When Does Buying New Construction Single-Family Homes Make Sense?

by | BiggerPockets.com

As the prices of properties continue to soar in many areas, the question regarding whether to buy a newly built home or rehab an existing one has been popping up with increasing frequency.

For some, the lure of a freshly built single-family home that has never been inhabited is a no-brainer. Others prefer the perks that come with dated construction—prime locations, established neighborhoods, the character of old world construction, and so on.

There is also the small matter of cost, and although new builds are a percentage costlier than their existing counterparts, this disparity is fast washing away. What we are seeing in some markets is old single-family properties priced so high that it makes more sense to build or buy new.

Does the Charm of Old Construction Justify the Cost?

There are some things we just cannot take away from old single-family homes. Considering these properties were constructed way back when property prices were very low, they are more likely to sit in some of the most prime locations in town.

Typically, they tend to have larger yards and more mature trees and vegetation, and they are often located closer to downtown, entertainment, and restaurants.

As far as the houses themselves are concerned, there is no denying the fact that older construction was meticulously built, and the genuine craftsman is still hard to miss. After all, they have weathered the storms for decades; others centuries.

Older homes also have more character thanks to the interesting architecture dating centuries back. Popular styles include Victorian, Colonial, Tudor, and Greek Revival.

old-homes

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

Beyond this allure, though, older homes often come with a lot of baggage. A lot of this mostly boils down to one thing: cost.

There is always something that requires fixing. Chimneys may require tuck-pointing; so might stone foundations. Roofs may leak. Floors may slope.

While periodical maintenance is essential for every home, old or new, it is an inevitable, frequent undertaking in the case of older homes.

Replacing the wiring and plumbing is also an expensive affair with older single-family homes. Apparently, this is something that is bound to come up at some point.

Growing tree roots could, for instance, break up sewer pipes. If a property was constructed prior to the sewer system, there is a likelihood the cesspool will overflow into a sewer. Old galvanized pipes are also prone to rust.

In the case of electronics, the sensitive ones require grounded wiring. Aluminum wiring, common with older homes, is also a fire hazard. The list goes on.

There is also no overlooking the fact that many older homes might not be equipped with trendy installations. The HVAC system aside, this could also mean costly bathroom and kitchen remodeling jobs. Assuming this is all taken care of, then it will no doubt reflect on the listing price.

Speaking of listing price, despite their age, classic and vintage homes these days generally cost more than many new builds. This is not all to do with the obvious charm. They also tend to be within proximity of mass transit, schools, shopping, and urban amenities.

Why Buying New Makes More Sense

From an investment point of view, a newly constructed single-family home comes with a slew of benefits.

For one, there will be little to worry about in the case of repairs. All the major systems in the property, from the roof to the plumbing to the electrical and HVAC are in tip-top condition.

This not only means less overheads in the name of maintenance, but also better prediction of monthly homeownership cost. Warranties can also protect a new home for years before any major repairs are needed.



Related: 4 Vital Points to Consider BEFORE Getting Into New Construction

New homes are also likely to be more efficient when it comes to heating and cooling—one of their major selling points, actually—which means lower utility bills to contend with.

These types of properties are also smarter and healthier when it comes to integration of technology and building materials, as they often use paints and materials low or devoid of volatile organic compounds (VOC), which translates to better indoor air quality.

The other advantage a new home has over an old one is a more updated look that appeals to the modern-day renter or buyer. Newly constructed homes are coming with open concept floor plans (a big deal these days), granite counters, and other higher-end finishes.

Essentially, this means less or zero work to bring the property up to the standard that most renters or buyers expect, not to mention the potential for higher rental rates since tenants will fork out more for a newer home with all the nice finishes.

Do you prefer to buy older homes or new construction? Why?

Comment below!

About Author

Nasar Elarabi

Nasar is a corporate failure who was saved by Real Estate. Nasar is now a Wholesaler, Rehabber and Landlord in the Charlotte area. Nasar may have just barely graduated college but can flip a house like an acrobat. Nasar’s work can also be found at RealEstateDoru.com.

8 Comments

  1. Bo Wagner

    Back when I closed transactions for a large national builder, I remember one investor who bought several new homes. He’d typically put down 20% or more, take advantage of builder ‘specials’ (e.g. closing costs, reductions for using their lender, etc.) and tried to buy right when a new subdivision opened. That way he received the benefit of the eventual price bumps as the neighborhood took off (e.g. built more equity, quickly). I believe he said he’d hold them 4-5 years so there would be maximum appreciation but prior to ANY maintenance issues. As a repeat customer I think he did receive some preferential pricing (or notices) from the builder as well. As noted, since they were all new, he could command premium rent pricing. It seemed like wise logic (of course it helped that he had the larger downpayments). Evidently you can only purchase so many using conventional loans as after he (individually) bought several, his wife bought several, he put them in adult children’s names, etc. Then I stopped seeing him! Wondering aloud how all that (plan) worked out? This was all 2001-2004 or so… Seemed to make sense to me though!

