If you're on the hunt for your next real estate investment, you may be wondering if the cost to build a custom home is worth it as compared to buying an existing house. Ground-up construction and custom-built homes can be a worthwhile investment, especially in the right market, but it may not be the best move for everyone. Continue reading to learn how much it costs to build a custom home to determine if it's a good fit for your next investment property.
What is a custom home?
A custom-home build is a new-construction house that is built where an existing home is torn down, on a vacant lot, or on an undeveloped piece of real estate. This new custom home can take the form of any house of any square footage, from tiny homes on up to a large single-family home or even a mansion. When taking this approach, you will literally be designing the build from scratch, which means a lot of time spent with an architect, general contractor, and interior designer. This process can be both time intensive and involve higher costs than purchasing an existing home, depending on the design elements and finishes, but will result in an on-trend new home with loads of curb appeal and minimal upkeep for years to come.
How much does a custom home cost?
The cost to build a custom home can obviously vary by square footage, building material selected, and even location within the U.S. But as a starting point, the average cost to build a house can fall between $100 - $200 per sq.ft according to Home Advisor (NYSE: ANGI). This estimate does include labor, which is nearly half of the total cost or around 40% of the total budget.
What isn't included is impact fees, land cost, or building permits, which will be in addition to the final cost. You should also calculate overage for unexpected costs that will inevitably pop up for all investment projects, including a custom build. You will probably want to hire a custom builder because they will be more familiar with the ins and outs of new construction more so than a general contractor who is used to working on already built homes.
Custom vs. new
New homes are appealing to investors because of their lower maintenance costs, floor plans that appeal to modern-day buyers, and upgraded features that can be included to improve the quality of the home from the start. But it's important for investors to keep in mind that new homes don't necessarily mean custom homes.
If the goal of ground-up construction is having a new home with decreased maintenance (in the short term), and you don't necessarily need the design features or customizability of a custom- built home, you might consider purchasing a house in a planned-development community.
By purchasing a home this way, you'll save an average of 15% on the construction cost compared to a similar house from a custom homebuilder. When opting for this route, you will choose a floor plan from a few different layouts and in most cases get a few choices on interior finish details, like the look of the granite countertops or paint color, but will be limited on much of the other design aspects. In many cases, this new house, not a custom home, will fit most investors' needs just fine since you aren't looking to build your personal dream home.
Is a custom home worth it for investors?
Considering the median existing-home price in March 2021 was $329,100 according to the National Association of Realtors, and the average cost to build a new house is $299,069, the cost to build a custom home isn't far off from the cost to buy an existing property.
A custom build is best suited for investors who are confident in their design skills and believe building a unique home in the area will appeal to more buyers or be used for the purpose of renting it as a vacation rental. This model can work extremely well for highly sought-after areas. Having a custom-designed home such as a cabin in the woods, A-frame or chalet near a ski town, or eco-chic villa on the beach may actually perform better and pay off handsomely if done well.
If electing for a true custom build, you'll need to secure a construction loan, which has a higher interest rate and may require a large down payment because it's considered riskier. Make sure to do your due diligence ahead of time and get costs written out before hiring an architect or custom builder. When well designed, new homes have distinct advantages for an investor, including marketability, minimal maintenance, and reduced holding costs, but they do have financing considerations and extended timelines during the build-out. Your first step should be to determine the goal for your investment, which in turn will guide your decision as to whether a custom, new, or existing home is the best option for your investment.