Deciding whether to buy a resale property or build new is an ongoing discussion within the real estate investor community. There are benefits and drawbacks to each approach. On a net basis, building new can be cheaper but presents additional costs and factors to consider.
Here's an overview of the costs of building a house versus buying, the pros and cons of each approach, and whether real estate investors should adjust their acquisition approach.
Cost of building vs. buying a house
So many factors go into the cost of a house. Just a few of these influential factors are location, size, and finishes.
The average cost to build a single-family home was at $248,000 in 2020, whereas the average resale home in America was $256,663 as of fall 2020. According to Realtor.com, the average cost per square foot for single-family homes sat at $123. And according to the National Association of Home Builders (NAHB), the average cost to build per square foot in 2019 was $114.
All things being equal, it's slightly cheaper to build than purchase an existing house. That said, some additional costs associated with a new home must also be factored into your budget. Further, if you're doing some or all of the build yourself, costs will decrease substantially. Similarly, if you find better build options such as a prefab home, tiny home, or something similar, you also may be able to reduce your costs.
For new builds, you have to factor in the costs of items builders may not include, such as air conditioning, landscaping, eavestroughs, and more. Further, resale may also carry its own additional costs, such as renovations. Taxes should also be factored in when considering each approach.
Construction cost: New home
Despite being slightly cheaper, some aspects of a new build may turn investors off. These include delays, additional costs, and timing.
Here are some of the most critical factors when considering building a house versus buying:
- Costs: Additional costs can add up. Many homebuilders won’t include the costs of a paved driveway, landscaping, sodding, eavestroughs, or air conditioning, to name only a few items, in their price to sellers. If you're considering a new-construction home, be sure to ask these questions of your homebuilder to ensure you’ve budgeted accurately. Closing costs will also be different for a new build versus a resale home, so be sure to ask your lawyer about this.
- Timing: This can work in your favor if you have a long time horizon, but the downside to building a new-construction home is that it takes time. A builder typically won’t begin until they’ve signed legal paperwork to sell the property, after which they can begin the construction process, which can take anywhere between six to 18 months.