New Construction vs. Older Homes: Which is the Better Investment?

New Construction vs. Older Homes: Which is the Better Investment?

3 min read
Joshua Keen Read More

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You’re ready to buy your first (or next) investment property, but you’re not sure if you should opt for a newly built property (anything constructed in the last 10 years) or an older home. Each has its own pros and cons, and you need to weigh them carefully to figure out which choice is best for you.

Here are the biggest things to keep in mind when determining which route you should choose.

The Case for Buying New

Modern from the start.

New construction homes are built with today’s tastes in mind, so you’re more likely to find elements renters are looking for, like open floor plans, stainless steel appliances and higher-end finishes such as granite countertops. There’s no need for you to do a complete tear-down of a ‘70s-era kitchen or spend time and money upgrading an outdated electrical system.

No hidden surprises.

What you build is what you get; you won’t have to worry about a home inspection suddenly revealing a mold problem behind the basement drywall or a seemingly functioning furnace dying on you at the first harsh winter.

Related: It Might Be Time to Switch Your Niche to New Construction – Here’s Why.

Less initial work for you.

You can put your DIY tool belt away because nothing in a new build will need to be rehabbed, renovated or repaired. It’s “move-in ready,” which translates to less sweat equity on your part. (If you outsource the construction, you can also breathe a sigh of relief – you don’t need to worry about project management or managing your contractors.)

Less maintenance.

With brand-new everything, you’ll save time and money on maintenance for years to come. The average lifespan of most major appliances is around 10-15 years, according to a study by the National Association of Home Builders and Bank of America Home Equity. And if something should break in the first years you own the property, it will most likely be covered by either a manufacturer’s warranty or building warranty.

Lower energy costs.

Newer homes tend to be more energy efficient, which can save you up to 30 percent on your utility bills, according to Energy.gov. You can pass that savings along to your renters (making the property even more attractive) or pocket it for yourself if you’re a landlord who covers utilities.

Tax savings.

Property tax bills are calculated based on the prior year’s assessment, and for most new builds, the property was nothing more than an empty lot the year before. It could take up to two years for the property’s assessment value to catch up to its current market value, and during that time, your tax bills will be markedly lower than those of older homes in your area.

Larger earnings potential.

A 2014 Trulia study found that twice as many people prefer newly built homes to existing houses. Many renters are willing to pay more for brand-spanking-new properties, especially when they come with higher-end modern amenities. This results in a steadier cash flow, lower vacancy rate and often a higher resale value when you finally decide to let the property go. All of which equal more money in the bank for you.

The Case for Buying Older

More personality.

For all their shiny perfection, new homes often lack in the “charm” and “character” department. They can feel sterile and cookie-cutter, while older homes often have unique features that can make a renter fall in love with the property. Don’t overlook the selling power of one-of-a-kind elements like retro finishes, antique crown molding, stained glass and original working fireplaces.

Fully grown trees.

Lived-in homes also tend to have more mature landscaping, and there are plenty of renters who’d love to have the shade of some fully grown trees in their yard. A study by Management Information Services/ICMA found that landscaping with mature trees can increase a property’s value by up to 20 percent.

Lower initial cost.

New builds often cost a premium. When you buy an older home, you can not only snag a great property at a lower price (up to 20 percent lower, according to Trulia findings), but you also have the ability to negotiate price in a way you can’t with a developer. If the established homeowners are highly motivated to sell or you can point out parts of the home you’ll have to spend time upgrading and repairing, you can knock quite a bit off the final purchase price.

Related: 8 Common Questions Investors Have About Home Inspections – Answered!

Access to better locations.

You can snag a spot in a highly desired neighborhood that’s been developed to the point that new construction simply isn’t an option anymore. A slightly run-down, smaller home in a historic district or popular hotspot hub could be well worth the investment. (Of course, this point is specific to your area. Some cities feature “hotspots” that are in new-construction areas, while other cities feature popular spots that are in historic neighborhoods.)

Ability to do more market research.

When evaluating properties to purchase, as well as deciding how much you should invest in things like extra finishes and upgrades, it’s critical to know the market for your area. Buying a home in an established area gives you access to more accurate data (and a much longer history) when it comes to price points, renter expectations and historical trends.

Investors: What do YOU think? Have you had better success with newer or older builds?

Leave a comment and let me know.