New construction or older property?

Question

Should I look at new construction properties in new communities that seem to be appreciating or older property that has lower mortgage and more likely to cash flow?

Ke Nan Wang · Answer

Pros for new construction:

Lowest insurance premium, in FL is a big deal. Not too sure about other areas in the country.

High likelihood of low maintenance for at least the first 5 years, depend on the build quality of the house. Most builders offer a one year warranty. Reputation is important (not only in terms of good build quality, because the quality of the houses builders built is heavily depend on the quality of the superintendent they had overseeing the project and the quality of subcontractors they used). Also the reputation of customer relationship post sales, how they deal with call backs and warranties. You won't get any kind of a warranty from a old resale house.

Easier to rent. Everyone loves new stuff, all my new constructions rents well. The house pretty much sales on its own. As long as you price it correctly, people will see the house condition matches the listing photos (professionally done), they will take the property as soon as they see it. For older houses, the mismatch between listing photos and reality is high. You will have a high percentage of people schedule showings and expect something nicer than the reality.

Pricing, usually when builder finishes a house, especially towards the end of closing out a community, their motivation to sell is extremely high because they have to maintain the staff there until they sold the last house in the community. Builders are in the business to build, so they are very motivated to move their inventory. Therefore it's not uncommon for someone to buy a new construction that's the same price as an old house but it comes with an one year warranty and all the new stuff.

Stuff you will get killed on if not careful with builders. We make all the money in upgrades, so if you are thinking about walking in to a model home and pick all the upgrades they offered, you will get slaughter. Either negotiate a good price or only pick upgrades that's necessary in the rough phase and do the upgrades with your own subcontractor/vendors after the house closes (kitchen upgrades, appliances, countertop upgrades, flooring upgrades, landscaping upgrades you can get them much cheaper without going through the builder).

New construction is a winner if all things are the same.

I would do the following: Get a really good home inspection, if anything comes up, do not close until the things are fixed. If builder pushes you saying "come on, don't hold up the closing for these minor items, let's close the house and take care of the them with warranties." Don't take the bait. Negotiate a meaningful amount of funds withhold in escrow until the issues are fixed. Meaningful is something like 10x the cost of fixing them. You may not get it but set the bar high, or the alternative is you won't close. If something cost $500 to fix, withhold $5000 in escrow. Otherwise good luck getting the builder back to fix the issues. They will easily write the $500 off and save the headache.

Preston Dean · Answer

Hi @Varika Pinnam

I would ask what your goal is?

Either option is good but they both have pros/cons

NEW BUILD - You'll have all those warranties, 1 year, 2 year, 10 year

EXISTING HOME - You might have more freedom for what you can do with the house, no HOA & larger backyard

A lot of new builds are offering interest rate buy downs that are lower than the regular market right now.

Drago Stanimirovic · Answer

Hi Varika,

Both options have merit, but it depends on your goals. New construction in appreciating areas offers long-term value growth, minimal repairs, and potential tax benefits, but often comes with higher purchase prices and slimmer initial cash flow. Older properties typically offer better cash flow due to lower mortgages and rents that exceed expenses, but may require more maintenance and updates.

If you prioritize immediate cash flow, older properties might be better. If you’re looking for long-term appreciation and lower maintenance, new construction could be ideal. It’s key to balance both when building your portfolio.

Need help with financing? Let me know!

Best,

Drago

Mike H. · Answer

Question.  Are you looking to buy these new construction deals right off mls and pay retail? Or are you looking to GC or quasi GC your own builds?  Typically a GC tries to get 15 to 20 percent margin on the build. So if you could gc them yourself, you could force some equity on the new construction deals and the new construction ones might be a no brainer.The other question I'd have is whether you're getting deals on the pre-existing homes.Ultimately, its going to be real tough to scale either one if you're paying retail because if you're buying 250k homes and putting down 20 to 25%, you'll run out of cash real quick.  Now if you're able to do new construction and pull out all your money except 5%, you can scale much faster.I'm building in eastern tennessee and recently got a GC license.  I'm only building rental cabins which is a higher price point due to their ability to produce income.  But we can build stuff at 70% to 75% or so including the lot and the financing.That allows me to grow a portfolio without putting hardly any of my cash into the deal.  And because I have a lower loan amount than people paying retail, i'm able to do ok for cash flow too. I'm sure there are other areas that people are doing the same exact thing. But thought I'd throw that out there too.Sometimes its not as much about which one is better in terms of cash flow. It could very well be which one is better in terms of equity so you can scale by not having to dump 25% of your cash into each deal and instead only having to put 5% into each one.   I'd rather take my 100k capital and end up with 5 400k houses at 75% LTV making 400/mo cash flow each than to have 1 400k house at 75% LTV making 1000/mo cash flow. So I would suggest invest in both as long as you can get them at the right discount to where you can scale.

Lindsay Davis · Answer

@Varika Pinnam,

Like many things in real estate, it depends. New construction could be a good fit if you’re looking for something hands-off. New homes are going to have virtually no repair, maintenance, or capex needs for the first five or so years, so you’ll be able to forecast your operating expenses and cash flow with a bit more certainty from the outset.

Older properties, however, are generally more affordable than a new home of comparable size and build quality, so if you’re after a good deal, you’ll likely have more luck here—especially if you’re willing to look beyond the MLS for deals. Also, give @Ke Nan Wang and @Mike H.'s excellent answers to your question a read—they do a great job presenting the complexities of the new construction vs. existing property dilemma you posed.

Amr Omar · Answer

If you're looking to invest as a long-term buy-and-hold property, one recommendation is to check the rental listings (Zillow rentals) and see how that market is doing.

There are a number of investors that went new-construction in DFW in fast-growing areas, like Princeton & Anna, but are struggling now to get their properties rented at the rents they were projecting.

Alecia Loveless · Answer

@Varika Pinnam If you know your market and that the general construct of the older buildings was quality then IMO older construction is the way to go. All of my properties (8) are between 50-100 years old and I’m confident are worth much more than a new structure in a cheaply built community.

Varika Pinnam · Answer

@Drago Stanimirovic thanks! I see that you are in FL - I am curious. Can lenders work across the country or is it state by state?

Varika Pinnam · Answer

@Amr Omar oh wow, I was looking in Princeton, Celina, and Anna too! Do you mind sharing what those projected rents are that they are not able to hit so I can keep it in mind as a marker please?

Drago Stanimirovic · Answer

Sure Varika, we lend in 44 states.

Let me know if you need any help!

Best,

Drago

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