Is building new always better than buying?

Question

Building a new SFH (and then holding it as a rental) appears to be a better option than buying an existing SFH. If you build (via managing a general contractor), you should (ideally) know more about how the property was built than if you bought an existing home--you know what's behind the walls, and ideally you might avoid anything wrong with buying an existing home with issues you and your inspector didn't catch.

I understand there's risk to building--it just seems right now that the risk is lower than buying an existing house--a house where you simply cannot know every detail without tearing it down to the studs and doing a complete remodel. If you bought an existing home and it had a massive problem your inspector didn't catch, your deal could go under.

Am I wrong to think about it this way?

Jay Hinrichs · Answer

not wrong just have to look at markets and market conditions.in many areas of the country building new just does not make sense when existing inventory can be bought for far less than replacement costs.. and rents wont change enough new vs old to compensate for it. Keep in mind there are plenty of not ready for prime time builders out there that will build a home that is not all that great with many defects even though its new..

Matthew Paul · Answer

In my area , you would have a minimum of 1 year from the time you bought the land until you could stick a shovel in the ground . Engineering , permits , stormwater management system , clearing , reforestation fee , sediment control , and landscape bond , all this would run you around $175K . Plus the cost of the land . Then the cost of the house . Much cheaper to buy existing

Jonathan Klemm · Answer

Hey @Austin Wolff - You bring up some good points about knowing the house better than anyone when you build new if you are actively involved and onsite regularly, but I'd get behind @Jay Hinrichs, in the sense that the numbers don't always allow you to build new.Here in Chicago, new developments are super pricey, and even the BEST DEVELOPERS HAVE SLIM MARGINS. Most areas that aren't A or B neighborhoods do not support new construction without some outside subsidy funding.

Mike Dymski · Answer

New development is an uncommon strategy for part time investors. Buying new, yes, but not building new.

Jay Hinrichs · Answer

builder pain is very regional and product type dictates.. My project in Oregon which is a move up product 700 to 1` mil I am selling them pre sale NO incentives and sold as many as I could build this year.. and same for the last two years.. Where I see the builder incentives and builders hurting is in starter housing or housing for rentals that investors are buying.. everything there is interest rate driven.. with land costs fixed and building cost not coming down , interest rates rising this hurts builders who are building product for those that MUST have financing to buy and are barely able to qualify IE starters.. Or for investment purpose were investors simply balk if the numbers dont work.. Same thing with what I am building in Charleston SC another red hot market with extremely limited inventory and no SFR goes for rental purposes.. those with funds to buy are still buying . when i built in florida starter homes that was and is a disaster.. granted I did not lose money but it was No way worth the effort time and risk.. so its market dependent. i dont know anything really about Texas market other than there has been a big building boom and houses can be built very cheaply there compared to other areas of the country.

Jay Hinrichs · Answer

just look at south side chicago were you can buy an exist 2 flat for what 100k that will need work so maybe 250k all in those properties even with the lot for free would cost double that to build today.. if not more.. I did see some new builds in south side last time i was there but they were non profits building them they are the only ones that can do this in areas were existing sells for substantially lower than new builds..

Mike H. · Answer

You definitely can't build in the lesser areas. Your costs to build are too high even if you're getting the land for free. That being said, there are some significant benefits to building versus buying and rehabbing.1) If you're building, you should be able to come in at 80% LTV or better assuming you're acting as the GC. If you can't do that, then something is wrong and you're not finding the right subs.The benefit to that though is that when you refi you could refi at 75% ltv and only have 5% of the cost in the house. So lets say you build a house thats going to be worth 300k and you can be all in at 240k and you refi at 75% or 225k. That means you'll only have to be out of pocket 15k and you you'll have 75k in equtiy. So if you had 150k, you could build and own 10 houses. Versus if you buy a house for 240k and have to pay 25% down, you're looking at 60k out of pocket. That 150k will only get you two houses.The question there becomes will the property cash flow with a loan of 225k. If yes, thats good. If no, then thats a non-starter.2) But it brings you to the next benefit. Brand new construction rents at a premium. I would say a 3 bed, 2bath, 1500 sq ft home that was 20 to 30 years old here might rent for 1750 to 1800. But if it was new construction, I could get 2,000 to 2,100. I would estimate a 10 to 15% premium for rent for new construction so that helps overcome a little of the price difference.3) Less repairs. So thats the other benefit in terms of cash flow. Older homes have more problems. New construction shouldn't have any major repairs for several years. And some of the biggest repairs not for some time (roof 20, hvac 10, etc) .To me, building a new sfh should allow you to get a bigger discount than what is typically available these days unless you're really getting lucky. But it requires way more work and way more risk as you have to manage the subs yourself and hope that they don't pull a fast one. It also takes a lot more time than simply buying an existing house and rehabbing it. 2 or 3 months for a rehab? 9 to 12 for a new build? The key is to find the numbers in the areas that work best for new construction. Find the balance where land is decent, but rents are high. And I would probably look at the smaller houses where you can keep your unit costs down but still rent them at a higher price point relatively speaking.

Alecia Loveless · Answer

@Austin Wolff It totally depends on your market. In my market no one is building that is not building a custom built $700,000+ house. With going investment properties going for $60-80,000/unit. New construction of any type just doesn’t make sense.

Drago Stanimirovic · Answer

Austin, you're thinking about this correctly. Building a new SFH gives you more control over the construction process, allowing you to avoid many of the unknowns that come with buying an existing home. You’ll have peace of mind knowing exactly what’s behind the walls and that everything is up to current standards. While there are risks involved with building-like cost overruns or delays, these are often more manageable compared to the potential hidden issues in an older home. If you'd like help exploring financing options for new construction, I’d be happy to assist!Best,Drago

Cassidy Burns · Answer

I think the answer to this depends on the amount of capital you will be able to put into the deal initially. If you are buying a primary, you can do 3-5% out of pocket if you buy existing. Building will require more capital upfront. Time and place for both.