To Build or to Buy? Chose the Right Path for Your Income Property
We’re a big fan of building vacation rentals, and no, it’s not just because we have great home builders we can recommend.
Buying a cabin isn’t wrong: you can find great deals—in some markets. If you can’t find a good deal, you should consider building, so let’s look at some myths and realities regarding new construction.
#1 Building Is Too Expensive
Obviously, it’s expensive, but many people overestimate the cost of new construction. Often the cost is only 10-20% more than buying a 20-to-30-year-old house. Would you consider a new car if it only cost 10-20% more than something that had been around a while? Of course, you would.
Although the structure of a well-built house should stand the test of time, if you buy a house and just a few of the systems fail in the first few years of ownership, your costs will be similar to that of a new construction, with none of the upside.
With new construction, you don’t have to budget for a new roof, new HVAC, etc. for quite some time. Comparing new construction with the real estate market is like comparing apples to oranges, so you have to factor in the serviceability of the major components of a house to see how the numbers actually come out. System replacement and maintenance costs should always be budgeted for in older houses.
#2 Building Takes Too Long
There is some truth to this one, of course. A custom cabin could take a year to build, and you could buy one and be done with it. Nothing good happens fast, however, and we still believe it’s worth investing a little more time and effort in the front end.
Here’s why: You’re playing the long game when it comes to real estate.
We wouldn’t recommend you purchase a property for investment only for the short term just because you think the market is going to shoot up and you’re going to cash out rich. You’re purchasing an income stream, so it’s worthwhile to invest a little more time to make the
stream bigger. Custom vacation rental homes built specifically for guests will produce significantly more money than just buying a used cabin.
An additional warning to those buying a fixer-upper (We’ve been through many painful renovations ourselves): Renovations can take just as long as new construction (You wouldn’t think so, but it’s true). They also carry a lot more variables and more “Gee, I didn’t know there
was mold there” situations than new construction.
Don’t think you’re going to buy cheap, remodel cheap, and get it listed quickly. They say good, fast, or cheap, pick two, but with renovations, you’ll be lucky to pick one.
#3 Building Is Too Risky
All real estate (like life) carries inherent risk, and from experience, buying an older home is far riskier than new construction as far as knowing what you are getting.
You don’t get a glimpse into the walls when you buy a house, and there is little recourse against previous owners even if they didn’t disclose something they should have.
#1 New Construction Has Lower Utilities
One the highest monthly expenses for properties is their utility bills, and if you’re getting the occupancy levels you should, your cabin will be experiencing high utilities use.
Guests will crank the A/C down in the summer and the heat up in the winter (You can set limits, but don’t be cheap and upset your guests). The best defense against high bills is good insulation, windows, energy-efficient hot tubs, water heaters, and appliances.
#2 New Construction Lowers Your Insurance Cost
Insurance rates are dependent on many factors, but, generally speaking, new construction costs are significantly lower than older homes. This cost difference is due to several factors, including age of the roof, safer electrical systems, and plumbing systems.
We highly recommend getting a vacation-rental-specific insurance quote on any home you are looking to purchase before doing so.
#3 New Construction Lowers Your Maintenance Costs
Most houses are not designed for low maintenance. Whether they are built by a spec home builder or by an owner with oodles of money who doesn’t care how much maintenance costs, many houses on the market will take considerably more maintenance than a well-planned house.
When you design a home, you decide everything: what type of outdoor materials to use (How about stone and concrete, not wood!), what type of flooring to install (Say no to carpet), where to put your washer and dryer (basement level, exterior wall, if possible, for a shorter dryer duct run and less clogs). We even have a recommendation for what color shower trim is best to easily make it look clean, what style of door stops to use that will hold up and not leave you with holes in your drywall: everything just works smoother when you get to choose.
#4 New Construction Gives You a Chance to Customize
Customization is expensive and awkward to do after the fact. We’ve all been through houses where they added a feature as an afterthought, and it looks goofy. Adding new features later can also be very expensive.
For example, adding a hot tub could be very costly with the site preparation, running the electrical conduit, and getting a proper drain system in place—all of which would be significantly cheaper if planned for in the construction of the home.
And just as new construction gives you a chance to add what you want, it gives you a chance to eliminate what you don’t need for a vacation rental—like those walk-in closets and two-car garages.
#5 New Construction Gives You a Chance to Use Durable Materials
Many times when you buy a home, you’re stuck with the poor choices of the previous owner.
The cabin may have carpet that is in good shape and doesn’t need to be replaced, but now you are stuck with carpet. Or maybe the cabin has cheap countertops or laminate cabinets that are starting to peel at the corners. With new construction, you get to choose the quality of the materials.
#6 New Construction Gives You a Chance to Choose Your Location
Sometimes you can find a great house for sale in a bad location, or a not-so-great house in an awesome location. New construction gives you the opportunity to match the size and quality of the home to the land and location.
You don’t want to be that person with the million-dollar house on a ten-thousand-dollar lot or a $100,000 house on a $100,000 lot. Another factor that weighs into this land-to-home comparison is depreciation, as the IRS lets you depreciate the house value, but not the land value.
Whether you’re going for a low-budget retreat or a high-dollar getaway, don’t be one of the dozens of houses in North Georgia that got put on the wrong piece of dirt.