New construction homes can be an excellent investment, especially if you want to avoid the ongoing maintenance and repairs that inherently come with older homes. Typically, new builds in an up-and-coming area with high rental demand generate excellent returns. As with any potential investment property you still need to crunch your numbers and do your due diligence.
When buying a new-build investment property, the main goal is to find one that generates a decent return on investment (ROI). An easy way to determine if an investment will be profitable is to look at the Cap Rate, also called the Capitalization Rate. The Cap Rate tells you the amount of money coming in from rent and the amount of money going out (rental income minus expenses).
If you are considering adding new construction homes to your real estate portfolio, we’ve rounded up the benefits and drawbacks of new build rental properties so you can determine if this strategy is right for you.
What is New Construction?
Before we discuss the pros and cons, let’s define this property type. When you purchase a new construction investment property, you are buying a brand new home, typically directly from a builder or developer.
Buying new real estate has some unique advantages and drawbacks. As always, extensive due diligence is an essential step before making any investing decisions. Some precautions you’ll want to take include 1) checking out the developer’s past projects and 2) reviewing how those properties appreciated or held their value over time.
10 Benefits of Investing in New Construction Homes
#1 Location! Location! Location!
Anybody who knows anything about real estate knows it’s all about location, and new builds are no exception. New construction homes are typically found in new or upcoming markets. These developments are usually built in or around A-Class neighborhoods, which have schools, lower crime rates, access to well-kept parks and closer proximity to amenities.
Because new construction developments are often located in good neighborhoods (or soon-to-be good neighborhoods), landlords should have an easier time finding high-quality tenants.
#2 People Like Living in New Homes
As humans, we have an incredible ability to adapt to our surroundings. For instance, a creaky ceiling fan might drive you crazy at first, but over time, you don’t even notice it.
Because we can get used to our surroundings, we also tend to get bored quickly. Most of us like shiny, new things. Why do you think so many people choose to lease their vehicles? The thrill of cruising down the street in a brand new car every two or three years outweighs the cost for many people. When that “new car feeling” wears off, they can start picking out their next car to lease and begin the cycle all over again.
New construction homes feel cleaner, often provide open floor plans and can offer better natural sunlight. Plus, knowing that you are the first person to live in a space and make it your own is appealing and comforting. Zillow reports that 42% of Americans prefer new homes over existing ones.
A huge benefit of investing in new construction property is that people will always be driven by novelty.
#3 Appreciation & Instant Equity
New construction homes are a good strategy for investors looking for growth. Investing in new and emerging markets can increase your property’s appreciation rate and build equity faster. Appreciation is never guaranteed, so make sure you perform a competitive market analysis before buying. However, if you know the market is growing and there is high rental demand, then you can feel confident about your property appreciating.
A friend recently purchased a new construction investment property. In just three months, its value has increased by $60k! Talk about buying in a fast-growing market with an incredibly high demand for rental housing.
#4 Extended Warranties & New Appliances
Another benefit of new construction rental properties is they come with brand new appliances and extended warranties on all major systems. Electrical, plumbing, heating and A/C, and major structural components should all be covered under an extended warranty (warranty lengths vary). If anything breaks or goes wrong, the factory warranty should cover it.
With new houses, investors won’t have to worry about as many surprise expenses, at least for several years.
#5 Low or No Maintenance & Repairs
Properties requiring little or no maintenance may be an enticing proposition for the less-handy landlord. New construction real estate investors avoid most or all of the maintenance and repair issues that often come with older homes.
New construction investors would not even consider the need for major repairs, such as a leaky roof or plumbing issues.
#6 Ability to Customize To Cut Costs
New construction homes are designed to appeal to what’s popular right now. So investors won’t need to spend time or money on making any updates. Buying pre-construction homes (homes that haven’t been built yet) allows you to customize the property inside and out. This will enable you to cut costs by opting for durable, basic features and amenities rather than upgraded or luxury alternatives.
With existing homes, unless a major remodel is planned, what you see is what you get. Older homes naturally have unique features and aesthetics, depending on what was in style at the time they were built. Updating even a few of the outdated aesthetics will likely be quite costly.
Most renters and homebuyers are looking for open floor plans, big rooms and vaulted ceilings. A housing trend we’re seeing with the COVID-19 pandemic is that outdoor space is also becoming a “must-have.”
