In the real estate investing world, there is a collection of classic debates that are likely to remain unresolved for the foreseeable future. Flip homes for a profit, or buy and hold long term rentals? If you go for long-term rentals, should you focus on cash flow or capital growth? Should you buy a portfolio of single-family homes or purchase multi-family apartment buildings? Pay off the debt on your investment portfolio or increase it by refinancing to add more properties? Buy properties in A and B rated locations or chase the higher returns of C and D ones?
I would add purchasing newer verse older rentals to that collection of debates. I am sure there will be real estate investors supporting each side of this debate but I wanted to try to offer an overview of the pros and cons of each property type. Then, I’ll follow it up by sharing the advice I give most of my investor clients on the topic.
The Benefits of Purchasing Older Rental Properties
There are three main benefits to purchasing older rental properties:
- Established location and neighborhoods closer in
- Predictable market rates for values and rents
- Older properties are usually better built
The primary benefit to purchasing older rental properties is that they are usually located in established charming neighborhoods closer to the main city hubs. As such, they tend to attract tenants most concerned with lifestyle and proximity. This tenant pool has its pros and cons. On one hand, they tend to be professionals that meet the income and credit criteria. On the other, they tend to be more transitory tenants and don’t typically stay for longer lease terms.
The second benefit to purchasing older rental properties is that market rates for values and rents are well established by virtue of the neighborhood being there for a long time. Sometimes when you purchase new construction there’s a certain amount of educated guessing you have to do to determine the appropriate rental rate.
Last but not least, investors that purchase older properties believe they’re better built than the newer properties. I’m not sure if this is objectively true in every case. There’s definitely a little bit of “Back in my day…” syndrome going on. What I can tell you for sure is that there’s a definite trend toward higher density in building. Older neighborhoods typically had bigger lots with homes having more space between one another. Now, builders are trying to fit more homes in the same amount of land due to increasing land costs.
The Benefits of Newer Rental Properties
Next, let’s look at the benefits of newer rental properties (which double as the Cons of older rentals). There are five main benefits of newer rentals:
- Newer rental properties tend to be zoned to better schools
- More predictable cash flow through lower major capital expenditures
- Higher energy efficiency and lower utility bills for your tenants
- Longer lease terms and less turnover
- Higher growth potential
The primary benefit to purchasing newer rental properties is that on average, these properties tend to be zoned to better schools. This is certainly not true in every case but we’re trying to look at the overall trend which has been that schools in suburban areas (where newer properties are located) are higher rated than schools in closer in locations. School quality is the most important criterion that excellent tenants look for when selecting a rental house. Newer rental properties typically lead to better tenants because they’re zoned to better schools.
Second, newer properties have lower capital expenditures over the next decade of ownership because all their major systems are newer. Even in the case of a remodeled older rental, unless the galvanized plumbing or the knob and tube electrical systems has been replaced and updated, you will likely see more expensive repairs on older rental homes than newer. If you purchase a rental that’s less than 5 years old, the roof has 20–25 years left on it before it needs a full replacement. That’s usually not the case with older rental properties. Put differently, if you want the performance of your real estate portfolio to be more predictable, you purchase newer rental properties.
Third, newer properties are typically more energy efficient because they have better insulation and better windows. This leads to lower utility bills for the tenants and that will cause them to stay your tenant for longer. You see, when a tenant first considers renting your property, they only look at the rent price. But when they consider renewing their lease, they look at the combination of rent price plus utilities. If your older rental property causes your tenant to see $300 electric bills every month in the summer (can you tell I’m in Texas?) you can rest assured they’ll look for a more energy efficient rental come renewal time.
Which is the perfect segue into the fourth benefit of owning newer rental properties: Longer lease terms and less turnover. This happens for several reasons. First, the tenant pool in newer neighborhoods is primarily attracted to the schools in the area and parents are usually reluctant to change their kids school. So they will end up staying until little Timmy finishes elementary or Jennifer gets through middle school. Instead of tenants who move every year, newer rentals get average lease terms of 3–4 years. Second, newer properties require less repairs which means less hassle for your tenants and a better renting experience.
Last but not least, when purchased properly, newer rental properties are located in the path of growth. There’s definitely an element of risk and unpredictability involved with purchasing in an area that’s not established yet, but that same risk offers the opportunity for growth returns that you just don’t see in older established neighborhoods.
I know there are a lot more nuances to this discussion than I’ve covered. For instance, there are markets where newer properties are just not an option so older rentals is all you get. In other markets, some of the trends I mentioned (i.e. newer rentals = better schools) don’t apply. But the purpose of this article is to be an overview of the trends that apply in most cases.
I’ll leave you with this: In my professional opinion, if your market offers it and you want your real estate portfolio to run like clockwork with less headache and less management, buy newer rental properties. If instead, you only want investments in central locations to attract professional tenants, buy older and established rentals.
Where do YOU fall in the old vs. new debate?
Share your opinions in the comments below!