Please note: This is Chapter 6 in the Complete Guide to Property Investment Strategies, focussing on Build to Rent property investments.
Build-to-Rent Definition
This is a growing sector, with large institutional investors getting in on the act, especially in places such as London. You can get an overview here.
It is what it says on the tin: Building properties with the explicit intention of keeping them to rent out, rather than sell on. It typically manifests itself as blocks of flats, probably because that usually provides the most rental units for a given space and hence maximises returns.
Build-to-Rent Challenges
It shouldn’t be a surprise that this is an advanced strategy. You will face the following challenges:
- Sourcing land suitable for new build property is difficult and potentially expensive, depending on where you are developing.
- You will need to gain planning permission (unless it is a conversion under permitted development rights), which in itself can be difficult, expensive and take some time. However, you can mitigate the risk by using a purchase option (see Advanced Strategies).
- Funds. It should be obvious this requires relatively deep pockets, even for a relatively small project. You will need to be able to access development finance for the build (often released in stages once agreed milestones have been reached) and the ability to refinance onto a term product which will pay off the development finance when you hold for the long term.
- Risks. Building or converting carries significant risk from unknown problems both from cost overruns and potential issues with the property or land you are developing. You will need access to significant contingency funds.
Build-to-Rent Advantages
However, there are considerable advantages, such as:
- You retain the “developers profit” for yourself, since you are building at cost and retaining and not selling on for a profit. This has a significant advantage on refinancing to hold as the developers profit will enhance the market value and allow you to exit the development finance.
- Economies of scale. By having several units in one block, management and maintenance is easier to coordinate. At the larger scale you can develop a brand, which has value in and of itself.
- Freehold ownership. You will also be the freeholder, so you remove all the downsides of flat ownership that I listed above. You will be in full control of the building and so can maintain it to the standard required.
- Future options. You have several strategies when owning a block. You can split titles and sell off some of, or all of, the individual flats to return capital. You can choose to sell off the freehold, which itself has intrinsic value.
- Branding. Done at scale, you can develop a particular brand and be known for a particular style, attitude and professionalism in the private renting sector. The big advantage of this is that brands have value, over and above the asset values of the property.
Really, this deserves a whole book by itself! Again, I have included for completeness, but the backbone of your property investment should be 2-3 bed family homes before branching into more advanced strategies.
TKM Triangle: Build-to-Rent
Hopefully it is clear that Build-to-Rent as a property investment strategy is not something you rush into:
- Time. Sourcing, analysing, gaining planning permission and managing the build will be very time intensive. Once built and let though, the time considerations diminish as you are managing a collection of Single Lets with some economies of scale from being in the same building.
- Knowledge. Lots of this required! Assessing viability, what planning permission is likely to be given (although this can be gleaned through the employment of a Planning Consultant), build cost, build requirements and so on is a steep learning curve to be acquired.
- Money. It should go without saying that you need deep pockets for this sort of thing for anything other than the smallest of developments.
In short, this is definitely at the advanced end of the spectrum. However, assess your own knowledge. Experience in planning or development will go a long way to making this fall within your comfort zone.