Single-family housing investors often debate about, “Should You Invest in Older or Newer Rentals?”.
In other words, which make better rental properties, older or newer homes? Let’s explore the pros and cons for each.
Should You Invest in Older or Newer Rentals?
Single-family rental properties offer a wide range of investment options, such as:
- Long-term versus short-term rentals;
- Higher priced versus lower priced; and
- Older versus newer homes as rental properties.
Benefits of Older Rental Properties
Let’s start with older rental properties. Three main benefits stick out to most investors with buying older rentals:
- Older buildings are usually built better;
- Location and neighborhoods better established; and
- Predictable market rates for rents and values.
First, investors find that older buildings are usually better constructed than newer ones. Of course, really old buildings deteriorate. Likewise, read our post warning to beware of old-style houses that threaten investments. Yet, over the years the rising costs for solid foundations and sturdy materials caused builders to cut corners.
Secondly, a prime benefit of older rental properties is their usual location in charming, established neighborhoods close to main city hubs. They offer all the amenities of downtown living. Thus, they attract tenants seeking proximity and lifestyle. Yet, these tenants vary from professionals seeking stability to transitory tenants not staying for long.
Thirdly, the longevity of neighborhoods sets the market rates for values. The problem with new construction is the uncertainty with determining the fair market rental rates. Older established neighborhoods make determining rental rates easier.
However, the days when older neighborhoods offered larger lots with large homes and space between them are dwindling. They get sold and torn down making room for new construction. Nowadays, builders try to fit more homes in the same amount of space because of high land costs.
Benefits of Newer Rental Properties
Let’s check out the benefits of newer rental properties. Understand, that this also includes the cons of older rentals.
Here are five benefits of newer rental properties:
- Higher growth potential;
- Less turnover with longer lease terms;
- Predictable cash flow with lower capital expenditures;
- Newer rental properties are usually zoned in better school districts; and
- Higher energy efficiency with lower tenant utility bills.
First, newer rental properties are usually located in the path of growth. Some investors fear the unpredictability of buying into an unestablished area. Yet, newer rentals offer the potential for greater growth than older neighborhoods.
Second, newer rental properties attract parents with kids in school. They are reluctant to change their kids’ schools resulting in longer lease terms.
Third, newer properties offer lower capital expenditures during the next 10 years because their systems are newer. Older homes need updating and replacements more often due to their age. Newer homes require fewer repairs and maintenance resulting in predictable cash flow. Similarly, remodeled older rentals may not replace old knob and tube electrical systems or galvanized plumbing. In addition, a rental less than five years old has 20 to 25 years left before a roof replacement. Older rentals require new roofs sooner than new rentals. Read our post about how some older homes require expensive maintenance and repairs.
Fourth, excellent tenants with children value school quality. Newer rentals are typically found in zoned areas with better schools due to higher property taxes. That’s why new rentals located in the suburbs enjoy higher-rated schools. Read our post about how school quality attracts good tenants.
Fifth, newer properties are more energy efficient with better windows and insulation which lowers their energy bills. When it’s time to renew their lease, they often compare utility bills with other properties and stay put.
What Do Experts Say about Should You Invest in Older or Newer Rentals?
Lindy Near of Rocket Property Group picked: New
Her reasons include:
- New rental properties require less maintenance and repairs;
- New rental homes are more desirable for high-income tenants; and
- Higher rents.
She explains these as:
New rental homes, if constructed correctly, should never require repairs during the first 10 years. Maintenance depends on the installed systems and materials. New systems carry guarantees and warranties that old homes do not offer.
Professional and high-income buyers usually prefer newer homes. An exception exists for classical older homes like Tudors and Mediterranean or Spanish styles. Yet, they must be fully upgraded because these buyers do not have the patience to deal with time and costs.
Newer home rentals almost always demand higher rents than older ones. Of course, an exception includes the classic older homes offering lots of space with large landscaped yards and fabulous views.
She maintains a portfolio of all new properties including new apartments, new houses, and new townhouses. All are leased bringing in high rents.
Liz Sterzel of Property Wizards recommends Older Established.
Her reasons include:
- Growth potential;
- Opportunity to subdivide; and
- Greater land component.
She explains that older properties are ripe for adding value with a cosmetic makeover to improve value, rentability, and rental return. You just can’t do all that with a new home. A well-done renovation makes older properties more attractive than new ones and offers more growth potential.
Older properties generally contain more land and if located in the correct zoning area you can subdivide to increase profits. For instance, you can keep the original home and add two smaller homes on the land. This gives you three rental properties for more rental income.
She believes in a different 70% Rule: Invest 70% of your money into the land and only 30% in the structures. This rule applies when land becomes expensive.
Bryce Holdaway of Empower Wealth picked: Older.
His reasons include:
- Period homes in the suburbs;
- Renovation opportunities; and
- Proven resale value.
He likes buying older rental homes within 10 miles of a capital city with a strong job market and full infrastructures like public transportation and restaurants. When buying a period house, he looks for parking, good storage areas, outdoor space, and a well-balanced flow floor plan.
He finds that renovated period homes maintaining their classic looks attract higher-income tenants who bask in the timeless appeal such homes offer.
While he holds rental homes for the long-term, he enjoys the option to re-sell when the economy turns so he can cash out.
Should You Invest in Older or Newer Rentals? – Conclusion
Whether you should invest in older or newer rentals depends on your investment strategy.
Older homes and newer ones have pros and cons. Whether the benefits of one outweigh the benefits of the other depends on personal preference.
The benefits of older homes as rentals include:
- Older buildings are usually constructed better;
- Located in established neighborhoods; and
- Easier to predict market rates for rents and values.
The benefits of newer homes as rentals include:
- High growth potential;
- Longer lease terms mean fewer turnover;
- Lower capital expenditures mean predictable cash flow;
- Newer rental properties are usually located in better school districts; and
- High energy efficiency lowers tenants’ utility bills.
Investors offer differing opinions about which is better.
Some like newer homes because they require less work, bring in higher rents, and feel are more desirable for high-income tenants.
Others like the older established homes because they offer more land to develop and classic renovated ones attract a high-income tenant.
Did You Know That San Diego County Offers Classic Older and Newer Homes For Sale?
WeLease offers professional property management services in San Diego County for older and newer rental properties.
Contact us for advice about finding houses to purchase as rentals and all other types of rental properties in San Diego County.
Steven Rich, MBA – Guest Blogger