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Should I Buy a Rental Home or Build One?

Framing of a New Home Being Built in ChurchillAcross 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 are thinking of expanding your rental property portfolio, you might wonder if building a home to rent is the answer.

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 several things you need to think about before deciding to build a rental.

Consider the Cost

Home prices and the cost of new construction vary widely from market to market. So you have to know your local market well enough to determine which investment strategy will make the most sense. 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 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

As you are comparing, make sure you also include the cost of the amenities and important extras on top of the cost of the property itself. New homes often do not include things like landscaping and 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. Older homes usually need to be renovated and repaired 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. Since these things wear out, repairing and replacing them is a must. 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 usually easier to forecast because there are a lot of comparable properties and an established rental history in the neighborhood. On the other hand, new builds are usually in recently 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, high market demand can cause a sudden increase in home values even in new areas.

In the end, you will have the final say on whether to build a home to rent or not. 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 Churchill property managers. If that is the case, reach out to Real Property Management Bozeman. We can help you take your next steps as a rental property investor with confidence. You can contact us online or call at 406-586-2226.

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