New Construction Rentals vs. Existing

Phillip Shearcroft

4/1/20245 min read

For real estate investors, the choice between investing in new construction multifamily rentals and existing previously constructed multifamily rentals comes with its own set of advantages and disadvantages. The choice can be hard! In this blog, we will explore the pros and cons of each option to help investors make informed decisions about their investment strategies. Please be reminded to always get several opinions and legal advice before moving forward on an investment of any sort.

Investing in New Construction Multifamily Rentals

Pros:

Modern amenities: New construction multifamily rentals attract tenants with state-of-the-art amenities, such as luxury finishes, smart home technology, and energy-efficient features. These modern facilities can set your property apart and attract high-quality tenants. The “New Home Smell” can be seen as a major luxury. There are many materials and amenities that builders can offer now a days that dramatically improve the living standard since many styles and needs of your average tenant have changed considerably and can be more thoughtful starting from scratch.
Higher rent potential: New construction properties often command higher rental rates due to the appeal of modern amenities, energy efficiency, and enhanced living spaces. This can lead to increased cash flow and a favorable return on investment. Keeping in mind that the cost to produce these could be seen as higher and should be carefully addressed during the planning stage. In my experience “over-building” is a common term used where your new building (despite being beautiful) might be too much for the highest market rents to achieve. Yes, it will look beautiful…but will it make a great investments.
Lower maintenance costs: New construction properties typically require less immediate maintenance compared to older buildings. With newer infrastructure and appliances, the need for repairs and renovations may be minimized, helping to lower ongoing maintenance costs. In short you are rewinding the clock on a building and like all well built items the need for a “repair expense” is not required but certainly should be budgeted regardless of its use. The added protection of “warranty” is also a huge benefit that can offer as much as 10 years of protection against failing materials. Please review your warranty guidelines closely as most items do expire during the first 2 to 5 years.
Cons:
Higher initial investment: Investing in new construction multifamily rentals requires a significant upfront investment, as these properties often come with a higher price tag due to their modern features and amenities. Most projects from construction to turnkey can be financed but the limitations within that financing approach can be a complicated journey to embark on. Please work with experienced loan officers or mortgage brokers who can properly prepare you for what is required. It can vary considerably compared to traditional residential financing.
Potential construction delays: Real estate projects, including new construction, can face delays due to various factors such as permitting, weather conditions, or labor shortages. Delays can impact the timeline for generating rental income and return on investment. Depending on your municipality the approval process to start building can be considerable and may turn you off from starting completely. In my current projects in Alberta this process appears to be faster than other major cities and and provinces across the nation. Despite there being a major need for new housing required some cities still delay and postpone builders getting started to satisfy their needs.
Uncertain rental demand: Due to the influx of new construction projects in certain areas, there might be uncertainties regarding the demand for rental units. Oversupply in the market could potentially lead to longer vacancy periods and decreased rental rates. This may not be a problem in the short term as Canada has seen a major supply issue. Although with many programs and investors getting involved in new construction this may very well become an issue in the future. My personal opinion as of the date of this blog is that we have nothing to worry about since demand does not see evidence of slowing down.

Investing in Previously Constructed Multifamily Rentals:

Pros:

Established rental income: Existing multifamily rentals offer a track record of rental income, providing investors with a more predictable cash flow compared to new construction properties. This can be appealing for investors seeking stable, immediate returns. The ability to lease up an entire building can be a tedious task and further delay the point of profitability. Most lenders will also put restraints on financing contingent on a revenue amount being achieved. This can cause a high pressure situation for the leasing manager or property manager responsible.
Lower per square foot cost: Existing multifamily rentals generally have a lower per square foot acquisition cost than new construction properties, making them slightly more accessible to investors with limited capital. This lower initial investment can provide a faster path to positive cash flow. Keep in mind the lower price tag also equates to a tentative lower revenue stream since tenants generally pay less for a dated building.
Value-add opportunities: Older multifamily properties present opportunities for value-add investments, such as renovations, upgrades, and operational improvements. This can result in increased property value and higher rental income over time. Essentially you are taking something that is not operating at peak efficiency and improving the building’s financial performance. Often times this could entail a tremendous amount of effort so please plan accordingly if this is a route for you.

Cons:
Higher maintenance and renovation costs: Older multifamily properties may require immediate maintenance, repairs, or renovations to bring them up to modern standards. These additional costs can impact the initial investment and ongoing cash flow. These buildings tend to be reaching the end of its economical life where small repairs may not suffice. You can certainly add in the cost to the overall financial plan but don’t lose site of the fact that you are taking something beyond what it was originally designed to do. If renovations & repairs are not of interest perhaps look for a building that has recently undergone a major rejuvenation.
Limited amenities: Existing multifamily rentals may lack the modern amenities and energy-efficient features that new construction properties offer, potentially affecting their appeal to prospective tenants and rental rates. This would make sense since most buildings were designed and built in a time where amenities were not a major driving force with tenant preference. They were simply looking for practical. Most tenants were using these accommodations to provide shelter for the short term. Compared to modern day preferences where your average tenant looks at these locations of a more long term endeavours due to the lack of affordable housing to purchase. Your average income earner can’t typically afford to purchase and finance a house.
Potential for obsolescence: Older multifamily properties may face competition from newer developments, leading to potential decreased market demand, especially if they do not undergo necessary updates and renovations. This is why a trend of renovating continues to grow as demand for more comfort and appearance becomes the focal point of tenant preferences.

Conclusion:

When considering whether to invest in new construction multifamily rentals or existing previously constructed properties, investors must carefully weigh the pros and cons to align with their financial goals, risk tolerance, and investment strategy. New construction properties offer more predictability and higher rent potential but come with a higher initial investment and potential uncertainties in rental demand. Existing multifamily rentals offer established rental income and value-add opportunities but may require higher maintenance costs and face competition from newer developments. By evaluating these factors, investors can make informed decisions to optimize their real estate investment portfolios. Our current investment approach believes heavily that a strong & balanced portfolio should entail both assets to allow for greater flexibility. With conditions changing constantly you don’t want all your eggs in one basket.

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