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Should I Buy a Rental Home or Build One?

Framing of a New Home Being Built in LawrenceThe demand for rental homes in various markets across the country is very high. 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.

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 some things you have to consider 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. In some places, it can be more cost-effective to build a home to rent instead of 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

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 is often 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 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. 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 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 so you will need to have them repaired or replaced. 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. In comparison, new builds are often in newly established areas that may be harder to assess. Depending on where the community is located, property appreciation may be something you will have to wait for several years for until the area, and even the price trend, is more established. 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.

Ultimately, the decision to build a home to rent is solely yours. With good market data and a clear investment strategy, you can make the best decision for your situation. You may also want to get some expert advice from professional Lawrence property managers. If that is the case, reach out to Real Property Management Indianapolis Metro. We can help you take your next steps as a rental property investor with confidence. You can contact us online or call at 317-484-8444.

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