Investing in New Construction Properties for Real Estate Investors

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Buying a new construction property as your first investment can be an exciting opportunity. New properties often come with modern features, lower maintenance costs, optimal capital expenses since you’re starting with everything new and potential for immediate appreciation.

However, there are also unique challenges to consider.

From navigating builder contracts to understanding how builder pricing works, it's important to be prepared.

You'll need to weigh the pros and cons, and think about upgrades and warranties.

With the right approach, investing in new construction can be a solid start to building your real estate portfolio.

Table of Contents

We cover the following:

• New Construction Pros and Cons

• Tend to Focus on Lower Prices

• Different Builders Have Different Standards

• Builder Contract

• Deals on New Construction

• Risks of Financing with New Construction

• Cost of Extra Bedroom

• Some Builders Limit or Don't Allow Investors

• How Builder Pricing Works

• Metro Taxing Districts

• Non-Potable Water

• Builder's Rep Does Not Represent You

• With or Without Agent

• Lot Selection

• Extras to Buy

• Air Conditioning

• Fencing

• Customization

• Radon

• Sewer Scope

• Inspection

• Builder Walk Through

• Use Your Property as Model Home

• Visiting Under Construction Properties

• Walking Through Prior to Closing

• Builder Home Warranties

• Warranty Claims

• Concrete

• Taking Photos For Rental/Sale

• Property Tax Delays

• Vacancy

• Extended Home Warranties

• Easier To Rent New vs Older Homes?

• Builders Saving Money

• New Construction Speculation

New Construction Pros and Cons

When you're buying a new construction property as your first investment, there are several pros and cons to consider.

Let’s start with the positives.

Pros

• Usually No Bidding Wars – In hot seller’s markets, this is a big advantage. You avoid the stress and price increases that can come with bidding wars on resale properties.

• Walking into Instant Equity – In an appreciating market, new construction properties can offer the potential to walk into equity as prices rise before the home is completed.

• Often Large Selection – With new construction, there’s typically a range of options in terms of floor plans, features, and upgrades. You get more choice compared to resale homes, where inventory might be limited.

• Some Customization – Depending on the builder, you might be able to customize certain aspects of the property, like finishes and fixtures, which can be appealing for future tenants.

• Additional Time/Flexibility – Since new construction can take months to complete, you often have extra time to line up tenants or tenant-buyers before the property is move-in ready.

• Lower Capital Expenses – One of the biggest draws of new construction is fewer immediate repairs. You won’t likely face large capital expenses early on, and warranties, such as a builder’s warranty or home warranty, cover many issues.

Cons

On the flip side, new construction comes with some drawbacks that you should keep in mind.

• Limited Room to Negotiate – In a strong seller’s market, builders usually don’t budge much on price. However, in a buyer’s market, you might find more flexibility.

• Dates Are Rarely Set in Stone – The closing date can change unexpectedly, sometimes at the last minute. Make sure to include clauses in your leases to account for this, and discuss the potential delays with prospective tenants or tenant-buyers.

• Risk of Negative Equity – In a declining market, the value of your property may drop before construction is complete. This could mean walking into negative equity or needing to renegotiate the purchase price.

• Higher Appraisal Costs – New construction appraisals can be more expensive because the appraiser might need to visit the property multiple times during the build.

• Missing Extras – Some features like backyard landscaping or window coverings, which are often included with resale properties, might cost extra with new construction.

• Interest Rate Risk – If interest rates increase between the time you sign the contract and when the property is completed, you could end up paying more than expected for financing.

Tend to Focus on Lower Prices

As a real estate investor, your main goal is to find properties that will cash flow. When it comes to new construction, this often means focusing on lower-priced homes.

The lower the price, the more likely it is that your rental income will cover your expenses and leave you with positive cash flow.

But, run your own numbers using The World’s Greatest Real Estate Deal Analysis Spreadsheet™ to see this for yourself and see if there are exceptions.

Different Builders Have Different Standards

When you're buying a new construction property, it should be obvious that not all builders are the same.

Each builder sets their own standards for things like flooring, countertops, and fixtures, which can significantly impact the quality and long-term maintenance of your investment.

As a real estate investor, these differences matter because they affect everything from tenant appeal to the overall costs of owning the property.

• Standard Flooring – Builders vary greatly in what they offer as standard flooring. One builder might include carpet and vinyl in their base model, while another could offer carpet and engineered hardwood. Some builders adjust their “standard” based on the model or series of homes they are building. As an investor, you should think about how durable these materials will be for tenants and how that will impact your maintenance numbers. Sheet vinyl might wear out faster, while luxury vinyl tile could be easier to maintain and replace, which matters when you're looking at long-term property maintenance costs.

• Countertops – Countertops can differ just as much as flooring. Some builders include laminate countertops throughout the home, while others may offer granite or quartz in the kitchen and laminate in the bathrooms. In some cases, builders will include granite or quartz throughout the entire property. As an investor, keep in mind that higher-end materials like granite or quartz might increase the resale value of the property and attract more tenants willing to pay a premium. Plus, these tend to keep maintenance costs lower for longer but tend to cost more up-front and when you do have to replace them.

• Trim, Backsplashes, Doors, Fixtures, etc. – The details in a new construction property vary widely depending on the builder. Some may offer basic trim, while others include more expensive molding as standard. Backsplashes might be included in the kitchen but not in the bathrooms, or they may only be available as upgrades. Doors could range from cheap hollow-core to solid wood, and the quality of fixtures, like lighting or faucets, can make a big difference. Cheaper fixtures may need to be replaced sooner, which can affect your long-term maintenance costs. It’s important to weigh these factors when comparing builders.

• Energy Efficiency Features – Some builders include energy-efficient windows, insulation, or HVAC systems as part of their standard package, while others offer these only as upgrades. Features like these might cost more upfront, but they can reduce utility costs for tenants and increase the property's appeal. Energy-efficient homes are often easier to market, especially if tenants are paying for utilities. They’re nice if offered as the standard but, in most cases, I’ve not found these to be worth the extra costs to upgrade since you probably won’t get the extra rent to support the additional expense.

• Appliances – The appliance package is another area where builders differ. Some include basic appliances like a refrigerator and stove, while others don’t include appliances at all, offering them only as upgrades. Upgrading to entry-level but in-style models (for example stainless steel if that’s the current trend) can often increase rents by more than the additional cost.

• Garage – Some builders may include a two-car garage as standard, while others only offer a single-car garage or none at all. As an investor, this is worth considering because a larger garage can add value to your rental property and make it more appealing to tenants. However, the lack of a garage or a smaller garage might limit the pool of renters willing to consider the property, depending on the local market.

• Outdoor Features – Outdoor features, such as patios or landscaping, can vary significantly. Some builders may include basic outdoor landscaping, while others charge extra for these features.

Builder Contract