Build New or Buy Existing?

Question

Let me start out by saying I’m very early in my real estate journey. I am still researching and taking in as much information as possible on all the different strategies out there...so it goes without saying that I haven’t executed a deal yet.

I am leaning towards starting with a duplex, triplex, or quad.

My question is, what are some pros and cons of building new vs. buying existing properties?

I should state that I am a commercial general contractor by trade, so the construction process is no issue for me. One thing that leads me to this question is the risk of the unknown with buying existing properties, as I am very familiar with renovation work and the surprises that can come with it. With a new building, you know exactly what you are getting.

What are some of the financing hurdles, rental rate variances, exit strategies, etc that may come with each property type?

Could there be more long or short term return in a value-add situation vs. starting new?

Jay Hinrichs · Answer

this is highly regional.. there are still large parts of the US were existing stock can be purchased and remodeled for far less than cost to build new.. especially with material costs right now.. OSB we bought last week for 38 a sheet popped us to 44 a sheet this week.. my lumber packs are more than double what i spent 18 months ago.. 20 to 25k to 50 to 60k same house. roofing is going up .. every thing is going up up up.. so unless rents really start rising your going to see a big squeeze in the rental / build arena in my mind.for retail owner occ we are able to pass it on and keep our margins.. its really easy when buy says Hey I saw your 2000k sq ft home 2 months ago for 575k how come its 610k today.. Easy lumber sky rocketed and given the market buyers are paying it if they want a new house in a great location with great schools. So 300 a foot to 600 a foot is the new norm.

Dustin Allen · Answer

@Landon JonesAs far as spec builds, I’m referring to build to sell. There could be a little less volatility in build to rent. Of course, if lumber prices go above your original projections, you could still get in some trouble.

Jill Curran · Answer

@Landon Jones I'm an investor and agent in Little Rock, with properties in midtown and Pennbrook (and SoMa soon, I hope). I suggest you look for a good first property and fit your strategy possibilities to it--learn by doing. M-f is high now, but building new is too. There are a number of empty lots in the city, but area is key. One barrier to buying existing structures is the higher down payment for m-f compared to buying your own home. If you need to raise the down payment, a flip might be a good way to make it, especially with your experience. If you see an MLS property you're interested in, let me know and I can represent you (which the seller pays for, as you know). Good condition duplexes to quads in good areas are getting offers, often more than one, within 24-48 hours, so speed is key. I'm happy to help you in any way, including just talking about possibilities and answering any questions I can. I'll message you my email and phone number. Good luck! Jill

Landon Jones · Answer

@Dustin AllenThanks for the info. When you are referring to spec builds and market volatility, are you referring properties for sale or rentals? Or both? From what I’ve learned, it seems like rentals are a little less risky when considering market swings. If you are referring to the market affecting building material prices then I understand that, as lumber is through the roof right now in my areas of Arkansas (Little Rock, Conway, Morrilton). I can see how new builds may not be the best choice at this time.

Dustin Allen · Answer

@Landon JonesYou are in a unique position either way you choose to pursue this. The ability to do construction or remodel at cost will make either strategy much more profitable for you than it would be for the average investor.Remodels are always a bit of an unknown but you should be able to find something that you are comfortable fixing and that others are scared to take on. Occasionally, we get half done flips that someone couldn’t finish or houses with a known issue that the average homebuyer is unwilling to fix. If you look for these types of properties, you can probably find something you are uniquely qualified to handle.As far as building new, that too can be a very lucrative proposition. Many spec builds are going up around me right now. Speed is your friend with those though. If the market starts turning, spec builds can quickly become unprofitable. There’s no right answer here. Keep your eyes on the market and find the place you can add the most value. Name a location of where you work and it will trigger keyword alerts for some local people. Local advice can help you determine what might be best in your specific area right now and maybe even lead to some good connections.