Top 5 Reasons Building Rentals Is Better than Rehabbing!

Likely the best aspect of investing in real estate is that you have many different options on how to make these investments. Many investors go with the BRRRR method, which involves buying a rental property, renovating it, renting it out, refinancing it, and repeating the technique. 

You can also invest in rental properties by purchasing a piece of land and building on it. While both options have their advantages, building a rental has proven to be a highly lucrative move in recent years. Before you add another investment to your portfolio, find out why building rentals is better than rehabbing. 

What Is Rehabbing?

Rehabbing occurs when you buy a property and renovate it before renting it out. This technique allows you to make improvements that should increase the property's value. Once the value increases, you can charge higher rents. 

While several different methods can be used to buy and rehab a property, the most common one involves purchasing a home that's being sold in "as-is" condition. Most of these properties are available at steep discounts, which makes it more likely that renovations will substantially increase the property value and improve profit margins. 

The process of rehabbing houses is simple and straightforward with the right exit strategy. However, there are considerable risks when it comes to buying properties that aren't in great condition and sinking a large sum of money into them. It's possible to avoid this issue completely by building a rental property. 

What Does Building a Rental Involve?

It's common for landowners to start new construction projects for single-family, multi-family, and commercial buildings. If you purchase a piece of land, you'll have the opportunity to build a rental unit on the site. The best aspect of this approach is that you have complete control over the building design. 

If you're set to construct a single-family home that you expect to turn into a rental, the process of building the structure can be completed in some simple steps. Once you've obtained the necessary building permits and finalized the home's design, there are 12 steps to follow during the construction process, which include the following:

• Prepare the site by clearing rocks, trees, and debris
• Pour the foundation, which can involve basements, crawl spaces, or slabs
• Complete the home's framing, which includes the windows, doors, walls, floor, and roofing system
• Set up the HVAC, plumbing, electrical system, and wiring
• Add insulation to make it easier for the home's interior temperature to be maintained
• Add the drywall
• Implement interior finishes around the doors, windowsills, mantle, and fireplace
• Add exterior finishes to any patios, driveways, and walkways
• Install faucets, light switches, and other fixtures
• Install carpets or hardwood flooring depending on preference
• Obtain an inspection from a local building code official to make sure the final product matches the initial design
• Go on a pre-settlement walkthrough to make sure the builder adhered to your instructions

If you're building a single-family rental, this entire process should take you around three to six months. 

Since you'll be constructing a rental unit, it's also highly recommended that you perform comprehensive market research before beginning development. The rental properties with the lowest vacancy rates are ones that have reasonable pricing, valuable amenities, and appealing locations. Some pieces of information you should gather before building a rental include:

• Neighborhood safety
• School system
• Average rental price
• Types of building materials you want to use
• Design and construction crews
• Population growth rates
• Average vacancy rates
• Median sale price for homes
• National Home Price Index data

5 Reasons Why It's Better to Build Rentals than Rehab Them

If you're getting ready to grow your real estate investment portfolio, there are many reasons why it's better to build rentals than rehab them. While rehabbing a rental gives you the opportunity to increase the property value, gain more qualified tenants, and build equity during the rehab, there are numerous risks associated with this strategy that you can avoid when building a rental from the ground up. 

1. Full Control Over Building Design

The main advantage of building the property from scratch is that you'll have full control over the building's design. Before you construct the home, find out what tenants most value in an apartment. The primary things that potential tenants want from a rental property include:

• Proximity to great parks, grocery stores, and restaurants
• Living in a safe neighborhood
• Accessible parking spaces
• High-quality school district
• Some appliances included
• Move-in ready, which means that all necessary repairs have been made
• Newer property
• Hardwood flooring, stainless steel appliances, and other upgrades
• Open floor plan
• Ample outdoor space

Before you start constructing the building, you'll be able to determine what you want the home to look like and the appliances you'd like to install. For example, modern renters and homeowners prefer an open floor plan, which focuses on eliminating partition walls to create large, open spaces.

