Now is a good time to invest in new construction.
Let’s be honest. Everyone likes new things, whether that’s a new pair of shoes or a new home. New homes are cleaner and have lower maintenance costs. They also have the latest trends and smart-home technologies. And like homebuyers, renters are looking for those same amenities. Investing in new construction homes has always been an attractive opportunity for these reasons, but does the high cost of buying new end up paying off later?
With the low-interest rates, your chance to buy a new construction home as your next investment property is finally here. Existing homes are still high in demand, and you could be paying a premium on a house. New construction inventory is also tight. But, 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. Although the price of a new construction home is un-negotiable, 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 incentives if you can close quickly by a specific deadline.
But 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 ROIs 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, like Jacksonville or Atlanta, 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.
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. Existing homes may be attractive to buy because of their location near already established communities. New construction homes 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.
With COVID-19 thrown into the mix, we also see a current trend in people moving away from city centers as companies move towards work-from-home solutions for their employees. The pandemic has also encouraged many renters to move from their apartment spaces to single-family homes, which feature larger living areas and backyards to accommodate their needs. Single-family rental homes have been rising in demand even before the pandemic due, primarily due to the unaffordability of houses in metro areas.
Maintenance costs on new construction homes are 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 want 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.
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. The next best option is renting a single-family home that can feel like they own it. A new construction home can offer the more recent amenities and trends that these renters are looking for in a rental property.
On the opposite side of the spectrum, baby boomers are also looking for rental properties to downsize into. 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. In February 2021, the median sales price of new homes sold was $349,400. Meanwhile, the median sales price of an existing home is $313,000. Additionally, new construction homes tend to have higher HOA fees and taxes than existing homes.
However, with today’s high demand for homes and low-interest rates, 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.
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