Which is better: Buying vs Building

Question

Hey guys,

My partner and I were having a conversation about which approach is better: either buying a rental property or building a complex with the same amount of capital e.g $500,000.

To me, the analysis makes more sense to build a property in an ideal city and rent higher than to buy an existing rental property: reduced repair costs, city tax incentives, competition among contractors/builders to build the most units for your money.

Thoughts?

Jason Hsiao · Answer

Hi @Joshua Awodele, you're right that you could probably build more units, the key is how many more (make sure you following the design standards), and the cash flow timing.

When I first started out I thought I could build a lot more units before I hired an architect on board actually and per what @Brent Coombs referred to, if you build you might spend 1-2 years in plan check and approval, and another 1-2 years, possibly longer to build it out. That's like 4-5 years of rent checks you're not collecting. $500k at 10 cap x 5 years (big assumption on the cap rate I know) = $250k you could almost buy another small place with it.

What I would advise is buy an existing property that's maybe poorly managed that needs fixing up or increase the occupancy rate and try not to buy on open market if possible. That should get you the best value for your investment.

Brent Coombs · Answer

@Joshua Awodele - prove it! One problem I see is: from the time you buy land until your new build is ready to rent (generating ZERO dollars) - your $500k could have been getting you a return from day ONE from ones that already exist! AND, at a higher Rent-to-Price Ratio to boot!

If you're not ALREADY a pro-builder (who can answer your own question) - then why speculate?

I'd be interested to see your side by side (realistic) numbers to validate your premise. Cheers...

Karen Margrave · Answer

Without having more facts, it is impossible to tell you which is the better deal. 4-5 years is extreme and I cannot imagine anywhere where that would be the case, EXCEPT for highly competitive markets with over regulated planning, design or environmental hurdles to deal with.

Unless we know the cost of your lot, how many units you can fit on it, type of design, etc. and whether or not you'll be handling any of the work or subbing it all out, we cannot have any idea of the costs to build. In addition, we'd need to know the original cost of an established home, cost to remodel including all permits and fees, materials, labor, and other expenses going into it, along with actual comps fro the area to verify values.

The point is, without knowing your experience, and having some specifics of location, local costs, and details we cannot give you any real information, only theories.

Joshua Awodele · Answer

Thank you very much for your contributions: @Brent Coombs, @Jason Hsiao, & @Mike Wood.

I will give more context so that you may understand where I am coming from. Our target area in the east coast is riddled with over-valued properties with heavy property tax burden. The mill rate for Trumbull, Connecticut for instance is $35 per $1000 assessed value. Therefore a $500,000 complex will be taxed $17,500 ~ 1,500/month. This in mind along with potential repairs/maintenance in an over valued area makes a new construction more attractive.

I understand that in terms of initial cash flow, buying an existing property has the advantage, but in the long run (in a buy&hold strategy), I'm thinking a new construction with better unit cost efficacy, warranty on construction, reduced potential repairs for years, and in a place with a tax abatement area will be better.

Given that this will be my first construction, I'm here to gather wisdom from experienced professionals who have been in this situation and can offer advise that will help make this project a success. And what better place than BiggerPockets with a legion of real estate professionals.

Thanks

Mike Wood · Answer

@Joshua Awodele New construction allows you to build exactly what renters want, no need to compromise with an older house.  You also get new units, so your repairs and CAPEX is very low.  All renters would prefer a new house, so your have a competitive advantage over existing units.  There is a period of time when the units are under construction that you will not be generating income, but unless its a huge project (which with a $500k budget, thats not likely), from purchase of dirt to construction would not be much more than 1 yr.

Also, since its new construction, your not paying the full amount out front like a purchase. For me, I would much rather have new modern units that rent for more money than older units. My new units rent for more as a percentage of the homes value (rent to price ratio) than if I was to purchase units.  Additionally, you have the ability to build in value, some that is not easy to do with a turn key purchase.

Which is better: Buying vs Building

Most Popular Reply