    • Dave Rav

      That is awesome. The thought of buying a brand spanking new property from a builder is nice. And you’re right, as one who has purchased new const as 1• residence, the incentives builders offer are awesome. When we bought back in ‘08, we got the equivalent of $15-20k in builder incentives! Included things like tankless HW heater, techshield
      roof insulation, integrated surround sound wiring, and more! All of these things would be “selling” and marketing points, and would likely command higher rents.

      The only major concern I can think of with renting out a brand spanking new prop is if a tenant totally wrecked it. Would recommend high scrutiny of prospective tenants, and possibly getting decent experience renting out properties and working with tenants before trying out a new build as a rental.

  2. Mike Akerly

    New construction (at least in major metro markets) rarely makes sense as a rental property. It sells at a premium of 20%+ to the resale market, but it won’t generate those increased returns on rent. There are investors, but they tend to 1) be interested in parking money for the long-term and aren’t yield focused (e.g. foreign investors) or 2) they’re making a bet on appreciation which is more gambling then investing. Yes, sometimes there are discounts to be had early in the sales process. That is likely true if there is long-term pre-sale campaign during which sales will begin substantially before product is delivered. In order to get those early sales, there are often discounts. Discounts are even more likely if the builder needs to hit certain absorption goals (e.g. if they have a construction pre-sale requirement to put a certain number into contract before their construction loan starts). However, though it’s always the hope of the developer, prices don’t always increase throughout the sales process. If you can lock up a contract with the right to assign it so you don’t even need to close, that’s the way to go, but most builder’s will put a provision in the agreement disallowing that (though there are some ways around it, it makes it harder to find a buyer). It’s also not uncommon for By-laws to require owner occupancy in the first year so as to limit investor purchases to protect end-user conventional financing which requires a certain percentage of owner occupancy. That’s something to look for.

    If you want the best of both worlds, buy “newish” construction that’s around 5 years old. You get most of the benefits, but it sells at resale prices instead of the new construction premium. Also, what wasn’t mentioned in the article is that construction defect issues are common, especially in multi-family condo, and often are discovered and litigated over in the first few years after delivery. Water intrusion issues are the big one. 4-5 years out, those issues have bubbled to the surface and most typically have been resolved.

  3. Cindy Larsen

    As a buy and hold investor, I do not buy anything built after 1980 due to inferior building techniques that began to be used around that time, and are still in use today. Basically, builders do the following:
    1. Frame the walls of the house using lumber with high mositure content: that 2×4 was a tree last month
    2. Use osb for exterior sheathing, and sheetrock for interior walls
    3. Use housewrap over the OSB: this is basically saranwrap, and is applied to keep moisture out of the house: it also keeps moisture from getting out of the walls
    4. Put siding over the housewrap

    The problem is that the walls are built with moisture in them from the lumber, since it is not kiln dried.
    OSB acts like a sponge to moisture, and can swell to,twice it’s size in case of leaks: hence the housewrap
    Unfortunately, the people living in the house creat moisture from living (cooking, showers, even breathing puts moisture in the air. the moisture travels through the sheetrock into the walls, and can’t get out because of the housewrap.

    There is a high potential for mold being inside these walls. And, there is nothing visible from either the exterior of the house, or the interior to tell you that there is a problem. Some houses may be fine. others may not, and there is no way to tell other than have a mold inspector before you buy the house. And many people advertising themselves as mold inspectors seem to use bogus or ineffective techniques.
    The cost of fixing a house with mold in the walls?

    Yes, older houses have known problems too: you may need to replace plumbing and or wiring at some point. You need to take care with the paint since there is a high probability that there is lead paint under the current paint. If the siding is not wood, then it might be asbestos cement: that requires hazmat removal and residing. If the house had an oil furnace at some point in the past, there may be an old oil tank burried on the property, causing polution from leaking diesel fuel. So have the old house inspected for these problems. And get estimates for the fixes: you may need to go on to a different old house.

    But those old craftsmen and victorian houses were built solid. If a house has been standing for 75 – 100 years and has no problems that can be detected, then their are no serious problems. With proper maintenance, the house will still be there 100 years from now. If there are problems, they are fixable, and the cost estimates are easy to get since those are common problems.

    And those old houses are very desireable today: just look at all the new houses that are built in more-or-less craftsman style. Unfortunately the new houses never have the character and charm and craftsmanship of the old houses. If they did, they would cost twice as much to build.

  4. John K.

    As with everything in RE, it depends. I also heard the standard 20% premium said over and over and fought my wife on looking at new. Turns out in my location, it was about a 20% price cut under an older home. Now, I did have to put in the backyard, but even with that, I’m about break even on a house that is exactly the way I want it. The older house, I would have had to do some serious remodeling to get there. Never mind the savings in maintenance because it’s new and the energy efficiency gains. Throw in all the home automation built in, really nice functional layout, and other modern design options that were incorporated, and I’m well ahead of the game. This was repeated by everyone in my neighborhood that looked at older houses as well.

  5. Joe C.

    I think a brand new home as a rental is ideal. The fact that you receive years of maintenance free rent is quite appealing. The key is to make the numbers work and find a builder that will offer a discount for investors. If property is retailing for 160 per sf and you can find a builder for 140 per sf, then it’s a no brainer. Every market varies and some builders are hungrier than others, but definitely worth exploring.

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