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Build to Rent?

Veteran international investor John Corey comments

What is the point of Build to Rent (BtR)? On the surface, the idea is to develop a site where the fo-cus is to create a number of rental properties. Rather than sell the completed units, someone is going to retain them and collect the rent thereby creating multiple streams of rental income.

The reason I am challenging the premise is the math. If you can produce a product which can be sold for a solid profit vs you could produce the same product and it will produce an average or weak yield, does it really make sense to hold? What if you need to leave some or all of the profits in the deal so the numbers stack on a rental basis?

For many developers, the constraint on their pipeline is finding the cash to fund the equity needed for the next project. With the right amount of equity, a developer will be able to secure debt financing for the construction phase of the project. At the end of the construction phase, the units are sold off. The debt, the construction loan, is repaid from the sales. After the dust has settled, the developer will receive their initial equity plus the profit for the project. The developer then rolls forward using the extracted cash for the next project. Call it recycling if you like.

When I look at BtR, there is likely equity ‘trapped’ in the deal so that the numbers stack up. The construction loan needs to be paid off. Fresh financing, the permanent financing based on the income stream, will be obtained. One loan replaces the prior one. This if fairly normal but do the numbers make sense?

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