Top 10 Challenges for BTR Operators

With the U.S. experiencing a significant housing shortage, with a deficit of over 3.5 million units according to Yardi Matrix data, Build-to-Rent and Single-Family Rental communities are becoming increasingly common. But with their increasing popularity come management concerns.

1. Tighter margin of error

BTR communities need to be managed meticulously from concept to residency. They usually have smaller unit counts than traditional multifamily properties, resulting in a smaller margin for error, according to Brett Forney, managing partner at Prim Properties. The staff count at the property management office is also smaller, requiring everyone to wear multiple hats and be experts in all areas. One delinquency or squatter can inflict more damage on a BTR community than it would in a multifamily complex. Costs are higher at BTR communities and the margin for profit is smaller.

2. Flatter rent growth

Although rent growth in the SFR and BTR space has outpaced traditional multifamily over the past 12 months, Jeremy Edmiston, executive director and U.S. lead for Build-to-Rent/Single-Family Rental at Cushman & Wakefield, said that new supply in various markets is causing rents to flatten a bit. Demand is favorable, but absorption rates have trailed off slightly in higher supplied markets.

3. Withering underwriting fundamentals

There are new developments now delivering their first units that were underwritten when fundamentals were stronger. These deltas can cause some pain right out of the gate, Edmiston said. Leasing velocity is lower, expenses are higher, especially insurance and property taxes. Meanwhile, insurance rates are still a bit unpredictable.

4. Slower pace of construction

The time between breaking ground and delivering an SFR or BTR property is considerably longer than with apartment buildings, garden-style communities or other multifamily assets. On average, 10 to 15 homes come online per month, said Edmiston.

5. Demand for land

With land prices still high, developers will be challenged to develop new homes in areas where demand is the strongest, said Edmiston. Although the spread between rents and mortgages has widened in favor of renting, there is a reasonable ceiling for “chunk rents” in most of the Sun Belt markets. And in some markets, qualified applicants can be more difficult to source.

6. Fleeting resident retention

Many individuals are looking to purchase their own homes but have been outbid by all cash deals from institutional investors, according to Robert Martinek, director at EisnerAmper. As a result, many SFRs are leased by short-term residents looking to leave when a home can be purchased.

7. How to staff a property

Staffing appropriately and anticipating resident needs during fluctuating supply and demand situations while also navigating successful lease-ups are necessary to create the best possible experience from move-in to move-out. In fact, management is rarely found onsite at BTR or SFR communities, said Core Spaces’ Managing Director of Business Operations Scott Stager. If a resident has a question, management must often be contacted by email or phone. Assistance with maintenance issues can take days or weeks. Managing from afar or from one centralized location may create operational efficiencies on one level, but the resident experience could suffer.

8. Maintenance issues unique

Because each SFR is different in age, condition and lot size, maintenance differs dramatically for each property. Also, emergencies at traditional multifamily properties are more easily dealt with. Residents at an apartment complex could be moved to another unit in the community. If this happens in an SFR, repairs must be made immediately. Managing many properties in diverse areas can be difficult, with a large array of reliable vendors needed to deal with maintenance issues.

9. Replacing important items

At traditional multifamily projects, unit interiors are usually alike. There is excess inventory when replacing long-lived items such as countertops and cabinets. Since SFR communities are often unique, replacements can be more challenging, said Martinek.

10. Navigating local regulations

There are different regulations from one town to another. As a result, local laws and legal issues can be difficult to navigate, Martinek said. Adding to the challenge, noted Edmiston, is that the product type is still widely unknown and is often faced with opposition from municipalities. Operators must spend a considerable amount of time advising and supporting clients regarding the case for SFR/BTR.