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Why New Construction is the Smart Investment Choice in 2024
The Rising Appeal of New Construction Rentals
In today’s fast-changing real estate market, new construction rental properties are increasingly becoming the preferred choice for investors. With rising maintenance costs, soaring insurance premiums, and escalating material prices, older properties present growing financial challenges for both landlords and tenants. Conversely, modern, energy-efficient homes align with tenant preferences while offering landlords reduced operational costs and higher long-term returns.
Our partners at Rent To Retirement specialize in guiding investors through these market shifts, ensuring they capitalize on the growing demand for new construction rentals. Below, we explore the key reasons why new builds are outperforming older homes in today’s rental landscape.
The High Cost of Maintaining Older Homes
The upkeep of older properties is becoming increasingly burdensome. Essential systems such as HVAC, plumbing, and electrical wiring often require costly repairs, particularly in homes over 30 years old.
According to the National Association of Home Builders, properties built before 1960 incur annual maintenance costs averaging 8% of the home’s value, compared to just 2% for homes constructed in the 2010s (HomeKeep).
How New Construction Reduces Maintenance Costs:
- Modern materials and systems require fewer repairs.
- New homes typically include warranties covering significant components for up to 10 years.
- Lower maintenance requirements translate into increased profitability and reduced time spent managing repairs.
Lower Insurance Costs with New Builds
Insurance premiums for older properties tend to be significantly higher due to increased risks associated with aging structures. Homes older than 30 years can have insurance premiums that are 75% higher than those of newly constructed homes (The Zebra).
Why New Homes Are More Affordable to Insure:
- Compliance with current building codes lowers risks.
- Disaster-resistant features, such as hurricane windows and reinforced roofing, reduce insurance costs.
- Newer homes are less susceptible to fires, floods, and structural failures, making them more cost-effective for landlords.
Modern Amenities Attract Quality Tenants
Today’s renters have high expectations for their living spaces. A 2023 RCLCO survey found that 37.3% of renters are willing to pay more for new kitchen appliances, while an additional 50.7% may consider paying higher rent for upgraded amenities. Older properties, with outdated layouts and inefficient systems, often struggle to meet these modern demands.
What Tenants Prefer:
- Energy-efficient appliances and systems that lower utility bills.
- Open floor plans and contemporary designs.
- A move-in-ready experience with minimal maintenance concerns.
By offering these features, new construction rentals can command higher rents and maintain lower vacancy rates, ensuring a steady revenue stream for investors.
Escalating Costs of Repairs and Renovations
The cost of materials and labor for home renovations continues to rise, making upgrades to older homes increasingly expensive. While new construction has also faced cost increases, renovation projects tend to be even more costly due to the time and labor-intensive nature of retrofitting aging properties.
Advantages of Investing in New Construction:
- Standardized, durable materials that are easier and more affordable to maintain.
- Avoidance of expensive, time-consuming renovation projects.
- Improved efficiency in long-term property management and cost savings.
Navigating Insurance Challenges in High-Risk Areas
In regions like Florida and California, rising insurance premiums present a significant obstacle for landlords. Some insurers have scaled back coverage or exited markets entirely due to heightened risks from natural disasters. According to Reuters, certain Florida homeowners experienced a premium increase of over 60% between 2019 and 2023.
How New Construction Provides a Solution:
- Built to withstand environmental hazards with hurricane-proof windows and elevated foundations.
- Lower insurance costs and reduced risk enhance investment viability.
Energy Efficiency: A Win-Win for Landlords and Tenants
With energy costs on the rise, there is a growing demand for energy-efficient homes. New construction properties offer superior energy performance compared to older homes. According to the U.S. Department of Energy, LEED-certified homes consume 20% to 30% less energy than non-green homes, with some properties achieving up to 60% savings.
Investor Benefits:
- Attract environmentally conscious tenants.
- Qualify for tax incentives and rebates.
- Reduce operational expenses over the long term.
Secure Long-Term Success with New Construction Investments
From lower maintenance and insurance costs to tenant demand for modern amenities, new construction properties offer a competitive edge in today’s challenging market. Whether you are a seasoned investor or just beginning your journey, investing in new construction rentals presents a path to profitability and long-term success.
