Hi, everyone. Quick question: What are your thoughts on purchasing a rental property in an area that has new construction apartments going up? The area seems to be on the rise, but I’m afraid that a rental property, specifically a duplex, won’t be able to compete with the fancy new apartments. My monthly rents would probably be comparable to what the new apartments are asking for and decreasing the rent breaks the 1% rule.
So...should I be nervous of new apartments or is that just a common hazard in the business?
You can always expect competition in the rental business, but more so when you are competing against bigger apartment buildings. A lot of renters prefer actual apt buildings because they offer more features and are new compared to most standard multi-fam homes. While you should hopefully be able to still rent your property you may see an increase in the length of vacancies or may have to maneuver a little more to get your units rented out, and unfortunately that often times means undercutting the bigger apts rent prices.
I'm in a similar situation, and will it very market dependent, I didn't find that much difficulty getting new tenants. We are priced about the same as the apartments, and while we don't have a gym or pool, we do have a yard and accept pets.
It is important to look at the rental rates of the new construction. You may not have comparable amenities but the new construction will be a yardstick that you can use to price your rentals accordingly. My experience has been that new construction usually pulls up rental values in the area. Also, take a look at the new construction when it is completed and see if you can renovate your rentals to a comparable level to get comparable rent. Make sure to crunch all the numbers to see if it is worthwhile.
@Adam Briley is the duplex Class A property or Class B or C? The new construction is Class A, so if your duplex is Class B or C, then you shouldn’t be trying to compete with Class A for tenants and rents. Different tenants. If you’re having to compete against Class A properties with a Class B or C rental and can’t be flexible on rent, then it’s probably not a great deal.
If your rents are comparable to the new construction, then don't.
In California, new construction is almost all aimed at the premium end, since permits etc. make it uneconomical without subsidies to build anything at the lower end. This gives a good opportunity for Class C, since more are not being built. The potential headache is when there is a recession, the over built luxury units may drop their price, competing at a lower price point.