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.
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
When you buy a new construction property, the contract you’ll likely sign is not the standard “Contract to Buy and Sell Real Estate” that real estate agents typically use in your market. These builder contracts are usually written by the builder’s attorney to protect their interests, making them more pro-builder and less favorable to you as the buyer.
One difference you’ll often see is that your earnest money may go “hard” earlier in the process, especially if you’re adding upgrades or making change orders. This means your earnest money could become non-refundable well before closing—sometimes immediately upon signing the contract if you choose upgrades.
It’s also important to understand that most real estate agents aren’t typically trained on builder contracts. Real estate agents are not attorneys and likely won’t be able to interpret or explain the finer details for you. Builder contracts are usually presented by the builder’s sales representative, and keep in mind that they represent the builder, not you.
If you have questions about the contract, it’s generally a good idea to consult your own attorney, CPA, or other advisors before signing. If you’re considering working with a particular builder, you might want to ask for a copy of the contract early so you have time to review it with your team. This way, you’ll have a clearer understanding of what you’re agreeing to and can address any potential issues before moving forward.
Deals on New Construction
Sometimes, you can find deals on new construction properties, but they’re not always advertised in the same way as resale homes. Builders may offer discounts when they’re trying to close out a phase in a development, liquidate standing inventory, or meet a deadline like the end of their fiscal year. These situations can provide opportunities to negotiate, and sometimes you can get significant discounts.
The downside is that you’ll often be choosing from what’s left over. You may not get your ideal lot, floor plan, or preferred upgrades, and builders may require you to close quickly to take advantage of the deal. This can limit your flexibility, but if you’re prepared, it might be worth it for the savings.
Staying in regular contact with the builder’s representatives is key. Veteran reps will know the patterns and can give you insights into when the builder may be offering deals. It can also help if you’ve purchased properties from that builder before, as they may be more likely to offer discounts to repeat buyers.
If you’re patient and willing to be flexible, these deals on new construction can be a great way to secure a good price for your first investment property.
Risks of Financing with New Construction
Financing new construction properties comes with its own set of risks, especially if you’re buying your first investment property.
One of the biggest concerns is interest rate risk. Since new construction often takes months to complete, interest rates could rise before your closing date. This means you could end up with a higher mortgage payment than you initially planned for.
To mitigate this, some lenders allow you to lock in your rate well in advance. However, locking your interest rate far out may come with an additional cost or a slightly higher rate. In some cases, lenders may offer you the option to “float down” your rate if interest rates drop during the construction period, but this option is usually limited to one time and may come with restrictions.
Many builders have preferred lenders they encourage buyers to use. These lenders may or may not offer you a better rate than what you can find elsewhere. Sometimes, they’ll incentivize you to use their preferred lender by offering to cover some of your closing costs or by buying down your interest rate. This can lead to a better deal than you’d get on a resale property, where you might need to spend thousands of dollars to buy down the rate yourself.
Even if you decide to use your own lender, builders often require you to get qualified with their preferred lender as part of the process. If you don’t qualify, the builder may allow you to terminate the contract.
Be mindful that if the builder provides seller concessions to help cover closing costs, you could lose them if they’re not used properly. Make sure you follow up with your lender to ensure you’re applying all of the seller concessions you’re entitled to, so you don’t miss out on any of the benefits.
Another potential cost is appraisal fees. With new construction, appraisers may need to make multiple trips to the property during the build process, which can increase the cost of the appraisal. This is something to keep in mind as you budget for closing costs.
Cost of Extra Bedroom
When you’re considering a new construction property as an investment, one option builders might offer is adding an extra bedroom or converting a loft space into a bedroom. This can be tempting, especially if the price difference between models is relatively small.
The cost of an extra bedroom varies, but it can often be around $10,000. If you choose to finance this additional cost, it might add roughly $50 per month to your mortgage payment, depending on your interest rate and down payment. The question then becomes: can you get an extra $50 per month in rent for that additional bedroom? In many cases, tenants are willing to pay more for an extra bedroom, but this will depend on your local rental market.
