How do I learn how to judge between new construction and buying?

Question

Hey everyone! I am wanting to explore the options of buying vs. building new in the Kansas City area. I purchased a four-plex in Oklahoma that has been great, but quite the fixer upper. My wife loves the idea of getting into real estate (thank god) but wants something with less work and in a safer market when I move back up to Kansas City. I totally agree with her statement and know most of the trade offs. I am willing to make less cash flow, knowing i'll have less capex and maintenance. I have an open mind and want to learn how to judge if building new is the right move. What steps can I take to ensure I make the right decision. Thanks!

Caleb Brown · Answer

@Rose White is spot on. Most of the older multi in KC is built in the early 1900's. If you go to the suburbs outside of KC those multi are built 1950's-1980's. In the growing parts of KC there is new construction going on., most of the time the new construction is in the premiere part so you'll have strong appreciation.

Yoni Benimetzky · Answer

Hey @Grant DoyleEvaluate the difference in cost (include the time value of money because new construction will probably take longer) between a fixer upper and new construction. Outline a thorough comp report that will detail the rent difference between both products, and run a simple profit analysis to see what makes more sense for you based on your budget and risk appetite.

Also, understanding replacement cost will help you make wiser decisions when it comes to this. If it's cheaper to build new product then buy existing than your answer is right in front of you :)

Nick Rutkowski · Answer

@Grant Doyle

I am learning the hard way by not choosing a new build over my existing 4 unit gut rehab. I’ve literally fixed everything on this 4 unit from

the foundation, to the roof. So this is what I’ve learned. If you look at a house and say to

yourself “Man, this should be torn down.” or “I think I this will be a complete gut rehab.” then chances are...it should be torn down. I’ve spent 18 months turning my house around just to realize I could have spent 18 months building a new one.

Rose White · Answer

Hi Grant,

I personally bought a new construction for primary residence in suburb of Atlanta. While my husband and I were looking for houses to purchase last year, most of the issues were common with the fixer/turnkey homes that were older.

As far as "building new" for your investment house, i think "buying new construction already in place?" is better than you doing the building ground up- I am not sure if that's what you meant already but wanted to mention that (potential for attachment if building ground up? lol and could take longer period of time to complete)

with fixer/turnkey older homes: (which you probably know already) con: - had to worry about HVAC, water heater unit being old and not replaced yet - if it was somewhat fixed already - dealing with potential short cut work from previous contractors - find any unforeseen issues that you'd have to have trustworthy people in place to find out for you (with your due diligence in place)- could have issues after purchase when you try to do your rehab Pro: obviously even with those issues above, there "could" be more ROI in place when its done.

New construction: con: - not much addition to do to add more value to your home - Hoa fees could be higher - because newer neighbors use CPM (community property manager) in the beginning - Need to know if the neighbor has a cap of rental properties before purchase, and need to purchase quickPro: - like you mentioned, less capex and maintenance - potentially find a tenant faster - most of the things in the house has warranty up to 5 years

Also, if you do end up buying new build, look around the area to see if there are more new constructions going up, it could indicate that population in the area is growing and the area is in demand.

With it all said, i wouldn't think new build is a bad idea for rental (ps. i live in an area with 60 homes with 10%-12% rental restriction and all the houses are already rented out since it completed building a year ago. those tenants were there since investors bought it)

Good luck :)

How do I learn how to judge between new construction and buying?

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