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Should I Buy a Rental Home or Build One?

Framing of a New Home Being Built in CambridgeThere is a rising demand for rental homes in different markets around 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.

It might make more sense to build instead of purchasing an existing home depending on the conditions of your chosen market and the costs involved. Here are several things you need to think about before deciding to build a rental.

Consider the Cost

Home prices and the cost of new construction vary widely from market to market. You have to know your local market well enough so you can decide on the best option that makes sense for your investment strategy. There are some places where it will be more cost-effective to build a home to rent versus buying one. This can be a good option for you if you already own a vacant lot, have a good relationship with a contractor, or have the edge on a new construction project.

Local Market Demand

Even in a competitive market, small to midsize investors without such contacts may find that building a home to rent may be more costly than buying an existing home. This holds particularly true in areas where the demand for new construction is very high. Higher demand typically drives up prices, and you will end up paying 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. With all the pluses and minuses, it’s important to know what you’ll get for your money and factor all costs into your calculations.

On the other hand, buying an existing home also comes with additional costs that you should take into consideration, as well. Older homes often need renovation and some repair 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 so you will need to have them repaired or replaced. 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. On the other hand, new builds are usually in recently established areas that may be harder to assess. It could sometimes take years before your anticipated appreciation is realized depending on where the community is located. It could take long before an area becomes more established and tracking of home prices becomes available. At the same time, market demand and other factors can also bring about a sudden increase in home values for a new area.

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 decide on the best option for your situation. You may also want to get some expert advice from professional Cambridge property managers. If that is the case, reach out to Real Property Management Commonwealth. We can help you take your next steps as a rental property investor with confidence. You can contact us online or call at 617-299-2342.

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.