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Should I Buy a Rental Home or Build One?

Framing of a New Home Being Built in EllsworthAcross different markets in the country, there is a high demand for rental homes. 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 want to expand your rental property portfolio, building a home to rent could be the answer.

Depending on your market and building costs, it might make sense to build a home instead of purchasing an existing one. Here are some things you need to know before you decide 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. There are some places where building a home to rent will be more cost-effective than 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 especially 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

As you are comparing, be sure to include the cost of amenities and extras that are important to you in addition to the cost of the property itself. 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. Given all the advantages and disadvantages, it is important to know what you will be getting for your money and consider all of the costs in your calculations.

On the other hand, there are additional costs to buying an existing home that should be considered 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. 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 often easier to estimate because of the number of comparable properties and established rental history in the neighborhood. New builds, on the other hand, are usually in newly established areas that may be harder to assess. Depending on where the community is located, you may not know exactly how quickly your property appreciates until after several years when the area is more established and home prices have been tracked over time. 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, it is your sole responsibility to decide whether or not to build a home to rent. 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 Ellsworth property managers. If that is the case, reach out to Real Property Management Acadia. We can help you take your next steps as a rental property investor with confidence. You can contact us online or call at 207-561-7482.

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