More Real Estate Investors Than Ever Are Building Their Own Properties. But Why?
In the past, real estate investors would pick through existing properties on the market with a fine tooth comb, looking for those with high yield potential. But those days are coming to an end. Landlords are now increasingly considering building their own properties from scratch.
For outsiders, developments like these can seem a little confusing. Why would investors suddenly change their strategy? It all comes down to incentives. Building a property is now a better proposition for many landlords than simply buying one and renting it out. Find out why below:
Imagine buying a property in week 1 and then discovering that it is 10 percent more valuable in week 10? Such movements don’t usually happen in the regular property market, but they do occur when you build real estate rentals from scratch. Banks will often value your property on the low end of the scale before the construction and then boost its sale price once you complete the project. In a sense, this gives you instant equity (and greater borrowing collateral). You could make back 10 to 20 percent of the construction cost just in equity gains alone, without having to find a single tenant.
Building your own rental property is often cheaper than buying one with an established income. That’s because you’re not actually purchasing a future stream of income. Instead, you’re just buying land, building materials and labor to construct the property. There’s a big difference.
Granted, construction will still be expensive. But you probably won’t have to forgo as much capital as you would if you bought an existing, income-generating property. Of course, the risk is that your new property won’t make any money. However, so long as you understand the local market, that should be a risk.
You don’t necessarily have to build for single-occupancy. In fact, firms such as Costas Constructions, recommend that landlords build multi-occupancy rentals.
There are several reasons for this, but the main one is improved income security. You’re much more likely to get a positive return on a property that has six bill-paying tenants than just one. Void periods are far less common.
When you build a new property, you get to claim back all of the depreciation on both the structural and internal features. And because everything is new, the level of depreciation is extremely high. You can then subtract this from your taxable income to reduce your overall tax bill, without having to subject yourself to any additional expenses.
Remember, depreciation on real estate can be extraordinarily generous. It’s a great way to shield high income levels from the taxman. Make sure that you run any depreciations past your accountant first.
Build For The Market
Lastly, you can build new rental properties for the market that you serve. By doing this, you automatically make your property more appealing than legacy rentals in the area, allowing you to charge a premium. Naturally, that means higher yields and a better use of your capital.