SHINY VERSUS STEADY: ARE NEW RENTALS BETTER?

by John Hill

Barnett & Hill's May 2016 rental report revealed that rentals in 79601 were newer, but leased slower and had flat rents.  This counter-intuitive event cause me to dig a little deeper into the data to appreciate the impact that a new home has on rental appeal. 

Of course, new is a relative term.  Our broker Mitch Barnett just bought a new (to him) truck that is several years old.  My wife and I have lived comfortably in multiple houses, but never lived in one that was builder new.  A quick review of opinions on the web doesn’t reveal an industry definition regarding what is old and most writers that weigh in on the question acknowledge that an old home that is properly maintained can be just as good or better than a relatively new home.  That said, I’m going to pick 10 years as my cut-off.  In 10 years, finishes look dated and worn, the HVAC system may need to be replaced, fences need repair, paint needs to be reapplied and the roof has experienced one or two hail events necessitating replacement.  

Through the North Texas Real Estate Information System (NTREIS), information on 6,881 leased  residential real estate transactions in Abilene were assembled dating back to 2009.  Akin to the rental report that Barnett & Hill generates each month, we looked at rental size, rent/sqft, days on the market (DOM), security deposits and the percent of units allowing pets.  We did this twice – once for homes built before 2006 and again for homes built after 2006.  We then compared these two tabulations to get a sense of the rental market for new homes in Abilene. 

None of the outcomes tabulated provided much in the way of surprises.  As one would expect newer homes rented (7 days) faster and for (20¢) more per square foot.  These homes were 327-sqft larger and charged $536 more for security deposits.  The only surprise was for pets; homes built after 2006 were 7% more likely to rent to tenants with pets. 

When we look at homes built after 2006, we see that 79602 has the highest rent per square foot at 90¢/sqft and 79601 has the smallest rent/sqft at 82¢/sqft.  79602 also has the greatest number of new rentals at 339 built after 2006.  79605 has the fewest new rentals at 2.  Wylie ISD has more than 4 times the number of new rentals compared to Abilene ISD (433 v. 99) and post-2006-built Wylie rentals lease for 7¢/sqft more than Abilene ISD rentals if built after 2006. 

So, if “new” rentals lease for 20¢/sqft more and 7 days faster is it worth it to buy a newer rental?  Consider the following table that compares the average case, irrespective of ZIP code or school district, for homes built pre and post 2006.   

Using rent/sqft and the average size of newer versus older rentals, one discovers that the typical newer rental leases for $561 more each month.  The newer rental also rents 7 days faster than the older rental resulting in a $363.39 bump to annual revenue.  When we combine this information one discovers that newer homes generate an additional $6,470.28 per annum over older homes (and it is important to note that newer homes have less repair expenses - a cost not included in this tabulation)..

Conventional wisdom among investors breaks along two lines; older units have a lower price and mortgage payment hence better cash flow versus newer units with initial, scant cash flow, but better returns when the mortgage is retired.  When you consider that the typical, newer Abilene rental leases for $6470.28 more than a rental built before 2006 and you evaluate this difference at a cap rate of 10%, this bolsters the rationale for paying more ($6470.28 rent difference ÷ 10% cap rate = additional $64,703 in value) for a home that is newer, given the prospect for higher rents and less time on the market without a tenant.