Forward Purchase Models: The Next Stage in BTR’s Evolution
These structures are replacing traditional development.
Build-to-rent has emerged as one of the most compelling strategies in residential real estate, particularly as traditional value-add apartment investing has become more difficult to execute. For nearly a decade, value-add multifamily drove outsized returns as operators acquired older assets, renovated units, and pushed rents in an environment supported by low interest rates and consistent rent growth. That model began to break down in 2022 as rising rates, elevated operating costs, and flattening rents compressed margins and increased execution risk. At the same time, investor expectations reset, with higher return thresholds making many deals no longer viable.
Cracks in the value-add model began to emerge in 2022. Interest rates rose sharply, and deal costs, including labor, materials and insurance, skyrocketed. Rent growth on vintage apartment complexes flattened and, in some markets, turned negative. Investors grew less interested as margins compressed, and the calculus of making an illiquid investment for a modest return no longer made sense, particularly given the gains available in the stock market and the attractive yields on savings accounts and inflation-protected bonds. As a result, limited partner capital became more expensive, with investors requiring deals underwritten to a 20 percent IRR or higher. Many chose to sit on the sidelines, waiting for conditions to improve.
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As sponsors pivoted away from value-add, a new model began gaining traction: build-to-rent. The most common version of this strategy focuses on developing newly constructed cottage, townhome, or single family projects to be operated collectively as rental communities. The earliest BTR deals often resembled low-density multifamily developments. Sponsors or developers would entitle land, construct horizontal communities of detached or semi-detached homes, and lease them as rental neighborhoods. While this product offered a differentiated living experience relative to traditional apartments, it still carried many of the same risks as ground-up development, including entitlement uncertainty, construction cost volatility, and extended timelines to stabilization.
Over time, the model began to shift. Rather than functioning purely as developers, many sponsors moved toward acquiring newly constructed townhome communities designed specifically for rental use. These projects typically consist of two- to four-bedroom units arranged in attached configurations, delivering the space and functionality of single-family housing within a more efficient, scalable format. Projects are often completed and sold in phases, with builders delivering units as certificates of occupancy are issued and sponsors closing on each tranche.More recently, the BTR model has entered a new phase, one defined by structured forward purchase agreements with national homebuilders. Under this approach, builders control land acquisition, entitlements, and construction, while sponsors contract in advance to acquire completed homes at a fixed price. Closings occur in phases as units are delivered, allowing capital to be deployed incrementally and reducing the need for large upfront equity commitments.
Most national builders require a declaration to be recorded on the project at each closing. This declaration typically prohibits any owner or affiliate from residing in a unit and prohibits the sale of individual units separately for a period of typically at least 10 years, subject to exceptions required by lenders in a foreclosure scenario. The primary purpose is to establish the project’s market value as a rental community, based on stabilized rental income rather than for-sale unit values, and to protect exit value on that basis. It also preserves continuity of ownership in connection with any homeowners association required by the applicable governmental authorities during entitlements.
A regulated investment
As this evolution has taken place, a new external factor has begun to influence how BTR is evaluated: regulatory pressure on institutional ownership of single-family housing. Recent housing proposals introduced at both the House and Senate levels signal a growing focus on limiting large-scale ownership of detached homes by institutional investors. While the specifics remain uncertain, the policy direction is clearly framed as preserving access to homeownership by reducing competition from institutional capital.
This introduces an important distinction within the BTR landscape. Detached single-family rentals, whether acquired individually or developed as horizontal communities, are increasingly viewed as substitutes for for-sale housing and, therefore, more exposed to potential regulation. In contrast, purpose-built rental communities, particularly those composed of attached townhomes, are positioned differently. These developments, designed and delivered specifically as rental housing, are often integrated into master-planned communities, and add incremental supply rather than removing existing inventory from the for-sale market.
As a result, the definition of BTR is becoming more precise. It is no longer sufficient to describe a project simply as “single-family rental.” Instead, the focus is shifting toward how the housing is created, delivered and positioned within the broader market. Purpose-built, rental-specific communities, particularly those executed through builder partnerships, are increasingly viewed as the most durable form of the strategy.
There is now a clear progression: from developer-led projects to phased acquisitions of new construction to forward purchase structures that reflects a broader trend in real estate investing. Capital is migrating toward models that reduce complexity, compress timelines and isolate the variables that matter most. In the case of BTR, that means removing development risk and focusing on stabilized cash flow.
Challenges of the new model
But the forward-purchase model is not without risk. Beyond proving out rents and executing lease-up and stabilization, sponsors face numerous other challenges. Until the final closing, they have limited control over many aspects of the project, including construction timeline, methods, and quality, as well as the governing association documents and other encumbrances necessary in connection with development. Due diligence and title review conducted during the investigation period can also be quite limited, given that a sponsor may be evaluating vacant or partially improved land where entitlements are still in process and certain encumbrances (including plats) have yet to be finalized and recorded. There is also the risk that a project fails to reach completion, potentially leaving the sponsor with a partially finished asset and little recourse against the seller. And across many pre-closing matters, sponsors may find themselves in a “take it or leave it” position on terms they will have to live with long after closing.
Build-to-rent has emerged as a compelling alternative for sponsors navigating a more challenging investment landscape, offering a path to new, institutional-quality product without the risks traditionally associated with ground-up development. For the right sponsor, one with market conviction and the operational capacity to execute lease-up and stabilization, the model presents a great opportunity. As the build-to-rent sector continues to mature, those who succeed will be the ones who understand the unique legal, financial, and operational dynamics the model presents.
Douglas Kelin is real estate partner at law firm Honigman LLP, and Bryan Pritchard is founder & CEO of Tricap Residential Group.
