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Should I Buy a Rental Home or Build One?

Framing of a New Home Being Built in HamptonThere is a noticeably high demand for rental homes in markets throughout the country. Because of the number of people searching for a home to rent, competition to buy existing homes become so strong that some investors are turning to construction to fill the gap. If you are thinking of expanding your rental property portfolio, you might wonder if building a home to rent is the answer.

Depending on the conditions in your particular market and the costs involved, building a home could make more sense 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. So, it’s important that you are familiar with your local market so you can determine which option is the best for your investment style and strategy. 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 is very true in places 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 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 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. 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 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 renovation costs should also be considered before you make a decision.

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 tend to be in newly established areas that can 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, high market demand can cause a sudden increase in home values even in new areas.

Finally, the decision to build a home to rent is entirely yours. 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 Hampton property managers. If that is the case, reach out to Real Property Management Dominion. We can help you take your next steps as a rental property investor with confidence. You can contact us online or call at 757-395-4274.

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