When discussing real estate investments, the typical image that comes to mind is a 'fixer-upper.' It's somewhat uncommon for investors to consider purchasing new construction homes as additions to their portfolios. However, this investment approach could be a savvy financial move, capable of yielding substantial returns when executed appropriately.
The advantages, such as state-of-the-art designs, advanced features, and potentially higher value appreciation, are plentiful. However, like any investment, it comes with its set of considerations to ponder before getting started. Regardless of your experience level in real estate investment - whether you're a seasoned veteran or a newcomer - understanding the pros and cons of investing in new construction homes will aid you in making an informed and reasonable decision.
Pros of Investing in New Construction Homes
To start with, new construction homes often have the potential for quick value appreciation. According to a Federal Housing Finance Agency (FHFA) report, new properties tend to appreciate faster than older ones.
For instance, a new build with its modern open-plan design, upgraded smart home technology, and top-of-the-line kitchen appliances might see its value increase by as much as 5-7% per year, compared to a 3-5% appreciation for older homes. This rapid value appreciation could lead to a hefty return on investment for future-focused buyers planning to hold for a while.
Finding renters can often be easier for new construction homes. Many families that are waiting to get into their build are often interested in renting in the neighborhood ahead of time. Additionally, modern features and amenities are highly attractive to renters and are not usually matched by older construction. Less vacancy means a better return.
Moreover, new construction homes offer an unmatched level of customization. Imagine being able to choose the type of hardwood for your floors, the style of your kitchen cabinets, or even the layout of your master suite. Such personalized features can not only enhance your living experience but also add to the home's resale value. A report from the National Association of Realtors (NAR) suggests homes with custom features may fetch up to a 5% premium on resale compared to standard properties.
Finally, new construction homes typically meet or exceed the latest energy-efficiency standards. For instance, a home built to the 2023 energy standards can be 30% more energy efficient than one built just ten years earlier, according to the U.S. Department of Energy. This means lower energy bills and a smaller carbon footprint, making these homes appealing for environmentally conscious buyers and those looking to save on long-term utility costs.
Cons of Investing in New Construction Homes
While new construction homes bring a host of advantages, it's important to also consider the potential drawbacks that could accompany such investments.
The first consideration is the higher initial cost. On average, new construction homes can be about 20% more expensive than comparable older homes, as reported by the National Association of Home Builders. The inclusion of modern designs, premium appliances, and cutting-edge amenities drives the cost higher than a pre-existing home. Many investors perform a cost-benefit analysis on the property to determine if the anticipated return can justify the higher upfront costs.
Delays in construction are another potential downside to consider. For instance, the U.S. Census Bureau reported in 2022 that building a new construction home takes roughly eight months. Unforeseen issues, ranging from inclement weather to labor shortages, can push back completion dates.
There are also the HOA and investor constraints to consider. Some HOAs and builders limit the percentages of homes that can be purchased by non-occupant residents. This is done to stabilize the community and establish healthy long-term growth. A NewHomesMate expert can help you determine what communities are open to real estate investors.
Lastly, location constraints could pose a risk. New construction homes are often situated in up-and-coming neighborhoods, which might lack established amenities such as schools, hospitals, and shopping centers. While these neighborhoods may hold the promise of significant growth and development, there's an inherent uncertainty associated with their trajectory.
Well, should you invest in new construction homes? Unfortunately, this isn’t a simple “Yes” or “No” answer. However, if the rental rates support it, it should absolutely be something to consider if you are already looking at investment properties. All real estate is local, and our New Home Experts have helped investors buy hundreds of homes in new communities, so if you are interested in learning more, we are here to help.