New construction is divisive in the world of real estate, whether you’re an investor or a traditional homebuyer. Some are attracted to the totally turnkey nature of new builds. Others are skeptical of the quality of modern construction and developing markets.
Here’s the big question: is new construction worth the investment?
Investors capitalize on new construction in two primary ways: buying brand-new properties on the traditional market or buying built-to-rent (BTR) properties. We won’t be differentiating here because these share many of the same pros and cons. If there’s a unique point to make about BTRs, we’ll say so!
New constructions often come with modern designs, energy-efficient appliances, and contemporary amenities that appeal to residents. With modern sensibilities in mind, you won’t have to worry about common frustrations with houses from bygone eras, like tiny kitchens or limited storage space. These updated features can justify higher rental rates, too.
You’re less likely to face immediate repair costs with brand-new plumbing, electrical, HVAC systems, and appliances. You don’t have to wonder how old something is. You’ll know! Should something go awry, new homes often come with builder warranties, reducing out-of-pocket expenses for repairs and defects in the early years.
New constructions typically include energy-efficient windows, insulation, and appliances, lowering utility costs. Technology has also evolved in ways that better protect the integrity of the property. For example, crawl space encapsulation. In the past, a simple vapor barrier was used. Today, different, more effective materials, including insulation, dehumidifiers, and sump pumps, are utilized. This improves air quality, prevents mold growth, and protects structural beams.
Rarely will you see new construction outside of a planned community. Modern homes in these areas – neighborhoods designed cohesively with community amenities in mind – are particularly attractive to long-term residents. People who rent in these areas are looking to put down roots.
New constructions are often located in developing areas or as revitalization efforts. These areas are almost always up-and-coming, which means excellent appreciation potential.
BTRs come with a few unique benefits. First off, they’re designed with renting in mind. That means they’ve taken into account what renter households value. They use design to incentivize lease renewals. Additionally, the construction materials they choose keep the investor in mind regarding maintenance demands and cost.
Want to know more about BTRs? Keeping reading: Why Build-to-Rent is the New Wave in Real Estate Investment
Understandably, new construction homes usually have higher purchase prices than older, existing homes. However, if you factor in the cost of renovations (and potentially costly surprises in older properties), it might not make a big difference.
New developments may be in less established areas, posing risks if the area does not develop as anticipated. Be mindful of surrounding developments and their performance. There’s a big difference between a newly built neighborhood on the outskirts of town and new townhomes in the city center.
You may be buying properties in various stages of completion. Potential construction delays can postpone rental income. The same can be said of renovations, however. The only guarantee here is to buy after the property is completed.
Many new developments have HOAs with additional fees and restrictions that can impact your property management and costs. HOAs can vary from relatively cheap and unintrusive to burdensome and controlling. Before you buy, request to see any HOA bylaws and factor their fees into your calculations.
Builders may have less flexibility in price negotiations than private sellers of existing inventory. New things offer less wiggle room for haggling, regardless of the industry. Don’t expect to score new construction for cheap!
By and large, there are more new construction options on the market than existing inventory. While every investor must exercise the same due diligence regarding these properties, their potential benefits are great. With inventory remaining tight, whatever we can do to incentivize more housing options – whether investing in BTRs, buying newly constructed homes, or revitalizing old neighborhoods – is a good thing!
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