Advantages and Disadvantages of Build to Rent

Build to Rent is gaining popularity among corporations as a way to provide affordable housing. However, there are disadvantages compared to individual homeowners who receive tax advantages not available to corporations. The Build to Rent initiatives appeared designed to give some tax advantages to Corporations. However, corporations enjoy advantages unavailable to individual investors and homeowners in the housing market.

Community Capital is designed to give some of the advantages that corporations hold that individuals in the housing market do not hold. It also removes some of the disadvantages of corporations in the housing market without the need for subsidies.

Advantages of Corporate Build to Rent

1. Funding advantage: It costs less per unit to fund many units than one unit. The cost of transferring occupation of a single unit is much less than transferring ownership.
2. Predictable Cash Flow: As a landlord, one of the primary benefits is the predictable, steady cash flow from rental income. This revenue can help cover the costs of mortgage payments, maintenance, and repairs and be an income source.
3. Long-term Investment: BTR properties can be a solid, long-term investment. As the properties appreciate over time, they can provide substantial returns when/if they are sold through Capital Gains.
4. Demand: The demand for rental properties has increased due to changing lifestyle choices, increased mobility, affordability issues with home ownership, and other demographic trends. This provides a sizeable market for BTR properties.
5. Professional Management: BTR properties are often managed by professional property management companies, which means less direct involvement from the owner in maintenance and dealing with tenants. This can be particularly beneficial for owners with multiple properties or those who don’t live near their rental properties.
6. Economies of Scale: There are economies of scale if you own multiple rental units in one building or development. For instance, it’s often cheaper and more efficient to maintain and manage multiple units in the same location than it is to deal with multiple standalone properties.
7. Placemaking: Unlike traditional buy-to-let properties, BTR developments are designed with renters in mind. They often include communal spaces, gyms, co-working spaces, and concierge services. This can lead to stronger community bonds, leading to lower tenant turnover and the potential to command higher rents.
8. Stability During Economic Downturns: Real estate, including BTR, is often considered a “safe haven” during periods of economic uncertainty. While property values might fluctuate, people always need a place to live, so the rental income is typically more stable than other investments.
9. Tax Advantages: Depending on the jurisdiction, there could be tax advantages to owning rental property, including deducting expenses and depreciation.

Disadvantages of Corporate Build to Rent

1. Tax Disadvantages: Individual homeowners get tax advantages unavailable to corporations or investors.
2. Financial Risk: Real estate, including BTR, requires substantial upfront Capital. If you have a mortgage on the property and cannot find tenants or if your tenants aren’t paying the rent, you may struggle to cover your costs.
3. Market Risks: Rental income and property values can fluctuate due to changes in the market. Economic downturns, changes in interest rates, and shifts in the local job market can all impact both the demand for rentals and the amount tenants are willing or able to pay.
4. Maintenance and Management Costs: Maintenance and repairs can be expensive and unpredictable. Additionally, if you are not managing the property yourself, you must pay a property management company, which will cut your profits.
5. Tenant Issues: Dealing with difficult tenants can be time-consuming and stressful. Bad tenants can cause damage to your property or fail to pay rent on time, and evicting a tenant can be costly and complicated.
6. Liquidity: Real estate is relatively illiquid, meaning it can take considerable time to sell if you need to access the Capital.
7. Regulatory Changes: Changes in laws and regulations can affect your profits. For instance, changes in rent control laws, tax laws, or building regulations can all impact your bottom line.
8. Market Saturation: Depending on the area, there may be a high degree of competition in the rental market, making it challenging to find tenants and putting downward pressure on rents.
9. Limited Diversification: If a large portion of your investment portfolio is tied up in one real estate property or one geographic area, your financial risk could be higher.
10. Changing Demographics: Demographics and societal trends could impact demand for rental properties. For instance, if there is a trend towards home ownership, demand for rental properties may decrease.

Home Ownership with Community Capital

Build to Rent proposals benefit corporations and investors directly and benefit renters and occupiers indirectly. Community Capital, where occupiers become investors, can benefit renters, occupiers, non-corporate investors and corporate investors like superannuation funds.

Community Capital can be retrofitted to any community of occupiers — renters, landlords, investors and homeowners.

Community Capital is Capital where the profits from the use of Capital are shared between the investor, occupier, buyer and renter by all becoming shareholders in a Company that owns dwellings, with occupiers becoming owners of dwellings within the Company with the rights and obligations of homeowners.

The direct financial advantages are:

1. Investors get a flexible indexed annuity that lasts twice as long as the average superannuation-indexed allocated pension. Investors must take a minimum of a 10% inflation-adjusted allocation each year.
2. Occupiers pay a minimum of 25% of their disposable income or 2.5% of the home's value to occupy their home -whichever is the lowest.
3. Both 1 and 2 are flexible and decided by the Community Capital company.

Everyone in the Community benefits equitably from Community Capital compared to investors, renters and homeowners in the existing home, rent, and money markets, where some benefit much more than others.

Sharing profits from using Capital reduces the cost of buying and selling assets in Capital markets and is one reason Community Capital benefits more. In the housing market, monetising a house to transfer it is expensive. Community Capital removes that need. Community Capital removes unearned interest on interest and removes the need to redistribute some of the profits through taxation.

To see a further discussion of the implementation of Community Capital for housing, visit Affordable Housing.