common Misconceptions About Build-To-Rent
Mike McMullen is the CEO of Prominence Homes and the author of Build. Rent. Sell. Repeat!
Since the build-to-rent model quietly crept into the real estate sector in the early 2000s, it has steadily gained steam, chugging to prominence in the last few years. But the success of build-to-rent is relatively new, and some investors still misunderstand the sector and its potential for growth.
Here’s where I can help. I own a construction and rental management company that have both benefited from the build-to-rent boom. While guiding the ship, I’ve learned a lot about the trend.
Here are three of the most common build-to-rent myths:
Myth No. 1: Build-to-rent is a universal term.
I’ve spoken to many would-be investors who have trouble understanding what build-to-rent means, but even those who intuitively understand the concept often blunder when trying to use “build-to-rent” in a sentence.
This might be because the definition of build-to-rent differs slightly between the U.S and the U.K. Residents of the latter generally use “build-to-rent” to describe what Americans call “multifamily housing.” Americans, on the other hand, frequently use “build-to-rent” when discussing single-family residential developments. It might seem like a small difference of emphasis, but it often creates a gap in our understanding and confuses would-be investors in the process.
Here’s a quick rule-of-thumb: When reading a U.K. source, assume it is describing multifamily housing; when reading an American source, think “communities of single-family homes.” It’s not perfect, but it could add some nuance to how investors understand the term.
Myth No. 2: Build-to-rent is a bubble.
I suspect that this myth comes from a sincere place of hurt. Many real estate investors weren’t just burned during the crisis of ’08, they were incinerated and they still get understandably queasy when people talk about a booming sector that defies the conditions of the market-at-large. But build-to-rent isn’t the housing crisis, and each phenomenon relies on completely different economic math. The crash of ’08 was caused by a rotten economic foundation, whereas build-to-rent sits firmly on solid ground.
I’ve discussed the strengths of build-to-rent at length in other pieces, but here is the short version: Renting is on the rise and demand is outpacing supply. This means that any company that brings houses to market quickly and effectively stands to make substantial gains. As I mentioned earlier, I own both a construction and a rental management company. I’ve certainly seen growth in my own businesses over the last few years and our acceleration shows no sign of stopping.
But I’ve got a vested interest in the success of the build-to-rent model, so please don’t just take my word for it. Check out this article from Architectural Digest, or this one from GlobeSt.com which both report heavy investment in the sector.
Myth No. 3: Build-to-rent is too pricey for “average” investors.
I saved this myth for last because I think it is the most insidious. It has the potential to cause financial harm, or more accurately, to prevent financial gain. The idea that there is such a thing as an “average” investor is ridiculous — an investor is anyone with $5 seeking to make $10. Putting people into boxes like “average” can cut off possibilities for growth and creativity.
While it may be true that an investor can’t buy a property for $5, they can make a mortgage payment for $500, turn those payments into rent revenue, and slowly become the full owner of a property that appreciates over time.
I speak here from experience; at one point, this was my story. I was the regional director at a YMCA selling and buying houses on the side. Today I serve doctors, lawyers, builders and school teachers who seek to turn their own savings into cash flow. Such clients might not buy whole communities, but they stand to make substantial gains off of build-to-rent investments.
My advice for anyone trying to break into the build-for-rent space? Start small, start smart and don’t pay attention to the myths.
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