Should you invest in new construction rentals?

Is Investing in New Construction Right for You?

Let’s be honest. Everyone likes new things, whether that’s a new pair of shoes or a new home. So, if you’re here exploring real estate investing, you may be wondering if new construction properties are good for your portfolio.

Here’s some good news off the bat: New homes are cleaner and have lower maintenance costs. They also have the latest trends and smart-home technologies. They are also doing well in today’s housing market as the need for low-maintenance, move-in ready homes is high.

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A Gem in Today’s Real Estate Market

Like homebuyers, renters are looking for the very virtues newly constructed homes offer, such as new amenities and modern components. They are much less likely to need big repairs like older properties, and they are energy-efficient to boot.

Investing in brand new construction homes has always been an attractive opportunity for these reasons, but does the high home prices end up paying off later?

With there being high competition for existing rentals and high demand for renting in select markets, your chance to buy a new construction home as your next investment property is finally here. Let’s talk about this particular investment opportunity and see if it’s right for you!

What are some advantages to choosing new construction rentals?

As an investor, you can have more flexibility with your closing date, which may be your biggest advantage. You don’t have to worry about selling your current house or coordinating moving dates. A flexible closing date can give you the chance to pick up a new construction home deal that may have fallen through the cracks.

Depending on the builder and the situation, you may be able to score a bit of a discount with your new construction home. Again, your flexibility may be your biggest advantage here. Builders may be more eager to sell off their inventory to meet end-of-quarter or end-of-year goals. Lower purchase prices help you earn a decent return on investment!

Depending on the builder, you can negotiate the pricing on upgrades or a premium lot in most cases. You may also find that builders may give you other special builder incentives if you can close quickly by a specific deadline.

Is investing in new construction worth it?

There are pros and cons to investing in new construction, just like there is in any investment. Turning a new construction home into a rental property with good ROI relies on several factors.

One of the biggest is location. If you buy a beautiful new home in the middle of nowhere, away from any good job opportunities, then the chances of you finding a long-term tenant are pretty slim.

However, in metropolitan areas with steady job growth and a high population of renters, buying new construction as a rental property makes a lot of sense. The price of new construction in metropolitan areas is typically higher than in suburban areas. As a result, many cannot afford their own house in those areas.

As an investor, this is great, and these areas may be precisely the location you’re looking for. Buying a rental property in a good neighborhood will help attract tenants who want to stay longer.

What about Builders?

Builders think in much of the same way. Location matters to them. If they chose to build in the middle of nowhere – away from parks, shopping centers, and good job opportunities – it’s likely that they will also have low chances of finding people who want to buy their new construction homes.

This is why they build quick move homes according to local market trends, capitalizing on actual demand. This is good news for investors who are looking for properties in emerging areas that also have a good potential resale value.

Existing homes may be attractive to buy because of their location near already established communities. New construction homes and build-to rent units are built around areas that are still developing, sometimes outside of city centers. However, in a few years, the areas around new construction developments may become more well established as more amenities are added, and more people move into the area.

Future maintenance costs on new construction homes are usually low.

The biggest benefit to buying new construction is that you’ll likely be maintenance-free for the first couple of years. Even if there are repairs, you should have a builder’s warranty to cover those major repairs. You should still have maintenance routines periodically, such as cleaning the gutters or replacing HVAC filters, to keep your new rental home in tip-top condition.

However, the maintenance costs on a new construction home will be nowhere near the cost of maintenance and repairs on an existing home. An existing house will have more expensive maintenance and repairs due to its old age in the long run.

People also prefer to live in a new rental home.

While an older home may have character, tenants also worry about living in an older home that may require more maintenance and repairs. Although the costs of these repairs will typically fall on you, the landlord, tenants aren’t too fond of having to wait for repairs or take time out of their busy schedule to accommodate repairers entering the property.

What’s more is that when you have newer amenities, they tend to be much more efficient and save you and your tenants money on electricity bills. Happier tenants mean longer stays, and less vacancy means more rental income for you!

On top of that, tenants, much like homebuyers, are attracted to the newest trends and amenities. A large percentage of the millennial population cannot purchase a home due to student debts and rising housing costs that don’t match up to what they’re currently earning.

Also, in today’s market, renting a single-family home is the new “starter home stage” for many Millennials. A new build can offer the more recent amenities and trends that these renters are looking for compared to an older, resale home.

Downsizing for Empty Nesters

On the opposite side of the spectrum, baby boomers are also looking for rental properties for downsizing. Much like the millennials, renting saves them the hassle and costs of maintaining a property, even if it means losing on equity. A new rental home is also a desirable option to baby boomers because they tend to feature open floor plans and smart home upgrades.

Open floor plans make homes seem bigger than they really are and are great to have for when you’re entertaining friends and family. Smart home upgrades, such as controlling lighting and temperature, now make it easier for everyone, not just baby boomers, to access certain features in their home. For baby boomers specifically, smart-home upgrades can help them live more independently.

The Bottom Line

The major downside to buying new construction is the price tag. Additionally, new construction homes tend to have higher HOA fees and taxes than existing homes. However, with today’s high demand for homes, buying new construction as a rental home is now a more viable option. And it makes a lot of sense.

Like homebuyers, many investors turn to new construction homes because they offer more recent amenities and require very little maintenance or repairs, translating into a higher ROI later on. Having more recent amenities and trends attracts more reliable tenants who want to stay longer.

Buying an existing home may be cheaper at first, but the tables can quickly turn if there are expensive repairs or renovations to complete to make the home more attractive.

When it comes to buying your next rental property, location is key. You want to invest in a good neighborhood with good walkability and is close to shopping centers and parks or in an area that is quickly developing. You also want to invest in an area near a growing population and job opportunities.

There are many pros and cons to think through before deciding to buy a new home or an older existing home for your next rental property. But the bottom line to making a good investment is to do your research.