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Should I Buy a Rental Home or Build One?

Framing of a New Home Being Built in MontroseThere is a rising demand for rental homes in different markets around the country. More and more people are searching for a home to rent, and with the competition to buy existing homes very strong, some investors are looking into construction to fill the gap. Building a home to rent is actually one way for you to expand your rental property portfolio.

Depending on your market and building costs, it might make sense to build a home instead of purchasing an existing one. There are several things you need 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. You need to know your local market well enough so you can determine the investment style and strategy that best fits your situation. In some places, it may be more cost-effective to build a home to rent rather than buy 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

Small to midsize investors might find that building a home to rent may not cost less than buying one– even in a competitive market. 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 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 also do not automatically come with landscaping or appliances so you should also include the cost of these. But they may have upgraded features, like energy-efficient HVAC systems, smart technologies, and lower maintenance costs for the first few years. Take all the pros and cons into consideration so you will know what you’ll get for your money after you factor all costs into your computations.

On the other hand, there are also additional costs associated with buying an existing home that you should factor in, as well. Older homes also need some renovation, and sometimes major repairs, 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 additional renovation costs should also be a consideration 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. In comparison, new builds are often in newly established areas that may be harder to assess. It could take several years for your anticipated appreciation to happen depending on where the community is located. It would take time until the area is more established and home prices have been tracked over time. 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. You will need good market data and a clear investment strategy to help you make the best decision. You may also want to get some expert advice from professional Montrose property managers. If that is the case, reach out to Real Property Management Affiliates. We can help you take your next steps as a rental property investor with confidence. You can contact us online or call at 713-539-5765.

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