Beyond just the rent, an extra bedroom can make your property easier to rent. Larger properties often appeal to a broader pool of tenants, and the added space could reduce vacancy times or attract applicants that may stay longer thereby reducing both possible vacancy and turn-over costs. However, this benefit isn’t always straightforward or easily measurable in immediate dollars. It often shows up in lower overall maintenance costs, vacancy costs and less work with fewer tenant turns.
An important side note concerning fair housing: when evaluating prospective tenants, it’s critical to follow fair housing laws, particularly regarding familial status. You cannot choose tenants based on whether or not they have children or any other protected class. To avoid fair housing violations it is a best practice to select the first qualified applicant who meets your written qualification criteria.
Some Builders Limit or Don’t Allow Investors
When buying a new construction property as an investor, one thing to keep in mind is that some builders limit or don’t allow investors to buy their properties. This is especially common in developments with Homeowners’ Associations (HOAs), which can restrict how properties are used or rented out.
Before you get too far into the process as the sales rep and double check and read the HOA restrictions. This really applies to all properties, not just new construction. Some HOAs have strict rules about renting out homes, limiting the number of rental properties allowed, or even banning short-term rentals entirely. You don’t want to find out too late that you can’t use your property as a rental.
If you’re following the Nomad™ strategy, where you plan to buy as an owner-occupant, live in the property for a year, and then convert it to a rental, this might work better in certain developments. Some builders or HOAs are more flexible with this model since you’re initially buying the property as your primary residence. They may not have restrictions on rentals, but the builder may not be selling properties to investors or have a limited number of homes they’ll sell to investors. As a Nomad™ you’re buying as an owner-occupant and will convert it to a rental later.
On the other hand—and not specifically related to new construction but we see it happen more frequently with new neighborhoods—your HOA may opt to vote to limit rentals in your neighborhood. If you’re Nomading™, you might get caught in a situation where the HOA votes to prohibit rentals while you’re owning occupying the property. This is uncommon, but it does happen.
For those planning to buy as a straight investor, especially if you’re using a new construction lease-option business model (which we will cover later), make sure you understand the builder’s and HOA’s policies ahead of time. Certain developments may not allow properties to be rented out at all, or they may have specific guidelines that could impact your investment strategy.
Always clarify these restrictions before moving forward with a builder or development, as it can save you significant headaches down the road.
How Builder Pricing Works
Builder pricing can vary quite a bit from builder to builder, so it’s important to understand how they set their prices when buying new construction. Typically, builders start with a base price when they first release homes in a subdivision, and as they sell more houses, they raise the prices gradually. This is often used as a sales tactic to push buyers to act quickly before a price increase at the end of the weekend.
These price increases also help builders with appraisals. They need recently sold properties at higher prices to justify future sales prices, which is part of how they continue to raise prices as the development progresses.
Builders also serve as barometers for the market. If they start offering incentives like discounts or upgrades to get homes sold, it’s often a sign that the market is softening. Some builders use rotating incentives as a way to create urgency. For example, one weekend they might offer a free air conditioning unit, while a couple of weeks later, they might offer seller concessions or financing incentives. These offers are designed to encourage buyers to commit by presenting limited-time deals.
A common strategy is to buy early in a subdivision, when the prices are lower, and then hold the property as the builder raises prices multiple times throughout the development. In this scenario, you could benefit from built-in appreciation simply because the builder is pushing prices up. That said, builders sometimes discount the last few homes to close out their inventory, but these homes are often the least desirable lots or floorplans.
Another way to take advantage of these price increases is through the lease-option strategy. Since the builder is raising prices as homes sell, you can lock in your price early and use the built-in increases to benefit both your rental income and eventual sale price.
Not every neighborhood will follow this pattern, but in strong markets, new construction tends to see prices steadily increase from the initial release through most of the development process, with the exception of possible discounts at the end. This knowledge can be a useful part of your strategy when considering new construction for your first investment property.
Metro Taxing Districts
When buying a new construction property, you may come across Metro Taxing Districts, which can affect your long-term costs and cash flow.
