There are many different options for investing in the real estate market. You can invest in pre-construction properties, existing properties, or even REITs. So, which is the best option? That depends on your situation and goals. This blog post will compare and contrast pre-construction vs. resale investments and help you decide which is the best for you!
Pre-Construction Pros
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Customization
One of the benefits of investing in a pre-construction property is that you often have the opportunity to customize your unit. Customization allows you to choose your finishes, fixtures, and even layout in some cases. It will cost you extra, but this is a great benefit if you want to put your personal touch on your investment, like removing a wall, making room for a home theater, or your home gym equipment.
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Lock-in Today’s Pricing
As a real estate investor, you want to realize the maximum possible gain on your investment. Another benefit of investing in pre-construction is that you can lock in today’s pricing without owing mortgage payments until the build is completed. If you have done your research and are investing in an area slated for growth, there is the potential for significant appreciation when your home is ready. Note that prices in the real estate market are constantly changing, and appreciation is never guaranteed. The assumption is that by locking in today’s lower price in a growth market, you can be reasonably sure that your investment will be worth at least the same amount (if not more) when the property is completed.
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Low Upfront Investment
Pre-construction projects require a minimum down payment upfront, and regular installments are usually phased in over 1 to 2 years. The full payment is due at closing once the property is ready to move in. As a result, even if you can’t afford the full purchase price or a mortgage today, you can invest with a portion of the down payment amount for now. Then you have a significant amount of time to plan your finances, generate additional income, boost your savings and pay installments.
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Minimal Maintenance Costs at the Beginning
When you invest in an existing property, you are often responsible for all maintenance and repair costs. However, when you invest in a pre-construction property, the developer is typically responsible for these costs during the warranty period. New construction will typically require less maintenance than older housing even after the warranty period.
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Can Assign Before Taking Possession
If you invest in a pre-construction property, you often have the option to assign your unit before taking possession. Assignment means that you can sell your purchase contract to another buyer for a profit. Selling the purchase contract before the construction is complete is a great way to make money if you are not ready to be a landlord. If you are planning to assign, read your purchase agreement to ensure that your builder allows assignment and whether there are any restrictions. Most builders want a set percentage of the units to be sold before allowing assignment and charge an assignment fee to offset the legal work associated with transferring the contract.
Pre-Construction Cons
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Waiting Required for Completion
One of the downsides of investing in a pre-construction property is waiting for the property to be complete. The construction can often take years! Waiting can be a long and frustrating process, especially if there are delays. If your main investment goal is to generate cash flow from rent, construction delays can set you back by a year or more.
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Builder May Charge Future Pricing
As explained above, one of the benefits of purchasing pre-construction is to take advantage of the spread between today’s pricing versus future pricing. In some high-demand markets, builders are increasingly plugging this gap and are charging future prices at the time of signing. As a real estate investor, make sure you do your research to understand market pricing norms. If your goal is to benefit from appreciation, you may be better off purchasing a resale property instead of investing in a pre-construction.
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Can’t See the Finished Product
Another downside of investing in a pre-construction property is that you can’t see the finished product. You get to choose your finishings, paint color, flooring, etc. before construction begins, but if you don’t like the finished product, you’re responsible for it. Build quality also varies from builder to builder. In case of build defects, there is a warranty period for the builder to address it, but builders have the leeway to change room dimensions, fittings, and other supplies as needed. Therefore, it is essential to select a builder with a good reputation.
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Can’t Back Out After Signing
Once you sign a contract for a pre-construction property, you are usually stuck with it. What does this mean for you? If you change your mind or the market changes in the 3 to 4 years it takes to build, you could be stuck with a property worth less than what you paid.
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Builder May Not Finish
Believe it or not, most pre-construction contracts include an option for the builder to cancel the project for various reasons. If the builder can not obtain enough financing, or if the market conditions are no longer favorable, the project can be canceled or delayed for an extended time. In the event of a cancellation, most contracts include terms to return your down-payment amount to you. While you likely won’t lose your deposit, your investment does not accrue any appreciation during this time. If the cancellation occurs two or three years into the project, the market prices could be well above what you previously paid for the canceled property.
Resale Pros
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Can See What You’re Buying
One significant advantage is seeing precisely what you are buying upfront. There are no surprises with an existing home as to what the final product will look like and how much space you will have.
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Immediate Occupancy
The main benefit of investing in a resale property is that you don’t have to wait for the property to be complete. You can move in right away or start generating rental income immediately! Immediate possession is music to an investor’s ears.
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Leverage for Additional Liquidity Sooner
As you make mortgage payments sooner on your resale property, you can build up considerable equity in the time it would have taken a pre-construction property to be completed. You can then refinance your mortgage sooner and use the equity in your house to invest in more properties or other investments.
Resale Cons
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As-is Condition
Most often, the best deals on resale properties include a fair amount of renovation. Even if the property isn’t run down and you want to make any changes or customization to the property, it will require additional investment.
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Need Money Right Away for Down Payment
Down payment for a pre-construction property can be spread out over several months or years. When investing in resale properties, you need to pay the down payment at closing. Arranging for a hefty sum of cash can be difficult if you are not prepared or do not have the funds readily available.
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Mortgage Starts Immediately
With a resale property, your mortgage payments start as of the closing date. If you need some time to do renovations or modifications to maximize your rental income, you will have to add the cost of your mortgage payments and interest to the project cost.
Conclusion
When it comes to real estate investment, there are pros and cons to pre-construction and resale properties. You must research and weigh your options before deciding. Both types of investments have the potential to make you money, but you must choose the option that is right for you!
About the Author
Ash & Pri are the founders of AshandPri.com, where they empower readers to make smart money decisions across all aspects of life.
After achieving their FIRE goals in their 30s, they launched their blogging business in late 2021 and scaled it up quickly to generate a consistent income within a few months.
You can find their expert financial advice & tips featured on sites like Forbes, GoBankingRates, Apartment Therapy, MSN, and more.
