The built-to-rent (BTR) sector has quickly become one of the most vibrant corners of U.S. real estate investment. For companies like CSSI, which look at real estate-adjacent services (finance, tax, development, etc.), understanding the mechanics and tax levers is essential to evaluating opportunities. Below we’ll define what BTR is, look at recent trends and why there’s such strong momentum, and then dig into how cost segregation can materially benefit BTR investments.
What Is Built to Rent?
Built-to-rent refers to homes (often single‐family or smaller clusters) built specifically for the purpose of renting, not for sale. Instead of building speculative single‐family homes and selling them, developers build housing stock that remains in a professional rental portfolio, often with standardized amenity packages, property management, and maintenance services built in. Some key features:
- Design & amenities tuned for renters: modern finishes, shared amenities (parks, pools, fitness, common spaces), often built with low maintenance in mind.
- Professional management from day one: full caretaker, maintenance, and community services are typically provided.
- Consistency & scale: Because developers build multiple homes in the same community, there are efficiencies in construction, ongoing operations, and marketing.
Why BTR Is Experiencing a Boom
Several interlocking trends have pushed BTR from niche to mainstream in the last few years:
- Housing affordability and high mortgage rates. As buying a home becomes more expensive — both due to high home prices and rising interest rates — many households are priced out of ownership or simply prefer renting without the risk or upfront capital commitment.
- Strong demand for space and quality. Especially post-COVID, people want more space (yards, garages, more light), amenities, and lower maintenance. BTR gives many of the benefits of single-family home living without many of the hassles of ownership.
- Demographic shifts. Millennials, Gen Z, empty nesters — different cohorts are more open to renting longer, particularly if renting gives flexibility. Also, population growth in Sunbelt and other high-growth metros fuels demand.
- Supply constraints in ownership housing (zoning, land costs, regulatory delays) push developers to consider rental alternatives. In many markets, it’s easier (or more profitable) to build for rent than build for sale.
- Massive pipeline of units. Over 110,000 single-family rental units are currently under construction in the U.S. across 600+ communities. States like Texas, Arizona, and Florida are leading in both number of units and the growth rate.
- For example, Texas alone has nearly 22,000 such homes under development.
- Dallas-Fort Worth is among the top metros, with ~8,500 single-family rental homes in the pipeline.
All of this means strong tailwinds for BTR: rental demand, willingness to pay, economies of scale, and regulatory/tax environments align in many markets.
What Is Cost Segregation?
Cost segregation is a tax strategy that allows property owners to identify parts of a building and its systems that can be depreciated over shorter time periods (e.g. 5, 7, or 15 years), rather than the standard 27.5 years for residential rental property (or 39 years for commercial property).
It involves a detailed engineering and accounting study that breaks down (“segregates”) the total cost of the property into components:
- Land improvements (sidewalks, driveways, landscaping)
- Personal property (appliances, carpeting, certain fixtures)
- Building structure
- Systems (HVAC, plumbing, lighting)
By doing this, you can front-load depreciation deductions (especially with “bonus depreciation” where applicable), reduce taxable income earlier, increase cash flow, and improve returns.
How Cost Segregation Can Benefit Built-to-Rent Investments
BTR investments are especially well-suited to cost segregation. Here are specific ways cost segregation adds value in the BTR context, along with some cautions and strategic considerations.
| Benefit | Why It Arises in BTR | How Big the Impact Can Be |
|---|---|---|
| Accelerated tax deductions & improved cash flow | Because BTR communities are new builds (or substantial renovations), there are many components eligible for shorter-lived depreciation. Utilities, landscaping, finishes, appliances, etc., often have useful lives of 5-15 years. Segregating those increases depreciation sooner. Lower taxable income = tax savings early on. | Depending on the scale, this can lead to tens or hundreds of thousands in tax savings in early years. For large BTR portfolios, this helps with debt service, reinvestment, paying property management, etc. |
| Bonus depreciation advantages | Under U.S. tax law, many components with useful lives of 20 years or less qualify for bonus depreciation. That means you might be able to expense large portions immediately (or nearly so) rather than over many years. BTR’s high component count (personal property, land improvements, etc.) gives more “targets” for bonus depreciation. | Especially in years before phase-downs, this can dramatically reduce after-tax cost and improve internal rate of return (IRR). |
| Improved return metrics | With more cash preserved earlier (less tax drag), the investor sees better return on equity, faster payback of investment, and more flexibility. CSSI or any stakeholder can reinvest in amenities, scale operations, or reduce financing costs. | Can improve IRR by several percentage points in early years. Also helps with underwriting, investor pitch, financing terms. |
| Mitigation of risk from rising costs | Many BTR projects are large capital outlays. Any tool that improves early cash flow helps buffer against risks: unexpected cost overruns, slower occupancy ramp up, inflation, rising interest rates. | Helps with cushioning during lease-up periods. May reduce pressure on needing high rent escalations. |
Strategic & Practical Considerations
While cost segregation offers substantial upside, to successfully extract value it’s important to manage certain practical and strategic issues:
- Timing
- The study should ideally be done when the property is placed in service (i.e. ready for rent) because depreciation starts then.
- For new development, you need to have all the costs documented (construction, hard and soft costs) to allocate properly.
- Cost vs. benefit
- There is a cost to performing a cost segregation study (engineering and accounting fees). The scale of the project matters; larger portfolios with more component cost are better suited to this.
- You need to compare the expected tax savings vs study cost and the time value of those savings.
- Bonus depreciation phase-downs
- Legislation (Tax Cuts and Jobs Act, etc.) has enabled 100% bonus depreciation for certain assets. But these provisions are set to phase down over time.
- If you miss the window, the benefit is reduced.
- Maintenance & replacement cycles
- BTR communities will have component turnovers (appliances, landscaping, etc.). The useful life of many components is shorter; keep good records to ensure that replacements or improvements are properly accounted.
- IRS & tax compliance risk
- The segmentation must be well-documented, defensible, often by combining engineering and accounting practices. If audited, you will need detail.
- Misclassifying something (e.g. what qualifies as personal property vs building) can invite dispute. Having specialists (engineers, cost segregation firms) is valuable.
- Investment horizon and exit strategy
- Because depreciation benefits are front-loaded, returns look great early but an investor must consider what happens when selling: depreciation recapture, capital gains, etc.
- But for hold-longer BTR portfolios, early cash flow may significantly help scaling or building more units.
Putting It All Together: BTR + Cost Segregation = Strategic Edge
The built-to-rent market is growing rapidly; driven by affordability constraints, demographic trends, strong suburban land markets, and shifting renter preferences. In this environment, cost segregation emerges as a powerful tool to unlock more value from BTR investments by accelerating depreciation deductions, reducing tax burdens, improving cash flow, and enhancing returns.
Contact CSSI today to start maximizing the tax benefits of not only your BTR property, but any of your investment properties.
