Building A House VS Buying An Old House: Which Is Better?

When you look at the housing market today, there are so many old dated homes that require so much money to renovate. It kind of makes you think, would it be better to just build a brand new house from scratch? New construction homes seem pretty great compared to a lot of the older homes that sell for a similar price. I know so many people, and really myself included, who have purchased old homes and within the first week had to deal with all these maintenance issues. Especially in LA, a lot of the more starter homes are over 50 years old by this point. So they're likely going to have a ton of maintenance issues in the coming years. Whereas with a brand new house, unless the builder is shady, you shouldn't really have any issues in the first five years and pretty minimal issues within the first ten. But there are some disadvantages to building a new construction house. And honestly, just less information about how to do it. How much are the permits? Can you finance it? How much do you need to be able to buy a house versus build a house? I decided to talk to a builder today to find out all the things they don't tell you before building a new construction house so we can really see which is the better route for most people. So these are a few things you need to know if you're looking into embarking on the process of building new construction, specifically in LA. Also, life update, I am now a licensed real estate agent in LA. So if you are looking to buy or sell, I'll have my info down below if you want to learn more about buying or selling in LA. Let's start with the biggest benefit of building a new construction house. You can actually get more for your money this way. But the major con of building new construction is you need more money up front to build it than you would buying a traditional house. When buying an existing house, you can put down as low as 3.5%. So on a $500,000 house, that's only $17,500. There would also be some closing costs. So the total would be roughly $22,000 to get into home ownership, putting a really low amount down. Now the cost to build a comparable new construction house would be less overall, but more money needed up front. Let's say this is in Dallas. And to buy an older home, it would be $500,000 to get 1,500 square feet. Well, to build that same exact house brand new would only cost $415,000. In this case, the land would be $100,000. The actual home construction would only be $240,000. Architectural fees would be $16,000. Permits, $20,000. Utility connections would be around $20,000. And landscaping would also be $20,000. And when the builder went to sell this house, they could list it for $500,000. They'd likely pay about $13,000 to the buyer's real estate agent, in the end profiting $72,000 with a profit margin of 14%. So this is why people go through the hassle of building. If done right and in a timely manner, you can either sell it for a profit or refinance it into a regular mortgage and live in the house, having saved, you know, 14% on the total cost because you went through the hassle of building. But like I said, you need more upfront cash to do this typically. So here's how much you would need upfront in this case. So typically you can finance the construction and the landscaping, but most of the other costs you would usually need to pay upfront. So the land, architectural fees, permits, and utilities, that all totals to $156,000. You would also need to pay interest for the construction loan while the project is being completed. If it took nine months to complete this project, that would be about $10,000 in interest that you would have to pay upfront as well. So let's talk about construction loans because I kind of breezed over that and they are quite different than a traditional mortgage. Construction loans usually have a higher interest rate than a traditional mortgage, usually 2 to 3% higher. Today, traditional mortgages are around 7% and with the Joshua Tree property, I'm in the process actually of getting a construction loan. They've offer us 8.5%. It could be 9% when we lock it in, who really knows, but they are a little bit higher because they are more risky. Construction loan payments are quite different from a regular mortgage as well because you're only paying interest on the amount you've taken out so far. So you can see in that example I used, the first three months, the interest payment is really low because they've only taken out $50,000, $80,000, but by month nine, they've taken out the full $200,000. So the interest payment is much higher at the end. You can see how if you get a delay at the end of your project, that's really going to eat into the profits. So we've looked at some hypothetical examples, but here's one that Peter actually worked on. The total cost for everything was 3.6 million. That's the lot, construction, utilities, and it sold for 4.625 million. And here's a look at the upfront cash they needed. They put down about $690,000. Connecting utilities back to the house was $15,000 and the permit costs were $20,000. And utility costs are typically higher than this for new construction, but they bought a lot that had an existing house and utilities on it. So reconnecting them later was less expensive. And this is really common in LA because there aren't a lot of completely empty lots and it also saves you time and money at the end of the project. So a lot of the time, it's better to just find a house that you can demo. Exactly. Because the cost of adding utilities, connecting them, that'll like be so much usually. There's the cost that is involved and also there is time. So all the departments, let's say SoCal Gas or DWP, they all take so much time to, you know, approve you. So for those, you know, we prefer to get something that's already in there. And then there was also the cost to carry this construction loan. It took three months to get the permit and then a year and eight months for the construction. So this was about a two-year process. After