Should You Buy Old Homes, Or New Ones?
If you’re buying a home in Hawaii for the purpose of long-term buy and hold, there are a lot of questions you have to ask yourself. What kind of tenant are you looking to attract, and in what market are you likely to attract them? Are you looking to purchase large family homes, small homes, duplexes, or larger complexes? Do you want to manage the property yourself, or would it be simpler and more profitable to hire a property manager? The list of factors to consider is seemingly endless. Buying a home in Hawaii is thus no simple matter, especially for the novice, wide-eyed investor full of dreams, fears, and energy.
One of the most significant questions you will have to ask yourself when buying a home in Hawaii is: should you buy an older home, or a newer one? The question isn’t merely one of personal preference; it’s a matter of practical concern, and your answer may depend on the exact location in which you are buying.
This week we will review the basic pros and cons of buying old vs. new homes to help you get one step closer to identifying your best deal!
Old vs. New: Your Typical Tenants
Different types of properties attract different types of tenants. Of course, one of the main questions you will have to ask yourself when buying a home in Hawaii is: what kind of tenant am I looking to attract? Your answer to this question might help you determine whether you should buy an old property or a new one.
Old Properties
Older properties tend to lie closer to population centers. That means that they are far closer to big businesses, fancy eateries, and nightlife than newer homes, which tend to emerge in outlying suburbs. Tenants seeking proximity to town centers are more likely to have demanding jobs, high incomes, and a busy lifestyle. Thus, they tend to be dependable and can afford higher rent. However, they might also be more transient.
A special note: if you are looking at buying a home in Hawaii near a boisterous tourist location or college town, you may be looking at younger tenants with lower incomes and rambunctious lifestyles. The best way to get a clear gauge on the type of tenant you can expect to encounter in an older neighborhood? Spend time in the town centers, and see whom you meet.
New Properties
Newer homes tend to lie further away from city centers in outlying suburbs. They also tend to lie in closer proximity to newer, nicer schools. These neighborhoods therefore attract young, middle-earners with children. Though these tenants have greater financial demands and may have slightly lower income, they typically seek longer lease periods. Millennials, especially, are more likely to raise families in rentals instead of purchasing a home. If you are looking for long-term, family friendly renters, consider purchasing new homes.
Again, you will have to gauge the unique features of your specific location. Perhaps newer homes in your area also lie closer to new population centers or universities and attract young, single individuals. Explore the local markets and make logical inferences about prospective tenants based on the services provided in the area.
Examining Property Values and Capital Expenditures
When buying a home in Hawaii, you will, of course, have to ascertain properties values and expected rental rates. The values of older homes tend to be more established, as are the trends pertaining to rental rates. Doing a little research on the local market is more likely to give you quick and accurate insight into your prospective profits on an old property.
It can be far more difficult to ascertain the value of a new property, and you may be forced to adjust rental rates as the market emerges and changes in your area. While newer properties present an opportunity for growth, that opportunity is nebulous, and likelihood of loss is higher. With older properties, you have more control over growth potential because you have more opportunities for capital improvements.
However, newer properties benefit from new systems and appliances. That means lower capital expenditures over the first decade of ownership compared to older properties. Lower capital expenditures means lower input costs, increasing your bottom line and making for happy tenants. It also means that your real estate portfolio will evolve in a more stable and predictable manner.
Turnover and Retention
Most landlords prefer long-term leases and minimal turnover—something to consider when buying a home in Hawaii. Turnover does mean that you can increase rent with less traction from renters, as you wont have to raise the rent on each individual tenant. However, most investors lose a lot of money in turnover periods.
Older rentals, for the aforementioned reasons, tend to have higher turnover rates. That can be good if you are looking to add value to a property. If you increase capital expenditures to increase the value of your property, you will have to increase rent to turn a profit. Buying an older home might therefore be a better option, as a steady stream of new tenants means less resistance to rent increases.
However, if you are not looking to add value to your property and want to minimize turnover, buying a new property is your best bet. Newer properties require fewer repairs and capital expenditures, meaning you wont have to raise rent as much to increase your bottom line. If rent remains relatively stable, you will have a better chance or retaining tenants. Further, newer homes tend to be more energy efficient. That means lower utility bills, happier tenants, and lower turnover than an older, less efficient home.