A few people in my coaching programs have asked about buying newly constructed houses as rental properties. I personally have never bought a newly constructed house as a rental, and I do not think most new houses make good rentals. There are a number of reasons why I do not like newly constructed houses for rentals, but the biggest one is it is really hard to get a good deal on them. When you buy a new house, you usually pay more for the newness of it than you would pay for a similar house that is a couple of years old. One of the biggest advantages of buying real estate is the possibility of getting a good deal. It is also usually tough to cash flow with these houses, and you cannot assume there will never be any repairs just because it is new.
What are the main benefits of buying rental properties?
I love rental properties for many reasons, but there are a few qualities that make them an awesome investment.
- The ability to buy below market value. When you buy real estate, you can buy it for less than market value. That is how I make money flipping houses, and you can do the same with rentals. I can make back 100% of the money I invest in the form of equity by getting a good deal.
- The ability to cash flow every month. The right rental properties will make money every month, even after accounting for all expenses as well as maintenance and vacancies.
There are other advantages to rentals, like favorable tax laws and the ability to leverage your money. Most advantages work with newly constructed rentals, but it is really hard to get a good deal or positive cash flow with new houses.
What are the cons of buying new construction?
Many people like new houses because no one else has lived in them and everything is new. However, there are disadvantages to new houses as well. Here is why I have never bought a new house.
- You will pay more for a new house. Newly constructed houses cost more than similar existing houses. Because they are new, the builders can charge a premium, just like you have to pay more for a new car. Not only are you not getting a good deal on a new house, but you are also paying more than you would for similar houses selling at full retail value.
- Not everything is included in a new house. When you buy a newly constructed house, it is rare that everything you need is included. You often have to put in the landscaping, a fence, an air conditioner, finish the basement, install a deck, buy window blinds, and other things depending on the builder.
- Many of the fixtures are very cheap. Many new houses come with the cheapest materials and fixtures unless you pay for upgrades.
- There is no guarantee a new house is built correctly. While a new house should be perfect since everything is new, that is not always the case. I always encourage buyers to get an inspection on new houses, and often the inspector finds things were done incorrectly. The builder should fix all these items, but you cannot find everything.
- When you buy a new house, you are taking on more risk. A house that has been around awhile has had a chance to encounter problems. There could be water-table issues, soil issues, or other problems that were not known when the house was built. If the house has been built for a few years, the chances are those problems will show up, and the seller is legally obligated to disclose them.
- The quality of the house may not be known for a few years. Some houses are built well and others are not. It is hard to tell how well a house is built when it is brand new. After a few years, you see how well the finishes hold up, the quality of materials, and any other issues.
- When you buy a new house, you have to use the builder contract. Almost every builder will require you to use their contract, which may not protect the buyer as much as a state-approved form that real estate agents typically use.
Buying a new house is not always bad, and running into major problems is rare, but it is possible. Buying a new house does not guarantee you will be problem free.
Why do newly constructed houses make bad rental properties?
The biggest problem with buying a new house is you cannot get a good deal (in most cases). The builder will charge a premium, and most buyers have to wait a couple of years before they have any equity in the house. This eliminates one of the biggest advantages of buying real estate.
It is really hard to cash flow with a new house. Prices are rarely low enough compared to market rents to make money on a brand new rental (single family). There may be some areas of the country where you can cash flow with new houses, but they are rare. Many people who say you can make money with new rentals may be ignoring costs like maintenance because the property is new. You will still have maintenance when you own rentals, whether the house is 100 years old or brand new. Hopefully, there is less maintenance involved with new houses, but tenants can still trash it. If you do run into tenants who treat your property poorly, it hurts much more when it happens to a new house you paid full retail value for.
When would a new construction property make a good rental?
There are some cases where it might make sense to buy a newly constructed property as a rental.
- If you are a general contractor and manage the job yourself. If you can save $30,000 being the general contractor on a new build, you will have bought the property below market value (hopefully). You still need to be concerned with cash flow and how much time it takes you to GC the job.
- If you buy multifamily new construction, you may be able to cash flow better. Multifamily new construction may cash flow from the very beginning, but you also may be paying full market value. If you can GC a multifamily property, it might make sense to buy new-construction rentals.
I need to warn you that general contracting a new construction project is not easy. It is easy to go over budget on time and money. That is another risk that comes with buying new properties.
Rental properties can be an awesome investment, but finding the right properties takes work. Typically, newly constructed properties will not be as advantageous as existing houses, especially if you know how to find a great deal.
For more information on buying great rentals, check out: Build a Rental Property Empire: the no-nonsense book on finding deals, financing the right way, and managing wisely.