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14 min read

S2 Ep30: New Construction vs. Infill Investing (August 5, 2022)

Aug 5, 2022 8:00:00 AM

What kind of investment property are you looking for? This week, Chris shares the pros and cons of buying into a new construction neighborhood versus investing in an older, renovated property.  What are the costs, and where are the payoffs? Listen up to find out! 


 

Full Transcript

Hey guys, Chris Clothier here with another episode of The Grind Podcast. This week, we're talking about a topic for real estate investors who are looking to buy that investment property far from home. Pros and cons of buying a new property, newly constructed from the ground up, versus buying a property that was renovated.

At the same time, we're going to talk a little bit to those investors who are looking to do it themselves, what are the pros and cons. If you're looking to renovate an older property, maybe in the middle of town, versus buying a brand new one in an outside neighborhood as an investment. What are the ups and downs of each of these strategies. 

The reality is that they both come with costs and advantages. There's lots of reasons to do [either] of them. So, I thought we'd take a moment here to go through a few of them. 

Let's start with new construction. I would say the biggest pro of new construction is the fact that—if done right and purchased right—you can put cap ex off for the first decade. Maybe even a little bit longer. All of this depends on how the property was built by the builder. Do you trust the person that built the home? Did they cut corners? Did they go high-end on the quality?

But, for the most part, when you're looking at a new property, everything about it is new. So, components should be in working order. You should have everything up to code, from electric and wiring to the materials used. There's a lot of codification that goes into building a new house. New homes that are inspected have to meet those codes. That's a major positive to looking to buy a home that was newly constructed. 

Some of the downside to that exact same thing, though, is that with all of those new materials come new material cost. The cost of the dirt, preparing the dirt. You're paying for the concrete, wood, every piece of plastic and wire and component that goes into the property. And you pay for all of it at today's pricing. The benefit, obviously, of buying something that's older is that you oftentimes are able to buy at yesterday's prices. Meaning that, when you're buying a home that needs needs a lot of renovation, you're not paying for the dirt again. You're not paying for the concrete again. Oftentimes you're not paying for many of the pieces of the home itself. You've got some renovation work to do, but you're not having to start back from scratch.

The new builds generally use brand new materials, so therefore that comes at, what we'll call that added cost. But it also comes with added peace of mind.

With that cost, you can generally feel like you're not going to have any cap ex expenses, as I said, for the first decade. If you have some form of a warranty from the home builder, then you end up with a warrantied house, for some period of time anyway. Should anything come up, at least it's covered by the builder. 

So, I would say the biggest pros that I know of are the fact that everything should be new and you should have a predictable cost structure, for a short period of time anyway. We all know that, if you're going to rent a property, residents are going to do what they're going to do to a property. Treat your residents right and they'll treat your property right. Not everyone buys into that philosophy. That being said, outside of any damage caused by a renter, you should able to expect a relatively low cost of ownership for a few years with a new construction house. 

Now, the downside is that you're often paying for that on the front end. So, as I said earlier, you're paying for that new property, that new area. Everything is new, new new. Believe me, nothing is cheap, cheap, cheap. Everything is high priced today. But with that higher price—especially if, all things being equal, you're using financing. Let's just say a 30-year mortgage, as an example. If you use a 30-year mortgage to finance your property, you're able to spread that cost out over the next 30 years. That's something to be aware of. It mitigates some of what you lose by buying brand new, because you're paying such a high price. You do get to leverage that out over 30 years. 

Those are some of the biggest advantages and disadvantages I see with buying something brand new. You get a warranty, but you're paying full price at today's pricing. But everything should be new and reliable. It's that Catch-22. You're getting, in most cases, what you have paid for. 

On the flip side of that, we look at a house that is 25, 35 years old. Newly renovated. What is it going to be like? Well, right off the bat, it should be less expensive. We're talking from a 60,000 foot view here. You get narrowed in scope, down to individual properties, and some of this might not always pan out the way I'm saying it here.

You're thinking of a renovated house as, the dirt is paid for, the concrete is paid for. How was the building framed up? It's paid for. The shingles? Paid for. The AC? Paid for.

