You can rent new construction homes as rental property by investing in a new construction project. A new construction home is considered a good investment for a rental property if the cashflow is positive, and the home is in an appreciating market.
In the recent 5 years, many new construction homes in Ontario were purchased as investment or rental properties. With the housing market growing at an exceptional pace, many people have realized the gains that are possible in flipping or renting new constriction homes.
We’ve spoken with new construction home buyers who have purchased townhomes, semi-detached and detaches homes with the purpose of selling after closing. Although this can be risky business in an up and down market – these buyers were able to net six-figure capital gains.
Knowing you can rent new construction homes, would you be interested in purchasing a pre-construction new build?
Buying New Construction Homes as Rental Property
When buying new construction homes as rental property, your bank will make sure you are placing a 20% down payment on the home. It’s recommended that you buy the right builder upgrades that will ensure you can rent your new construction home.
What do we mean by the right builder upgrades? Well, think about the amenities and home features a renter will consider valuable.
A renter won’t care much for a fireplace, but they’ll care for a home security system ($495 builder upgrade). They may also prefer having a garage door opener and access to your garage, especially in the winter.
If the home is being used as a rental property, there is no need to upgrade to upscale hardwood flooring – because chances are that they’ll get damaged. Countertops will get stained. Walls will have wear and carpeting will require cleaning.
A smart new construction build aimed at being a rental property will ensure that it includes a walkout basement, bathroom rough-in in the basement, conduit from the basement to the attic and sufficient sound insulation.
A detached home with a walkout basement can generate upwards of $5,500 per month in rental income every month in the GTA. With the current appreciation of new build homes, an investor is making a very high return on their investment,
Consider the following real life example from Whitby, Ontario:
- Purchased 2,600 sq.ft detached single family home from builder in Oct 2018 @ $785,000 (after upgrades)
- Obtained possession of the home in February 2020
- Rented at $3,000/month for a 1-year term
- Listed on the market in January 2021 for $899,000
- Sold in 10 days for over asking, at $960,000.
- Investor had net proceeds of ~$145,000 after realtor commission and expenses.
The fact is that the market is extremely hot. A newly built home in these neighborhoods don’t stay on MLS for long. This is another example of a Whitby, Ontario home that sold within 2 days of going on the market for $225,000 over asking in 2020.
Are New Builds a Good Investment?
New builds are a good investment if the cash flow is positive or if you plan to hold the property and live in it for a long period of time. Today, prices in Ontario are rising for new build homes at an incredible investment rate of return of almost 12% over a two year period.
If you’re considering renting your new build home, you should highly factor in cash flow. A cash flow positive rental property will also increase the value of a new build, as home buyers are consistently looking for a way to offset their mortgage payments.
With new build homes in 2021, the average mortgage and housing cost in the GTA ranges in the $2,800 – $4,400 per month range. This can be a lot of money for an average family where both parents are working and managing two-three children. To offset housing costs, many buyers value new build homes with a walkout basement – as the basement can be rented.
With the average basement in the GTA renting for $1,500 – $2,000 per month, it can be huge factor to consider a property.
You can charge a higher rent for a basement when it no longer feels like a traditional basement. A basement apartment often feels like a low-ceiling dark space in the home, with small windows. The following builder upgrades can increase the value of your home:
- High Ceiling Basement (8-9ft)
- Larger Windows (extra sunlight)
- Sufficient Lighting (recessed lighting)
- Larger Bathroom
- 7-8ft Interior Doors
- Vivid colors
- Gas line to the kitchen
- Additional heating
- Home security for the home
A renter who understands the value in these features will be willing to pay a higher rental fee.
Can You Rent a House After Buying It
If you’re buying a home as an investment property, by using a 20% down payment – you can rent a house after buying it. However, if you are buying a house with less than a 20% down payment, you cannot rent a house after buying it. Keep in mind that homeowners are always renting out spare rooms, basements and homes in both scenarios.
One thing to keep in mind is if there are special clauses in your mortgage agreement or private lending agreement.
Since most new homes are purchased from the builder with a 20% deposit, most home buyers are free to rent out their new build home.