Real estate investors are able to capitalize on a variety of investing strategies to grow their wealth. As a real estate investor, you can buy existing properties or build your own structures from the ground up to expand your portfolio. These methods can help you achieve the passive income you desire. Our team at Titan Funding in Boca Raton, Florida, will help you compare the pros and cons of investing in existing properties vs. ground-up construction so you understand the differences between these types of real estate investing strategies.
Pros of Investing in an Existing Property
There are some advantages for investors who put their money in an existing property.
Potential for Negotiation
Negotiating the final purchase price of an existing home is much easier when you’re buying an existing property. According to the National Association of Realtors, nearly 40% of sellers reduce the price of their homes at least once. This means that the price of the property could come down and that sellers may have this planned into their asking price.
Lower Purchase Price
You can typically get an existing property for less than you would pay to build a brand-new building. This is because you won’t have to purchase things such as a design from an architect or construction materials. Getting a loan for an existing property is also more straightforward, making the purchase process simple.
Established Neighborhood
An existing home is more likely to be in an established neighborhood with a history. This means that you know what to expect in terms of nearby amenities, schools, and the income level of people who live there. A developing area may not have statistics on education and may lack shopping facilities and job opportunities, making it riskier for investors.
Better Location Options
When you buy an existing property, you have more options when it comes to location. You can look in the best neighborhood, the least expensive one, or right downtown. Wherever there’s an existing property for sale, you can potentially buy. With ground-up construction, you’re often limited to where land is available.
Cons of Investing in an Existing Property
There are some disadvantages in buying an existing property that you might want to consider.
High Repair Costs
Fixing and flipping homes can be lucrative, but sometimes, the repair costs can add up. If you purchase an existing home that turns out to have major structural damage or other serious issues, it may take more money than you were expecting to fix up. On the same note, too many small repairs can reduce your profit margin, making a property cost more than it’s worth.
Market Fluctuations
Real estate market fluctuations can affect the value of an existing property more compared to a new construction. A new home tends to hold its value better than an older structure. Market fluctuations can happen for a variety of reasons, such as a major business closing.
Lower Rental Rates
Rental rates for existing property are lower compared to a new construction. A property that’s been used is less appealing to renters than a brand new structure. To stay competitive, landlords have to set the rates for existing properties lower than their new construction competitors.
Less Efficient
Most older homes are less energy efficient than their newly constructed counterparts. This is because the building materials available when some of these homes or structures were constructed weren’t made to be as efficient as they’re required today. Windows, appliances, and insulation in older homes won’t work as efficiently as what you’ll find in newer properties.
Pros of Investing in New Construction
There are some benefits of investing in ground-up construction that you might want to know.
Build To Suit
Ground-up construction allows you to build structures that will fill the need of the people, whether houses, apartments, retail spaces, or offices. Researching to identify gaps in real estate coverage before you build is the best way to grow your portfolio.
Instant Equity
You’ll realize instant equity once a new building is completed. The value of the land with a new structure will be much higher than the value of unimproved land. You can use this equity to help you refinance your ground-up construction loan into a mortgage.
Higher Appeal
New construction is more appealing to tenants and buyers. With a brand-new building, you can expect to attract a high-income bracket of potential renters or buyers who are willing to pay more for your real estate. This might mean that your property won’t sit on the market for long.
Construction Warranties
Your newly constructed building should come with a variety of construction warranties on parts and materials, covering you if anything is defective or of poor quality. Make sure you work with reputable contractors who provide and back warranties for their work.
Cons of Investing in New Construction
Before you invest in ground-up construction, there are some cons that you have to consider.
Timeline Delays
Usually, new construction comes with time delays that set the project back. When your construction timeline is delayed, it can cause a number of issues with future steps in the building process. This can be quite frustrating to investors on a deadline.
Cost Increases
Because of time delays, the costs of your building project can increase. This might happen because the price of materials goes up or you have to go with a more expensive contractor.
Location Restraints
New buildings can only be built on vacant land or an area with a structure that needs to be demolished. Therefore, new construction has location restraints that you may have to work around. For example, you most likely can’t build a new structure downtown because all the property in the area is occupied.
Unknown Market
With new construction, you’re building in an unknown market. This means that you don’t know who will live in the neighborhood or what type of businesses the area will attract.
Let Titan Funding Help You Meet Your Investing Goals
Investors who understand the market and have a clear strategy are more likely to succeed in the industry. As an investor, you can grow your real estate portfolio by investing in existing properties or building from the ground up as long as you know your goals and have a plan. Our team at Titan Funding in Boca Raton, Florida, can help you reach your investing goals. Contact us to learn more about your real estate investing options.
brown wooden building by Avel Chuklanov is licensed with Unsplash License