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Should I Buy a Rental Home or Build One?

Framing of a New Home Being Built in MililaniThere is a rising demand for rental homes in different markets around the country. Given that there are many looking for a home to rent, the competition to buy existing homes is so strong that some investors are turning to new 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.

If the conditions in your chosen market and the costs involved are favorable, it might make sense to build instead of purchasing an existing home. 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. So you have to know your local market well enough to determine which investment strategy will make the most sense. In some places, building a home to rent may be more cost-effective than buying one. You can seriously consider this option if you already own a vacant lot, have a good relationship with a contractor, or otherwise have the edge on a new construction project.

Local Market Demand

Small to midsize investors without such contacts might find that building a home to rent may cost more than buying an existing home– even in a competitive market. This holds particularly true in areas where the demand for new construction is very high. High demand means higher prices, and you will end up paying more per square foot than you would for an existing home.

Maintenance and Renovations

When you are comparing, make sure you include not only the cost of the property itself but also the amenities and extras that are important to you. New homes often don’t come with landscaping and even 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 has added costs you need to consider, as well. You may need to renovate and repair older homes 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. Since these things wear out, you have to repair and replace them. These renovation costs should also be considered in your decision-making process.

Long-Term Appreciation

Another key thing to keep in mind is the long-term potential for appreciation. It is usually easier to track value increases for existing homes since there are many comparable properties and 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, there are also instances where a new area experiences sudden increases in home values due to market demand and other factors.

Finally, the decision to build a home to rent is entirely yours. 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 Mililani property managers. If that is the case, reach out to Real Property Management Alliance. We can help you take your next steps as a rental property investor with confidence. You can contact us online or call at 808-427-0611.

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