If you decide to buy and rehab a property, you'll need to contend with a home that's already been built. While you can upgrade the property with tangible renovations, changing the floor plan would cost a large sum of money. It's also easier to make a costly mistake when performing large-scale rehabbing projects. New construction projects are fully mapped out before work begins, which ensures that the final design meets your specifications. 

2. Ability to Charge Higher Rents

When you decide to rehab a rental building, you'll benefit from higher property values once the renovations are made. However, your ability to charge higher rents may be somewhat limited based on the fact that some elements of the pre-existing home will remain even after you make upgrades. If the structure is 20 years old, there's only so much that renovations can do. On the other hand, building the property from scratch means that potential tenants will have access to a new building with modern appliances and systems. When you rehab a property, any major system that's more than 10 years old may need to be replaced before you start searching for tenants. 

3. Less Turnover

You'll also discover that there's less turnover when building rentals. If you rehab a property, you won't be able to change every facet of the home's interiors and exteriors, which means that some aspects of the property may not be as popular to potential tenants as others. There are only so many changes you can make in the relatively limited time you have to get the property back up and running. 

Let's say that you replace several of the major appliances but don't have the budget needed to replace the roof. If the roof is more than 10 years old and lets in drafts during particularly chilly nights, tenants might not be fully satisfied with their living experience. In this scenario, they can choose to move, which will cause you to spend more time vetting potential tenants and dealing with vacancies. 

Newer building rentals usually don't have many weaknesses. All major appliances and systems should be around the same age. It's also likely that the property will have enough modern features to keep tenants satisfied. 

4. Potential for Higher Cash Flow

You have the potential for a higher cash flow when building rentals instead of rehabbing them. The main downside to rehabbing a home is that you must perform a considerable amount of maintenance to make sure the property is move-in ready. Until you complete this maintenance, you'll be unable to bring in new tenants. The costs you spend to renovate the building will eat into the profits you make once you make the place available to tenants. 

The cash flow you develop when building a rental depends on how you paid for or financed the purchase. If you obtained a loan for 90% of the construction costs, it won't be long until you make back this money once you open up the property to tenants. Since there aren't any repairs or maintenance costs to keep track of, you get to keep a higher percentage of the rental income you bring in. 

Newer properties also tend to have better appreciation. Depending on how well-constructed the building is, you can return to your lender and ask for the property to be re-appraised. If the price is now significantly higher than what you initially paid for the property, you'll earn instant equity that will add value to your portfolio. 

5. Can Choose Ideal Location

While you can choose a great location when rehabbing an existing rental, you have less flexibility. Constructing a rental building gives you the opportunity to do so in strategic areas and neighborhoods where your investments will provide better payoffs. You can also make sure that every aspect of the building is appealing to potential tenants in the area. Rehabbing a property limits your options and can have just as many issues as benefits. 

Issues with Rehabbing a Rental Property

There are many problems associated with rehabbing a rental property, which is why building rentals is oftentimes the superior option for making a real estate investment. When you construct a building, there's always a chance that the costs will end up being higher than you estimated. However, you should be able to keep costs under control with enough planning. 

In comparison, buying a property to rehab it makes it possible that you'll overestimate the ARV or create a low estimate of rehab costs. It's easy for rehab costs to rapidly increase when you're in the midst of a project, which can substantially reduce the amount of short-term equity you have access to. 

You'll also find that financing and refinancing this type of property is expensive. You must pay high fees, a large down payment, and worse interest rates. Many of these costs are avoided entirely when building the rental from the ground up. 

Based on the types of renovations and improvements you perform, there's a higher risk potential. Even if you keep rehab costs relatively low, there's a chance that potential tenants won't find the new changes appealing, which means that you'd need to deal with higher vacancy rates. Some additional downsides to investing in rehab properties include:

• Unexpected expenses during the rehab process
• Taking too long to perform the necessary renovations
• Delays or higher costs that are brought about by inflation
• Limits to the types of renovations you can make
• You could deal with asbestos or lead depending on how old the property is

While rehabbing a property has the potential to bring you high returns without causing you to spend too much money, there's also a greater likelihood that things will go wrong and cause your costs to skyrocket. Building a rental means that you have the final decision on the home's layout, amenities, and price. When you want to add a rental to your portfolio, building it is the way to go.