Build-to-rent communities are capturing growing interest from institutional investors, but the familiar playbook of joint ventures used in multifamily and single-family rentals doesn’t easily translate to this evolving sector. According to Tim Zwerner, vice-chair of Burr and Forman’s real estate practice, the unique challenges of capital staging, governance and risk in BTR projects demand a different approach.
“Sponsors are the people running around, beating the bushes, trying to find opportunity and create value,” Zwerner told GlobeSt.com.
Yet these sponsors often lack enough capital to seize every opportunity or risk overextending their own financial resources. Most start with support from friends and family—investors who typically lack sophistication—quickly discovering the limits of having to explain even the most routine strategies.
To scale, deal-makers seek out institutional investors with deeper pockets and experience. But those partners, Zwerner notes, aren’t likely to trust new sponsors implicitly, leading most to rely on single-asset joint venture structures. These arrangements, common across commercial real estate, are transactional by nature and generally seen as lower risk.
“The flexibility they provide is a big advantage,” he said.
However, while this approach works well for conventional multifamily—longstanding, stabilized, and lighter on construction—build-to-rent is largely uncharted territory.
“Conventional multifamily has been around forever,” Zwerner noted. “Because the investment strategy is so much better understood and so much less risky, and, most importantly, so much lighter on construction, the joint ventures are very familiar to use.”
By contrast, BTR ventures frequently involve land purchases, securing entitlements and undertaking full ground-up development.
“If you think about multifamily or SFR like a highway, you start at purchase and end at sale, there are fewer off-ramps and less that can go wrong. With build-for-rent, you have a nascent asset class,” Zwerner explained.
BTR projects typically follow one of two basic capital strategies. The first involves securing loans for land and construction before a stabilized asset ever exists, eventually securing long-term financing. But as Zwerner warned, “There is a lot that can go wrong.” The alternative is a forward takeout, where buyers acquire the asset after construction is complete and a final certificate of occupancy is in place. This helps reduce certain risks but does not entirely eliminate uncertainty.
Zwerner emphasized that BTR isn’t necessarily more difficult than other real estate sectors—just less familiar. As the market matures, some of these complexities may fade. For now, though, investors should be prepared for a steeper learning curve and take extra precautions to protect their interests.
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