First Deal: Build from Scratch or Flip an Existing Home?

Question

I’m about to dive into my first real estate deal in Central Florida, and instead of flipping an existing home, I’m considering building a new house from scratch. I've been working as a construction manager for years, as well as my partner, so we are not completely unfamiliar with construction, subcontractors, etc. However, we've never thought about real estate investing but until now. I’d love to get your thoughts on this approach!

Ben Fernandez · Answer

I think it depends on the deal that comes your way.

If you can find a cheap plot of land that's buildable and the profits exceed a potential flip's (you could also acquire), go for the build.

Vice versa. If the flip is more efficient, and delivers a better profit, go for the flip.

Notice, I made hence to efficiency. That is a thought that's in the back of my mind regarding all the red tape you may encounter on the building side. Keep in mind, time costs. So a flip and a build with the same profit margin, but one is less time arriving to the goal, the shorter time span option is the better deal.

Allan C. · Answer

You should factor in time value of money and opportunity cost.  How many new developments can you execute in one year vs flips? Until you can scale, it's likely that you can execute flips quicker than new builds, thus you can turn around profits quicker to reinvest.

Todd Anderson · Answer

@Karla Garcia,

Great thought about that comparison.  I talk with a lot of flippers in this market and with the scarcity of good deals may are looking at new construction.  I would caution you on one thing.

Building ground up takes a long time in this new market.  I have worked with a number of investors that buy a piece of property, get construction financing, if they can, and don't get a product they can rent for a return for over 2 years.  It takes a long time to build right now.  because of this many lenders won't give construction financing on a deal unless you have a track record.

There is another way, I talk with investors now about new construction investing in a different way.  We can let the builder carry the construction costs and come in as an investor at completion.  If we can work out a deal with a number of builders to keep their properties moving than we can also ask this builder to give some incentives to the investor.  Many times we can get interest rate buydowns and even free property management.

I have exchanged my portfolio to this type of investment. The biggest advantage that i have found is now I can own a property for its first, best , years of its life.

This is a great way to invest. Best of luck.

Jaycee Greene · Answer

Right, @Karla Garcia but the trick in rehabbing is that you may think you know what needs to be done and how much it's going to cost until you start the process and then you knock down a wall and realize the whole house needs to be gutted! Good luck in whichever path you choose to follow!

Karla Garcia · Answer

Hi Jeff! Thank you so much for your message. I definitely need to run those numbers ;)

Karla Garcia · Answer

Hi Jaycee, thanks for your response! We're still in the process of obtaining numbers from some subs in the area for the construction budget. We've checked some lands on Zillow and Realtor. However, we're concerned about the possible unforeseen. For example, the wildlife under conservation protection like the Gopher Tortoise or others. Or the impact of the tariffs, when implemented, on the construction material. We haven't considered the acquisition/rehab of an existing property yet. But will do, thank you.

I guess the risk comes with the incertitude of the period the house is being built. Compared to rehabbing where the asset is already there regardless of the repairs needed. Thank you in advance for your advice.

Karla Garcia · Answer

You're right. Thank you so much. I understand none is really riskier than the other. I guess it is all about the numbers and the information available to avoid the unforeseen as possible. Thanks again!

Karla Garcia · Answer

Thank you Aaron! Good point.

Aaron Lawrence · Answer

Are there areas in your market that have comps that have densified? In other words taken SFR to 2-4plex or added an ADU?

Seems to me like considering a property where you could do an addition / add density OR flip would give you the opportunity to dip your toe in the water of new dev while giving you an emergency exit if you can't do what you had thought.

If it were me, my max acquisition budget would be based on my worst case scenario - a flip.

Best of luck!

Karla Garcia · Answer

That makes a lot of sense @Allan C. thanks! Our concern is that we are new on this and think flipping is too risky, given that you don't know what you could find in an old house. On the other hand, building houses is our day-to-day job (building for others, not for us, unfortunately) so we think we can leverage that experience. Does that make sense? We lack the experience as investor, though. All the buying the lot process, financing, permits, days on the market, etc and all other times associated.

First Deal: Build from Scratch or Flip an Existing Home?

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