all the construction expenses, they made $1.25 million. Don't forget though, there are realtor fees, escrow fees, all of that. At a $4 million sale price, that's about $167,000, making the net profit just about a million dollars before paying taxes on any of this. So this is why developers build new houses because you can make a good profit sometimes. But it definitely is risky. It's high risk, high reward. I've noticed there are two main risks with new construction. The first one being delays on the project. If it's really rainy that year, holidays can cause delays with inspections. Utility companies can delay things at the end of the project. And the longer it takes to build, the more you're paying in interest along the way. You don't know how to do this. And if you don't finish it on time, then the carry cost is so high that it will eat you at the end of the project. So it's very important to go in with an open mind of knowing all of your finished material, knowing what city you're working in. Because for instance, city of Beverly Hills that we're working in, inspections are usually about a week and a half to two weeks out. So if we request an inspection today, it would be for sometime early next week. So you have to know those timings. And also, the window frames are about four hours. So you're going to be there the whole day. So you have to know what you're doing to make sure that you will pay off at the end. Otherwise, the carry cost is so high. Right, because most of the cost of the construction loan is at the end when you've taken it all out, right? You know, that's why construction is notorious for costing twice as much as you think it'll be and taking twice as long as you think. And with that interest rate being much higher at the end of a project, if you get delayed three months at the end of a project or you take a few extra months to sell, that can really eat into any profit. And if you have a slim margin, I mean, you could lose money on a project. That does happen to people. The other big risk is if there's a downturn in the housing market. If home prices start going down and you're not able to sell for what you thought, that could eat into any profit. But also if the housing market just slows down and it takes you an extra three months to sell, you're paying a lot of interest for those three months. So that can eat into any profit. So those are kind of the main risks are things getting delayed or the housing market obviously can be unpredictable. You know, you can make a lot, but there are definitely times where people lose money on new construction projects as well. So I don't want to make it sound like it's super easy and everybody makes money because it's actually quite risky. Some people make a lot of money, but some people don't. I want to say it's not that easy. You have to really know what you're doing because construction could be very costly. Yeah. And it's very time-consuming. So if you don't know how to do this and if you don't finish it on time, then the carry cost is so high that will eat you at the end of the project. So when does it make sense to build new construction? Basically, if you have a lot of cash and you want to take the risk or you want to build your own custom home. Because there is that benefit of building in a lot more equity. You know, that's why people build new construction at all. If you didn't make any money doing it, no one would do it. Also, if you want to end up living in the house, even if it's just for two years, then when you go to sell, you won't pay taxes on the first $250,000 because you actually lived in it. So when does it not make sense? Obviously, if you don't have a ton of upfront cash. You only have $100,000. It is probably better to just put that towards a down payment on a house and just get into a house because it's going to be pretty hard to build a new construction house, especially in Los Angeles. You wouldn't be able to do it for $100,000, maybe in a more rural area, but it is risky and there's all these costs along the way like utilities, permits, all of that. So usually, you know, for a first-time homebuyer, it does just make more sense to buy an old house. So that is a little look into the world of building new construction homes and why people do it. I wanted to make this video because I had no idea for the longest time that there was a financial benefit that if you do it right, you can make a profit. I always thought people just built custom homes because they wanted everything customized exactly how they want it, but the cost was much higher. There is that benefit, of course. You do get to pick everything exactly how you want it, but there's also the benefit that usually the cost to buy the land, do the construction, all of that, if you kind of figure it out yourself, it's less than if you go and buy a spec house that somebody else built. I think a big reason a lot of people don't do this is you do need the upfront cash, but also I think there's just less information out there about how to do it. It's less common than just buying an existing house. So there's a lot of unknowns and I've just been kind of wanting to uncover how it all works. And I plan to do that more as the Joshua Tree build gets going, which hopefully we get started with soon. I will share everything with that. Also, you guys, exciting announcement. I actually got my real estate license here in California. So if you are looking to buy or sell in Southern California, I'm mostly focusing on LA and the Palm Springs area because I know a lot about that area. So if you are interested or you just even want to start learning about the process of if you could buy, I'll put my email down below. But I hope that you guys have enjoyed this video about new construction houses. If any of you have gone through this process, please share with us down below things that you wish you knew before you did it. I would love to read that. I'm always trying to learn more about this and that's gonna be it. I'll see you guys in the next video. Bye.