#7 Smaller Deposits Upfront
New construction homes can usually be reserved for very little money. Pre-construction homes can also be reserved before they are fully built.
For example, a developer requires an initial deposit of $1,500 in earnest money to reserve a new construction townhome valued at $225,000. You, the buyer, don’t have to pay any additional money until the property’s closing date. This keeps money in your pocket for longer, and if the market forecast changes and you need to pull out of the deal, it won’t hurt as much financially.
#8 Buy New Construction Now or Plan Ahead
Investing in new and pre-construction real estate provides more control over your buying process and timeline. When you buy a newly built property, the builder should be able to provide a firm closing date upfront. The same goes for a pre-construction investment property.
This can be highly advantageous for investors looking to buy right away or plan for future investments. You’ll also avoid potential bidding wars on existing homes for sale, especially if it’s a competitive buyer’s market.
#9 Work With the Builder’s Team to Expedite the Buying Process
Developers and builders will almost always have a team of professionals they prefer to work with during the selling process. Think about using your builder’s mortgage and title companies, appraisers, etc. Sometimes, you can even get a discount by working with their people because of the long-standing relationships they’ve made. Utilizing your builder’s team can help ensure a smooth and expedited buying process.
#10 “Smart & Healthy” Technology
Compared to resale properties, new construction homes provide far more advanced technology and energy efficiency. The materials used to build new homes are more durable and long-lasting.
Technology advancements have improved the efficiency of windows, insulation, heating and air conditioning systems. These advances create a healthier living environment, making energy-efficient homes an industry standard. In turn, your tenants will save on their utility bills every month.
6 Drawbacks of Investing in New Construction Homes
#1 Longer Commute / Location
New and emerging markets commonly pop up just outside of existing neighborhoods. Many major cities in the U.S. are already densely populated and developers have nowhere to build except outward. As such, new construction neighborhoods are often located farther away from city and town centers. A longer commute and less proximity to convenient amenities can present big drawbacks for investors and renters.
#2 New Construction Homes are More Expensive
When you buy something new, whether it’s a car, lawnmower, or table saw, it will be more expensive than if you purchased used. Because new construction is built with new materials, when you buy a new house, you’ll be paying retail market value for everything. For an investor to purchase anything at market value is not an ideal start to an investment, so this could dissuade many away from buying new homes.
Keep in mind that the trade-off for money is time. A new property is more expensive than a resale. However, a resale property often requires more ongoing maintenance and frequent repairs, which takes money out of the investor’s pocket. Real estate investors prefer different strategies, so it’s up to you to determine what is right for you.
#3 Give Up the Charm
It’s impossible to recreate the look and feel of older neighborhoods. If you’ve ever walked the sidewalks beneath 100-year-old trees lining the streets, you know the feeling of nostalgia I’m talking about.
Most of the new build homes are located in newer areas, not older, established neighborhoods. These newer neighborhoods and homes lack the charm many people look for.
#4 New Homes Can Be Generic
New homes in planned communities often look alike. It can be challenging to differentiate one street from the next. It’s pretty much the same “cookie-cutter” houses painted in slightly different colors. Renters looking for more character and charm won’t find new builds that are all that appealing.
#5 Lack of History
Newly built homes don’t have a history of past expenses, so it’s more difficult for investors to accurately run the numbers to see if the investment will be profitable. Certain unknowns, like property taxes that come with a new build, may be viewed as a disadvantage.
#6 Sometimes a Waiting Game
Housing supply and demand vary from market to market. Finding and buying a newly built investment property can sometimes take a while, especially if demand is high and supply is low. What if no finished new construction homes are currently being sold? Investors may end up waiting several months until they can actually close on the completed property.
How RealWealth Can Help You Purchase New Construction Homes
With the huge lack of affordable housing across the U.S., investing in new construction homes presents a unique opportunity. If you can find a new build in a growing market where there isn’t a lot of new construction, you’ll be able to offer something that other landlords can’t: a brand new home.
At RealWealth, we connect our members (for free) to property teams that sell single-family, multi-family, and new-construction homes across the nation. These homes are turnkey with professional management in place, and off the market, so there is less competition. To learn more about new construction investment opportunities, Join RealWealth. It’s 100% free!
