The build-to-rent home model has become one of the fastest growing classes of real estate, with many developers, brokers and investors trumpeting BTR as the wave of the future. Perhaps so, but where the product type will ultimately fit in the housing market is difficult to predict.

Rise of a Concept

Home ownership used to be described as the “Great American Dream.” But is it still? Prior to the Great Recession, the homeownership rate often ranged between 67% and 68%. Homeownership fell off after the recession and before the arrival of COVID-19, however, reaching a 50-year low of 62.9% in 2016. 

Even with a home buying surge during the pandemic, the homeownership rate stood at just 65.4% in the third quarter of 2021, well below pre-recession levels and down a full 2.0 percentage points from a year earlier, the Census Bureau reported. Owner-occupied housing units made up only 58.4% of total housing units in Q3 2021, with renter-occupied units making up 30.9% of inventory.

Within the nation's rental inventory is a growing build-to-rent presence. These developments generally consist of homes built to be rented, not sold. Like traditional multifamily projects, BTR developments usually leverage common amenities and management to achieve economies of scale. Essentially, a BTR developer purchases a tract of land and builds housing in volume with the intent of renting the units. 

The BTR concept took off in the wake of the housing crisis after the 2008 Recession. With many houses in foreclosure, individual homeowners saw renting newly built or unsold homes as a way to weather the economic storm. 

Traditional multifamily and single-family property values have soared in pandemic-era America. This has many investors fearful of investing in either a potential multifamily bubble with rock-bottom capitalization rates or a frothy single-family home mortgage market in an era of rising interest rates. Some promoters herald BTR as a variation of multifamily housing and a safer alternative investment.

The Target Market

Changing demographics partly explain BTR's appeal. Millennials and Generation Z have been loath to own, and many struggle with student debt or simply can’t afford homeownership. Typical home prices were up a record of 13.2% in June 2021 from a year earlier, CNBC reported, with prices growing 10% or more in 46 of the 50 largest U.S. metro areas. And avoiding the expense of private mortgage insurance generally requires a 20% down payment, out of reach for many households.

A June 2021 Wall Street Journal article cites the more transient nature of younger generations and the flexibility of renting as encouraging the BTR trend. BTR can also ease scarcities of affordable housing, which many communities cite as an impediment to economic development.

In a study released in June 2021, the National Apartment Association (NAA) reported that approximately 44% of Gen Z respondents would prefer to live in a vibrant suburb, with 43% wishing to rent single-family detached homes. A majority of Gen Z respondents also specified strong internet speeds, spacious floor plans and premium features such as a washer/dryer, walk-in closets, balconies and hardwood floors as key factors in their decision-making.

These housing preferences have interesting parallels in retail real estate. Consumers have become more accustomed to online shopping in the pandemic, but those proclaiming the death of bricks and mortar retail may have been disappointed by the increase in onsite sales during the Christmas 2021 shopping season. If the retail market is a harbinger, we may be establishing a new post-pandemic equilibrium in the housing market as well. 

Pre-pandemic, migration to dense urban areas was an unmistakable trend, but if working from home continues long term, many Gen Zers and Millennials may find a suburban lifestyle more attractive. Likewise, if social distancing continues, the privacy offered by single-family homes may increase their attractiveness.

Asset Class Appeal

Horizontal BTR, or the development of entire communities of rental homes, offers unique advantages for developers, investors and renters. An October 2021 article by describes advantages including: 

  • Shared amenities
  • Common property management
  • Predictable, low maintenance costs
  • Homes tailored to tenant needs
  • Larger homes (three- and four-bedroom) to attract mature renters with families
  • Longer tenant stays than in multifamily rentals

Horizontal BTR offers exit alternatives for builders, who can sell to individual investors or to institutions assembling rental communities. Similarly, a Gen-Z household ready to make a move may prefer the simplicity of exiting a lease to the time-consuming process of selling an owned home with the attendant market risk.

BTR Renter and Owner Considerations

BTR owners and renters should pay close attention to operational aspects of the lease, such as maintenance and amenities. The lease may restrict the renter’s ability to improve the home, for example. Few jurisdictions encouraging the use of standard-form residential leases have fully considered these issues. 

As with condominiums, lenders typically require painstaking analysis of governing documents for BTRs. Condominium documents usually detail the handling of common expenses and an owner's rights to alter the building. Despite this language, maintenance often depends on the condo association's willingness to collect monies and implement programs. Indeed, the BTR market resembles the pre-Great Recession hotel condominium boom, when developers sold units in hotels while promoting common management and amenities. 

Tax assessors are wrestling with how to value detached BTR houses. A typical attraction of a BTR house is lower rent than would be charged for a single family home rental. Consequently, an income-based valuation would produce a lower value and tax bill.

If an assessor decides that a sales comparison approach is appropriate, and assesses the BTR house as an isolated property with the cost of taxes being passed on to the renter, the renter could be in for a very nasty surprise come tax time. Comparing the prices of single family homes to BTR units is in many ways comparing apples to oranges.

So is the BTR here to stay?

BTR predates the pandemic and will almost certainly retain a place in American housing. Its future prevalence will depend on investors, renters, and the documents defining their relationship.