By Linda Williams
Buying an investment property is a financial decision that shouldn’t be taken lightly. If you’re interested in earning a passive income through investment properties, you may feel conflicted between building a new house or purchasing an already-existing property on the market.
Many homeowners spend a considerable amount of time and energy either designing their dream home or searching for the home that ticks off their wishlist’s check boxes before they sign a contract. As an investor, however, you’ll need to look beyond design and consider crucial factors such as price, location, returns, possible risks, market trends, and property taxes.
Before purchasing an investment property, check out this guide to understand each of the given options’ pros and cons. You’ll also learn everything you need to know to make an informed investment decision.
Pros of building a new house
When building your house, you can customize it to meet your expectations as long as it complies with your budget range. A wide variety of stock and custom house plans grants potential homeowners the freedom to build a house according to their own specifications.
For instance, you can customize your home to the desired interior and exterior layouts and tweak other features to meet your requirements.
Choosing to build your own home over purchasing a property on the market may also offer you tax benefits. For instance, an investment property owner may be able to claim depreciation in the future and attract high-paying clients who will pay more for advanced features that define a new wave of home design.
Similarly, building a house yourself eliminates the stress related to repairs and renovations. Because every lighting fixture, floorboard, and kitchen tile is purchased brand-new in the construction of a custom home, homeowners can rest assured that their property will withstand years of renter use. Another notable advantage of building your own investment property house is that it instills a more profound sense of ownership than buying an existing home does—making the purchasing process all the more fulfilling.
Another benefit worth mentioning is that newer homes are required to abide by the current building codes, making them energy-efficient and technologically sophisticated. With state-of-the-art appliances and security systems installed, your resale value will spike.
Downsides of building a new house
According to the U.S Census Bureau, building a new house from the ground up takes at least seven months. To most, this seven-to-eight-month window is a significant amount of time to invest in your investment property. Unfortunately, this average building time is often the best-case scenario. If a home building team faces human error, natural disaster, or bad weather, it may take longer for the property to start generating income. Additionally, with the extended building period, unexpected cost increases could stretch your budget.
Along with the time commitment, building a house from scratch involves focused decision-making, which can be overwhelming, especially during your first project. For instance, you may need to plot out the land, choose materials such as flooring and backsplash, create a floor plan, and decide on colors and finishes. Handpicking paint colors and wall trim can consume a lot of your time, especially if you’re managing a team of contractors along the way.
Another common disadvantage of building your house is its location. Many new property developments aren’t located in metropolitan cities. If your property doesn’t reside in a coveted area with well-reviewed restaurants, active nightlife, or outdoor recreation opportunities, it could lower the house’s value.
Pros of buying a house on the market
The most significant advantage of buying an already-existing property is that it starts generating returns almost immediately. In many areas, the property market is considered stable, so you’re guaranteed a fixed return on investment.
Because you receive a passive income from paying tenants, this source of income is guaranteed and won’t fluctuate in response to market trends or crashes. If the property’s rent exceeds the loan payments, you may not need to allocate extra money for mortgage payments. With extra funds for mortgage costs, a homeowner may be left with surplus cash to cover additional property costs.
Buying a house also allows you to deduct property expenses such as council rates, property maintenance, and other related costs required to maintain your rental property. Whereas, purchasing already-existing property grants you, as the homeowner, the freedom to compare prices and rates to score the best deal possible.
For time efficiency, purchasing a home on the market is much quicker than building one from the ground up. The home buying process is said to take about three months, a length of time that pales in comparison to the seven-month building process.
Downsides of buying a house on the market
While building your house is often stressful, you can customize it the way you want. On the contrary, when you buy an existing property, you may not satisfy every must-have—meaning you’ll have to compromise a few items on your wishlist.
While settling for second best may be the best savings-centric approach, compromising on too many must-haves can lead to buyer’s remorse or even lower the value of your property. As an investor, you could also face stiff competition, especially if you’re eyeing a sought-after property in the area.
If you decide to invest in a fixer-upper, remember that older homes can be a turn-off for potential buyers, especially those buyers in the process of building a family. An old house could require extensive renovations to meet current standards.
Depending on the number of repairs required and the extent of damage inflicted, you may spend more money on an existing property than you would on building a new home. Additionally, a property located in a less pleasant neighborhood will take longer to attract tenants, which can affect its value and income generated.
Whether you intend to build a home or buy an established house, remember that each option lends to a unique set of benefits and drawbacks. The decision you make will depend purely on your budget limitations and the desired return on investment. Therefore, assess your situation, weigh the options, and make an informed decision.