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Should I Buy a Rental Home or Build One?

Framing of a New Home Being Built in San CarlosThere is a noticeably high demand for rental homes in markets throughout the country. With so many people looking for a home to rent, and with the competition to buy existing homes so strong, some investors are turning to construction to fill the gap. Do you want to expand your rental property portfolio? You might also be considering building a home to rent as an option.

Depending on your market and building costs, it might make sense to build a home instead of purchasing an existing one. There are a number of things you have to know before deciding to build a rental.

Consider the Cost

Home prices and the cost of new construction vary widely from market to market. So you have to know your local market well enough to determine which investment strategy will make the most sense. There are some places where it will be more cost-effective to build a home to rent versus buying one. It will be to your advantage if you already own a vacant lot, have a good relationship with a contractor, or else have the edge on a new construction project.

Local Market Demand

Even in a competitive market, building a home to rent may be more expensive than buying an existing home if you are a small to midsize investor without such contacts. This holds particularly true in areas where the demand for new construction is very high. The high demand drives up prices so you will have to pay more per square foot than you would for an existing home.

Maintenance and Renovations

When comparing costs, make sure you include not just the cost of the property itself but the amenities and extras that are important to you as well. New homes also don’t always come with landscaping and other finishing touches, like appliances. But they may have upgraded features, like energy-efficient HVAC systems, smart technologies, and lower maintenance costs for the first few years. Consider all the pros and cons so you can factor all costs into your calculations.

On the other hand, there are additional costs to buying an existing home that should be considered as well. Older homes usually need to be renovated and repaired before you can lease them out. They may also have aging elements and systems, like the roof, electrical system, HVAC system, sprinkler system, and more. These things wear out and need repair and replacement. These added renovation costs should be included in your decision-making process.

Long-Term Appreciation

Another key thing to keep in mind is the long-term potential for appreciation. Value increases for existing homes are usually easier to forecast because there are a lot of comparable properties and an established rental history in the neighborhood. New builds, on the other hand, are usually in newly established areas that may be harder to assess. Depending on where the community is located, you may not know exactly how quickly your property appreciates until after several years when the area is more established and home prices have been tracked over time. At the same time, there are also instances where a new area experiences sudden increases in home values due to market demand and other factors.

In the end, you will have the final say on whether to build a home to rent or not. Good market data and a clear investment strategy will help you make the best possible decision. You may also want to get some expert advice from professional San Carlos property managers. If that is the case, reach out to Real Property Management Mid Peninsula. We can help you take your next steps as a rental property investor with confidence. You can contact us online or call at 650-696-1800.

We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.