In real estate, you have two main options when it comes to buildings: You can purchase something existing, or buy space to construct your own.
This is not an easy choice to make, as there are a lot of factors involved. The building process, for instance, can be challenging, but in some cases, it’s the better option for creating a unique vision or avoiding hidden issues with a structure. On the other hand, it may be more cost-effective to purchase an existing property and renovate it to be more to your liking.
To help you make the right choice for you or your project, a panel of Forbes Real Estate Council members share some important things to consider when deciding on new construction versus renovation. Here are some questions to ask yourself while making your decision:
1. How Do I Intend To Use The Property?
Not only is this a question that seasoned professionals get asked frequently, it’s one that many of us struggle with individually. My process always comes down to how and more importantly when I intend to use the asset. Another key thing to remember is your time. It is finite. Many times I have chosen existing over a new build simply because I could not spend the time to build and supervise. - Blake Plumley, Capital Pursuits LLC
2. What Are Existing Real Estate Prices Like In My Chosen Location?
Constructing a building is time-consuming and fraught with potential problems—especially for the inexperienced. Buying an existing structure can be quick, much simpler, and in dense areas may be the only option. The time to build is when land is readily available and the cost of construction is lower than comparable existing structures. - Jeremy Brandt, Fast Home Offer
3. What’s Behind The Walls?
I am a big fan of new construction. One of the many reasons is because you can see everything that is going into your new home. Most builders offer an “open wall” walkthrough so you know exactly where electrical wires or plumbing is located. This is a huge advantage if you ever decide to reshape your home. With existing buildings, you really don’t know what is behind the wall until you open it up. – Katie Brown, Downtown Katie Brown, Realtor
4. How Readily Available Are My City’s Inspectors And Contractors?
If you build or buy in a city with inefficient planning and development procedures, you could face delays. City fire inspectors and elevator inspectors could be fully booked so they can’t come to your property. If there are labor shortages, consider the extra costs of hiring contractors to build or maintain the property. We had a client hire and move contractors from Los Angeles to San Francisco. - Chuck Hattemer, Onerent
5. What Is My Appetite For Risk?
Since the cost of construction has increased tremendously in the past 20 years, it is cheaper to buy an already built building compared to building a new one. However, building a new building bears higher risks compared to purchasing an existing building—from construction costs to permits and unproven rents. Thus, returns on an existing building are in many cases lower and less risky. - Ellie Perlman, Blue Lake Capital LLC
6. What Is My Local Political Climate Like?
When it comes to new construction, investors and developers must know the local ordinances and restrictions in order to acquire permits and the local politics that might affect receiving approvals in a timely manner. I’ve seen too many people waste years and money trying to get a project off the ground because they didn’t know the local idiosyncrasies. - Lee Kiser, Kiser Group
7. What Does An ALTA Land Survey Professional Say?
Some of the most important considerations for deciding between new construction or acquisition of an existing building can be hidden from plain sight, such as encumbrances, encroachments, easements, underground utilities and compliance with setbacks. An American Land Title Association land survey is a professional study that can reveal material benefits or challenges for each scenario. - Bryan McLaren, Zoned Properties, Inc.
8. Do I Have Prior Building Experience?
It’s never as easy as it looks when it comes to building a new property. Unless you have decided to make a career out of building properties, settle for an already built one. When building yourself, you need a lot of experience in dealing with contractors, vendors, architects, expediters and city inspectors. I strongly suggest you stay away from building yourself. It really is a major headache. – Evi Kokalari-Angelakis, Golden Key Realty Group
9. How Much Will It Really Cost To Build?
Make sure you research all the expenses associated with constructing, including running utility lines, government permits, carrying cost/delays due to permits, etc. Development requires a vastly different budget and skill set than purchasing an existing building, even one that may require extensive capital or tenant improvements. – Catherine Kuo, Elite Homes | Christie’s International Real Estate
10. How Long Will It Take To Recoup My Investment?
Developing comes with risks, including high predevelopment costs, not receiving required entitlements and not meeting lease-up velocity. Also, cash distributions may take three-plus years and the all-in basis could be lower. It’s not impossible, however, to find finished deals below replacement cost, which generate cash flow immediately. Both scenarios must be appropriately underwritten. – Ben Colonomos, PointOne Holdings LLC
11. Can You Afford To Wait?
Consider building will take time and dates and schedules can change along the way. One delay out of your control can disrupt the entire timeline. The benefit to building is you will be able to build a property custom to your situation, it is just important to make sure you can operate without this building for however long it takes. – Joshua Lybolt, Lifstyl Real Estate