When does it make sense to build a new rental property vs. buying an old one?

With sky-high prices for rental properties in my area (even the Class C ones with A LOT of deferred maintenance), it has me wondering about whether new construction might makes sense.

I'm sure it has everything to do with the cost of construction and the market rent prices in your market (in my area, it's around $120 - $130 per square foot for a new build and the annual rents are about $10 per square foot).

Even if the margins are really thin, it would be pretty nice to have a rental property that is designed well, built to today's code and has practically nothing that breaks (at least for the first few years)... it would be a property manager's dream come true, haha.

Along those lines, I wonder the same thing about apartment buildings. When do the numbers officially make sense to build a new building vs buying and rehabbing an old one? Does anyone have experience with this?

I haven't done much of this myself but I did find a good explanation of how it can work in this video.

It probably depends on your market and if housing prices can support this kind of model, but it made good sense to me.

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Seth, to answer the original posted question: Never.

At least in most markets. I just bought and remodeled a rental for $62.50 sf. Including the remodel costs.

Now it was bank owned, and is a b class, and I got a good deal.... but, you can buy C class for 40 to 60/ ft and B class for 50-80 sf all day in dozens of cities if you know how to look.

I used to build new homes and LOVE new construction. But when you put it on paper it doesnt make financial sense...

If you are willing to build, you could buy some super cheap fixer uppers and completely remodel them, use great long term upgrades, and come out at 70 percent of new construction costs.

Its not as glorious as new construction, but it is where the money is at.

I think this is due to rising land prices and material production prices. This also crosses over to many industries.

Even John Huntsman Senor, the billionare petrochemical giant said that his wealth was built by buying plants and infrastructure during market downturns that were already in production. He revamped them to increase profitability, and spent only half of what it would cost him to build new.

Now this is SFR rentals that I am in. I think there could POSSIBLY be a situation where new construction would work in multifamily, but I doubt it.


@jawollbrink Great insight. How do you feel about pre-engineered and manufactured commercial metal buildings for businesses that need flex space with warehousing? How does this compare to remodeling older commercial bldgs? thanks

I am not in the commercial space, so I am not the best expert on this topic. However I would think it would depend greatly on the real estate values. There are vert expensive industrial properties, and some very affordable ones as well.