The great thing about investing in real estate is that it can lead to a steady stream of passive income. And while there are different ways to achieve that goal (for example, loading up on real estate investment trusts, or REITs), one tried-and-true strategy has long been to purchase income properties.
Income properties offer real estate investors two opportunities to make money. First, there's the potential for homes to gain value over time, which investors can then unload at a profit. Secondly, income properties in the right market can lead to years of reliable rent payments. That's money investors can use to cover their own expenses with or reinvest to grow their respective empires.
Now some real estate investors might shy away from purchasing new construction properties. The reason? They can be very expensive to acquire compared to the cost of existing homes, without enough upside.
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Simply put, tenants in need of a rental may be more willing to settle for a dated property than your typical homebuyer, since rental arrangements often aren't permanent or long-term. As such, it can be more difficult for income property owners to recoup their investment when purchasing new construction because tenants will only pay so much more for granite countertops over laminate ones.
But these days, homebuilders are having a harder time drumming up business. This means it could be a good time for income property owners to pounce on new construction homes.
New construction sales are on the decline
Sales of newly built homes fell over 8% in June compared to May, according to data from the U.S. Census. Meanwhile, new construction inventory rose to a 9.3-month supply, up from a 5.6-month supply at the end of 2021.
Now any time there's more supply of a given commodity and less demand, the price of that commodity is likely to drop. That hasn't really happened yet with regard to new construction -- but it could in the near term. And that could give income property investors a prime opportunity to scoop up newly built homes at a more reasonable price point.
The upside of owning new construction for both everyday buyers and real estate investors alike is not having to worry about near-term repairs. The maintenance on newly built homes can also be more manageable and less costly. And so if new construction homes become available at the right price point, investors should consider diving in.
In the meantime, homebuilders are increasingly boosting incentives in an effort to lure in buyers. Investors who move forward with new construction soon may be in a position to snag premium lots or to snag upgrades (think higher-end flooring, countertops, and appliances) at little to no added cost.
All told, new construction homes can be a solid investment despite their higher price tag. Those who have been on the fence about buying new construction may want to start researching local opportunities soon -- especially as builders get increasingly desperate to get contracts signed.
