In recent years, there has been much debate in the real estate investment property financing industry –invest in existing real estate or turn to the appealing option of ground up construction? Both have their own pros and cons, depending on what your clients needs and budget are, so it’s important to take their time with this process.
Here are a few things for your clients to think about when deciding about investing in an existing home or a new build:
Before breaking ground on any construction, investors must make significant cash outlays. Investors pay for feasibility studies, legal fees, zoning applications, and architectural designs, among other costs, before even receiving municipal approval. In the end, ground up construction can be a very lucrative type of investment if planned accordingly. New construction homes generally sell for a higher dollar amount than existing homes. The age of construction is an important part of valuing a property and new construction homes are generally built with better materials than some older homes that are on the market.
One of the biggest drawbacks of a new home build for many investors is the length of time it takes to complete. Even under the best of circumstances, construction timelines can be unreliable, and this means investors could end up spending a couple years on a project before generating any income, which can cause cash flow issues. Investing in an existing home is much quicker; in fact, in the current market, investors need to make pretty fast decisions and have a pre-approval for their loan ready to go so they can make an offer when they find a property they want to move forward with.
Ground up construction projects offer maximum flexibility because they can be designed to the investor’s unique visions. A vacant parcel represents a blank canvas. This flexibility appeals to many real estate investors, as it allows them to align their unique vision with the land’s highest and best use. Depending on when an existing home was built or renovated, you could run into structural issues or building materials being outdated.
Ground up construction requires investors to have a ton of experience to successfully execute. Developers need to understand and supervise tasks related to commercial financing, municipal zoning, construction, design, and accounting, among others. While purchasing an existing property still requires a solid plan and knowledge, it is typically easier to navigate than ground up construction.
When it comes to choosing between an existing home vs. a new construction option, there is no one right answer. Every investor approaches the process with a unique set of knowledge and experience. However, every investor should do research and make sure their budget and credit are all they can be before getting started in their next real estate investment journey.
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