01
BLOGS
ALL BLOGS
August 22nd, 2019

Should Investors Build New Or Renovate Existing Homes?

Real estate investors are studying the market and debating whether it’s better to renovate or build a new home. While the numbers in specific real estate markets will differ, the overarching trend saw home prices stall in the second half of 2018. After sellers enjoyed several months of high home prices due to an inventory shortage, buyers are now a bit more reluctant to purchase, pushing sellers to keep prices lower than 18 to 24-months-ago.

Given the pricing shift, investors are now questioning if it’s more profitable to renovate or build new. One of the most important factors for investors to do is make a shift in their demands as the market changes. In some markets, home pricing does make new build construction attractive, and at times, more profitable in the long-term.

Challenges With New Construction As An Investor

Before diving into a ground-up construction process, consider the challenges that comes with new builds as an investor.

Construction Time

Build time in some markets can take up to a year. If you’re planning a multi-unit structure like condos or apartments, the construction timeline may stretch two years or more. While you build, there is no rental incomes. As the investor, you take on all costs with no cash flow during construction. Crunch the numbers and be sure you can afford the build in the short-term.

Changing Market

Consider the changes we’ve seen in the real estate market over the past two years. We’ve gone from a seller’s paradise to a stagnant flow and now, in some markets, buyers are in control. A lot can happen while you build. Don’t bank on your current real estate market to still be in effect when it’s time to rent or sell your new-build project. Do you have enough in savings to support the units or home being on the market for months following construction?

Cash On Hand

Unlike purchasing existing properties, building new requires a significant amount of cash up front. From the down payment for land to the cost of building materials and labor, you’ll need plenty of cash on hand. For seasoned investors, the upfront cost of new builds may be more achievable.

As you consider if it’s better to renovate or build a new home, review your portfolio. Do you have enough properties to support a positive cash flow throughout the building and renter or seller search? If not, you may consider renovating an existing property.

As the market shifts, there may be a time when building new tops renovating in most markets, but with so many vacant properties on the market today, it’s worth combing through what exists and considering how you can improve it. Real estate investors don’t have to build to find deals that can quickly create a positive cash flow. Expand your portfolio by renovating existing properties, and when the time of new-build emerges, you’ll be ready.