Interested in exploring your options? Contact Rent To Retirement today to find the ideal investment property tailored to your financial goals.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“
Why New Construction is the Smart Investment Choice in 2024
Has the U.S. Housing Market Finally Begun to Thaw After the Pandemic?
It seems like the housing market might be showing signs of life. According to a recent report from Redfin, pending home sales in early October have seen their largest year-over-year rise since 2021, with a 2% increase in the four weeks ending October 6.
This news is likely to be welcomed by real estate investors who have felt the market has offered limited opportunities over the past few years. However, it’s important to take a cautious approach—one promising statistic doesn’t necessarily indicate a broader trend.
Is the Housing Market Truly Recovering?
Let’s explore the different factors at play.
Interest Rate Reductions: A Critical Factor or a Red Herring?
The Redfin report links the surge in pending sales to the Federal Reserve’s much-anticipated rate cut announcement in mid-September. According to Redfin, this announcement prompted buyers to re-enter the market in late September, despite mortgage rates having already been falling for weeks before the cut.
This psychological boost is crucial. Although buyers were aware of the falling rates beforehand, many seemed to be waiting for a formal signal to act. This could be attributed to a lingering fixation on the ultra-low rates of 3% to 4% that buyers enjoyed before 2022.
Any rate cut announcement serves as a nudge for prospective buyers, making them feel that now might be the right time to purchase, even if mortgage rates had been decreasing already. In an unstable mortgage market, such announcements hold significant influence.
However, mortgage rates are just one piece of the puzzle when analyzing housing market performance. As noted by Investopedia, the real estate market is driven by four primary factors: interest rates, demographics, economic conditions, and government policies.
Demographics: Shaping the Market
During the pandemic, demographic shifts had a profound effect on U.S. real estate, with major population movements like the Sunbelt migration fueling booms in cities such as Phoenix and Austin, which later became unaffordable for many.
Age is another key demographic factor, and the millennial generation’s pent-up demand continues to be a driving force behind the rise in home purchases. Despite the challenges of the past few years, millennials who have longed to become homeowners are now entering the market in greater numbers, as more properties become available.
Rising Inventory: A Sign of Stabilization
A key factor contributing to the market’s stabilization is the growth of housing inventory over the last year. The pandemic had a significant impact on the availability of homes, with sellers hesitant to list properties due to COVID-19 restrictions and, later, higher mortgage rates.
Some homeowners, particularly those upgrading to larger homes, found it financially challenging to sell and take on higher mortgages. Others, however, simply chose to wait for a more favorable market.
Although the latest Realtor.com report shows that inventory remains down by 23.2% compared to pre-pandemic levels, we are seeing an upward trend. For instance, new listings have been rising since last year, with a 5.7% year-over-year increase for the four weeks ending October 6.
As of September 2024, some states have even surpassed their pre-pandemic inventory levels, including Tennessee, Texas, and Idaho, with others, like Washington, close behind.
Vulnerabilities in Certain Regions
However, not all regions are showing positive signs. For example, some areas, particularly those affected by extreme weather, have seen inventory spikes not because of market recovery, but due to homeowners trying to offload damaged properties they can’t afford to repair.
For instance, regions like Florida and North Carolina, hit by hurricanes, have experienced increases in home listings, but these may reflect a response to climate-related challenges rather than market health.
Opportunities for Investors
Investors should be discerning when choosing markets, focusing on regions where inventory is growing due to increased home construction rather than climate-related distress. States like Idaho, Utah, North Carolina, and Texas, which are building new homes, offer potential, though caution is needed in areas prone to natural disasters.
The Midwest and Northeast, meanwhile, still face significant challenges in recovering to normal market conditions. These regions have lower rates of new construction, meaning inventory remains scarce, which could present both opportunities and difficulties for investors.
The Bottom Line
The U.S. housing market is showing signs of recovery, but the situation remains complex and varies by region. Interest rates play an essential role in unlocking the market, but investors should also consider other critical factors, such as homebuilding trends, climate risks, and government policies. While the market is heading in the right direction, it’s crucial to examine regional differences carefully before making investment decisions.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“