Paid for once, anyway. Now you're going to come back through with things that need to be renovated and replaced. Well, if that roof needs to be replaced, it's discounted when you're buying it. If the AC doesn't work, it should be discounted when you're buying it.

So, one way or the other, the money for that should be built into the deal. When all is said and done, you should be able to own that property for less than what you would have paid for a new property. Again, you can leverage this out over 30 years. You're able to take advantage of a 30-year mortgage to be able to drive your holding costs down. If it costs you less to get involved, that's a good thing. 

Some people think brand new houses don't have the same value as an older house because of—this is kind of silly, but it's true—trees and shrubbery and that kind of thing. A lot of new neighborhoods are flattened down, and they build these houses up, and they throw a tree in the yard that's six feet tall. You have to wait 30 years for it to grow to full maturity. You go by houses that need to be renovated in an urban downtown area, and you've got big trees. Lots of mature shrubbery. Different things people are looking for. It's so subjective, but you never know what you're going to find with new and old. 

The same thing goes with schools. A lot of times, new houses are built in the path of progress,  but that doesn't always come with the same services. Are there new schools out there? I don't know. That should be something that's looked at. Can you get a house and renovate it close to a school that you like? That would certainly be an advantage over a new house with a neighborhood or school you don't know about. 

There's a lot to consider when considering buying a new construction or buying a renovated home. For those that are doing it yourself this a really big, contentious point. When you're buying new construction, oftentimes you can put a downpayment in, something small. Let's say they're going to take 3-4 months to finish the house. Well, it doesn't cost you anything else during that 3-4 months. You've put your downpayment in. When you're ready to close, now your bank gets involved and brings a majority of the money to the closing. That's really the only time you're getting involved. Perhaps you need to make some choices on finishes or something along those lines, but there's not really a lot of other work for you to be doing.

But if it's a rehab you're doing yourself, man that's a full-time job! That becomes: I've got to do everything, start to finish. If you can do that and you're going to build something new, maybe you should be a home builder to begin with. If you know how to build a house, knock yourself out.

If you want to do the renovation yourself, again, that's on you. For me, the advantages of a renovated home versus new construction come down a lot of times to: how much time do I have? How much money do I want to spend? What location the house is in. I also want to look back at the rest of my portfolio. I've got a relatively young portfolio, but I do have some older houses in there. What's really funny is that I can't ever pick which one is going to perform better this year versus next year. I could have a brand new house that performs fantastic. One of the oldest houses on there, I did the renovation five years ago. A resident just loves it, takes care of it, and stays for another five years. You never know what's going to attract that long-term resident. 

That brings us to the final point. How much demand is there for where you're going? That's one of the things to be watching for with new builds. Is there a lot of demand? Is it near other developments? Is it near major roadways? Is it near grocery stores and shopping and public transportation? Because it needs to be near those things in order to create a thriving neighborhood and community. I don't know that you don't want to be the first. There's nothing wrong with being the first out into a neighborhood, especially if it's a rental property. But if there's not a lot of traffic, how long is it going to take to get the property rented? Those are the questions you need to ask. 

I love buying new builds. As a company, we build 100 houses a year. I think they're fantastic. But we're looking at all these things before you are as an investor. We're looking at what the demand is going to be, where's the path of progress. How are the schools? The same thing with every house that we buy as an infill renovation. We're always looking around to see how are these houses doing? How are they going to perform? What's better for us? What's the demand from our investors? I think we found a nice sweet spot: about 10% of what we do is build new construction.

When investors are coming to us, they are usually buying new construction to fill in their portfolio, to round it out with something new versus something old that's already in there. I have a lot of investors that like to do both. They'll buy something brand new and something old.

Mix them together, and you've got a nice cost-average portfolio. 

There are pros and cons to both. Those are a few things to look at if you're an investor trying to figure out which one [you] want to buy or how do [you] want to build out [your] portfolio. My advice is that you probably want a bit of both. Doesn't really matter what you start with. 

All right, guys. That was a little faster than normal. Hopefully you enjoyed the podcast and got a little bit out of that. Until we get the chance to meet again, be sure if you have questions to send them to me. If you want to interact with me on Bigger Pockets or on email or on our REI Nation Facebook Group, jump in there. I'm happy to connect with everybody. Commit to The Grind, we'll talk to you soon.  

 

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