Purpose-built rentals, also known as build-to-rents, have been our claim to fame. We have built many semi-detached homes right here in Canada for the purpose of renting them out for cashflow.
This purpose-built rental property strategy (aka build-to-rent strategy) has really kicked off our wealth building over the last few years. So the purpose of this piece is to share the many ways the build-to-rent strategy helps you build wealth.
6 Ways Purpose-Built Rentals Make Canadians Wealthy
1. Instant Equity
The first, and most obvious benefit to the purpose-built rental strategy is the immediate equity you build in the home at completion. Let us explain. If you were to go into the market place and purchase a new home off of a licensed home builder, there is a markup on the home. This mark up can be anywhere from 10% to 30%. On a $500,000 purchase price, this could mean the builder’s charge could be anywhere from $50,000 to $150,000. By building the home yourself, you could put an immediate $50,000 to $150,000 of market value right in your pocket. On our typical, 2-unit semi-detached homes, we often aim for a minimum of $200,000 of equity in the property upon completion. Obviously, building your own home takes time and headaches, but we believe the trade-off of the time is worth the instant equity it provides. It is not often that a real estate investment builds wealth so quick.
2. Rent Premium
With a purpose-build rental strategy, you are able to offer a brand new home to your tenants. A brand new home attracts a rent premium. When comparing similar style houses, tenants will almost always choose the newer house to live in. Thus, they will elect to pay more in rent for the newer home. We find that our build-to-rents attract about 10-20% more in rent than our older, resale rentals. For example, in 2020, we purchase a 20 year old, 3 bedroom, 2 bathroom semi-detached home in LaSalle, Ontario. We were able to secure $2,000 of monthly rent for this home. A few months later, we had to put up one of our build-to-rent units up for rent. It was also a semi-detached, similar in size and had 3 bedrooms and 2 bathrooms. We were able to secure $2,400 in monthly rent for this unit. This was because there was not much like it on the market. It was about 3 years old, and in great shape. Thus, the rent premium means more cashflow in your pocket. More cashflow leads to greater potential wealth.
If you’ve followed us for some time, then you know how much we love cashflow. We truly believe that cashflow is the key to true, long-term wealth. Purpose-built rentals are a great source of cashflow. Since you build houses for under market value, they carry less monthly expenses (ie. Mortgage payments) than a similar home you purchase on the market. In addition, as mentioned earlier, they attract higher rents. Thus, lower expenses and higher rents means more cashflow. The greater cashflow provided by build-to-rents allows you to reinvest at a quicker pace. Cashflow is a major reason that build-to-rents help you build wealth.
4. Less Future Time Commitment
Once a build-to-rent home is completed, there is much less time you need to commit to the property, compared to older properties. This is for multiple reasons. First, everything in the home is brand new. This means you are less likely to receive a call from a tenant about something that needs to be fixed. Second, along with higher rents, these units attract a higher quality of tenants. With higher quality tenants, you are less likely to deal with social issues, like fights, domestic violence, parties, etc. We typically find that retirees and young professionals occupy our build-to-rent units. They are usually quite quiet and respectful. Lastly, our build-to-rents usually have less tenant turnover. Everytime you have a vacant property, it requires time out of your busy schedule to clean it up, market it, and fill it with a new tenant. You could use that valuable time instead to create more income streams for yourself and greater wealth.
With a build-to-rent strategy, you are given more flexibility to create the ideal rental property for yourself. For example, when we build our rental properties, we are now building them with a grade entrance to this basement. This grade entrance gives us the opportunity to convert the basements into legal basement suite apartments in the future. This would allow us to turn a 2-unit building into a 4-unit building without the difficulty of building a grade entrance
6. Great Resale Value
Because purpose-built rentals are new, they hold great resale value in the near term, compared to an older rental property that you purchase. Likewise, because they require new, serviced land, they are often in nice, desirable areas, next to other newer homes. When you couple a new home and a good location, you should expect these homes to hold their value as they would attract more buyers, wishing to live in a newer home in a nice area. As a bonus, because they are purpose-built for rentals, they would also attract investors as buyers, making these homes extremely marketable when they are put up for sale.
And there you have it. These are the 6 ways that purpose-built rental properties help make you wealthy. Unlike a regular rental property, a purpose-built rental property does take a lot of time and effort, even if you hire a contractor. But as it is clearly evident, the time and effort can definitely be worth it if you implement the strategy properly.
If you would like to learn more on this strategy, check out our Build-to-Rent Course, where we share step-by-step how to implement this strategy in Canada.