Should You Focus on Older or Newer Rentals? A Look at the Pros & Cons

by | BiggerPockets.com

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:

  1. Established location and neighborhoods closer in
  2. Predictable market rates for values and rents
  3. 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.

Related: “I Live in a High-Priced U.S. City. Can I Still Invest in My Local Market?”

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:

  1. Newer rental properties tend to be zoned to better schools
  2. More predictable cash flow through lower major capital expenditures
  3. Higher energy efficiency and lower utility bills for your tenants
  4. Longer lease terms and less turnover
  5. 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.

Related: 7 Factors to Examine When Shopping for a Rental

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.

Final Thoughts

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!

About Author

Erion Shehaj

Erion Shehaj is the founder of Investing Architect. I help successful professionals design and execute a custom Blueprint Real Estate Investing™ strategy so they can achieve financial independence, retire early and gain the freedom to live the life they always wanted. Side effects might include: Early retirement, wealth and piece of mind. Follow on Twitter if that’s your thing.

3 Comments

  1. Cindy Larsen

    Erion, thanks for raising the topic. This should be fun. I only buy properties built before 1980, and prefer even older.

    First I’d like to rebut some of your pros for newer properties.

    Point 1 and 4. Most neighborhoods with good schools have a mix of older and newer homes,
    including duplexes and 2-4 unit multifamily properties.
    So the answer to point 1, and point 4 is: that same pro can be a pro
    for an older property in a good neighborhood with good schools.

    Point 3: yes, you are right, but my tenants pay their own utilities, and,
    Power companies often have programs that tenants can participate in
    to improve energy efficiency.

    Point 5. Not sure the “path of growth” is predictable. However, an
    older property that needs cosmetic remodeling, if it cash flows as is
    with current rents, is a great growth opportunity. I have re-rented
    6 units on 4 different tax parcels (three different cities) in the last 7
    months with 25% to 40% rent increase. This takes into account both
    higher rents and new tenants paying utilties when old tenants were
    not paying utiltiies. All it took to get the higher rents was cleaning,
    painting, and some areas of new flooring. And stricter tenant requirements.
    Good tenants actually like it that their neighbors are required to have good
    credit scores and not be felons.

    Point 2 is the one I find most interesting. Newer properties are built very
    cheaply, and the finishes are usually not durable. Counter tops look nice
    but are plastic over particle board. Carpets are new but cheap and wear quickly.
    Within a few years you will probably end up remodeling that newer property.
    The older property may need remodeling too. I actually look for properties that
    need cosmetic remodeling and have NOT been flipped. It gives me the chance
    to remodel using durable materials. Which decreases future expenses.
    As far as major capex expenses, Determine the costs before buying the
    older property and factor that into the price. Sellers will negotiate price if
    a property needs a new roof, plumbing, etc.

    Finally, the assumption that newwer properties are exempt from major
    capex expenditures is flawed. Since 1980, building techniques have included
    A. Framing with high mositure content lumber
    B. Enclosing that wall in particle board and the housewrapping it.
    Mositure is alreadyin the wall from the lumber. It also makes its way
    through the walls from inside the housf (generated by cooking,
    showers, breathing, etc) through the sheetrock and into the walls.
    Our building techniques are a recipee for mold. And there is no wa
    to tell it is there until tenants start complaining of breathing problems.
    I believe our building techniques are the reason mild and air quality has
    bcome such an issue. Older houses breate, so vapor can get outside
    and water can’t get inside. If you unknowingly buy a house with mold
    in the walls, you WILL experience capital expenditure with that newer house.

    And older houses ARE built better. If it is still standing a 50 or 100 years later,
    the major capex has all been done, except maybe the plumbing and electricity
    needs updating. or maybe it has already been done. A good home inspector
    can tell you how long the roof is good for, whether the plumbing and electrical
    needs work, etc. Contractors will give bids for doing the work, then you negotiate
    with the seller, and never buy unless it is a good deal.

    I very much prefer older properties.

  2. Todd Dexheimer

    There is a myth behind older properties being built better. I have bought and owned properties from 1886-2005 and the general rule is the older the property, the more structural issues you will have and the more problems overall. Today’s building codes are nation wide, with a lot of regions and cities adding to those codes for further quality control. We are also using material in a lot of cases that are better in quality.
    In older houses you will find: Under-sized joists, under-sized roof rafters, poor drainage around the building, foundations that are cracked, missing footings, especially on porches, cantilevered areas spanning farther than they should, missing header supports, undersized beams and more. You will also find galvanized and cast iron pipes, single pane windows, exposed exterior wood with peeling paint, poor insulation, aluminum or knob and tube wiring, cracked plaster, old heating systems, asbestos, lead and more.

  3. Robert Steele

    I’ve owned older residential homes built in the 50’s through newer homes built in the 2010’s.

    I’ve spent way more on capex on the older homes.

    One thing I hate in older (pre mid 80’s) is cast iron drainage pipes. These things rust out and cause foundation issues in concrete slabs. Replacing them with PVC is not cheap. On one rehab I had to spend $15K patching the cast iron with PVC. To re-route all the drain lines with new PVC pipes would have been $30K.

    I don’t know if newer homes are built better but I’ve found what would obviously be code violations today, and probably were then, in mid 80’s homes. My favorite one was the wall oven not having a break out box. It just had the electrical wires coming out of the wall.

    Moving forward I’ll probably only buy newer homes for rentals.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here