These districts are set up to help fund the infrastructure for new developments—things like roads, utilities, and parks. Because of this, the taxes in these areas are often higher than other neighborhoods.
Metro Taxing Districts help keep the initial property prices lower because the builder can either set up a taxing district to fund infrastructure or raise the property prices to cover those costs upfront. While the Metro Taxing District adds ongoing costs, it does come with some tax advantages, as it’s structured as a tax rather than a lump sum built into the home price. This can offer slight financial benefits compared to paying higher upfront costs in the purchase price.
In some cases, metro taxing districts replace the need for an HOA, while in other cases, they exist alongside a smaller HOA fee. You could end up paying both, so it’s important to understand the full cost upfront. Even though the metro taxing district is meant to cover infrastructure, you might still be responsible for some HOA fees for community amenities or maintenance.
In theory, these taxing districts—and the associated costs—go away over time, but this could take decades. They are often set up to gradually decrease as the infrastructure costs are paid off, but the timeline for this is typically quite long. You’ll need to plan for these costs to continue well into your ownership period.
To get a clear picture of how this impacts your cash flow, convert the annual metro district tax to a monthly cost. This will help you factor it into your overall expenses and determine whether the property still makes sense from an investment perspective when you do your deal analysis using The World’s Greatest Real Estate Deal Analysis Spreadsheet™. Make sure the price and cash flow numbers you’re working with include these additional taxes.
Non-Potable Water
When you’re buying a new construction property, you might encounter non-potable water systems. Non-potable water is water that isn’t treated for drinking but is often used for irrigation, such as watering lawns or landscaping. The big advantage here is that it’s typically cheaper than using city water, which can help lower overall operating costs.
In some developments, non-potable water is included in the Metro Taxing District fee, meaning you don’t pay extra for it. However, in other cases, it comes with an additional fee that you’ll need to factor into your budget.
As an investor, it’s ideal if you can bill this cost back to your tenant or tenant-buyer. If the property has a non-potable water system for irrigation, make sure your lease includes provisions for the tenant to cover this cost. By passing this expense on to the tenant, you can maintain stronger cash flow and keep your costs predictable.
Builder’s Rep Does Not Represent You
When you’re buying a new construction property, it’s important to remember that the builder’s rep represents the builder, not you.
Their main job is to look out for the builder’s best interests, which means they are focused on selling the property at the highest price with terms that benefit the builder.
Because of this, you should avoid sharing any secrets or sensitive information with the builder’s rep.
For example, don’t reveal how much you’re willing to pay, or details about your financing strategy, as they can use that information to the builder’s advantage.
Even though you need to disclose material facts to the builder (like your ability to be able to finance the property or not), be careful with what you share that isn’t required.
While you may have a Real Estate Broker representing you, you and your broker are both required to disclose material facts about the property or your financial position.
However, the builder’s rep does not have the same obligation to protect your interests. Always approach negotiations with this in mind and rely on your broker or attorney to handle the more delicate aspects of the deal.
With or Without Agent
When buying new construction, you might wonder if it’s worth bringing your own agent.
I’ve never seen a builder offer a discount for coming without an agent. While it’s possible that some builders might do this, I’m not familiar with any who consistently offer such discounts.
According to sales reps from popular local builders, the sentiment is clear. They often say, “We always tell buyers that we rely on Realtors bringing in buyers and if they heard that we would give a discount if they didn’t use one…it would be bad for business.” This means builders value the relationships agents bring and don’t want to set a precedent for bypassing them.
Even if you think going without an agent might save you money, it’s unlikely. Builders generally budget for the agent’s commission in the home price, so not using an agent rarely leads to any cost savings for you. In fact, having your own agent can provide you with added support and guidance, especially if this is your first investment property. Your agent will advocate for your interests, while the builder’s rep is focused on the builder’s goals.
In the end, it’s usually in your best interest to have representation when navigating the complexities of a new construction purchase.
Lot Selection
When choosing a lot for your new construction investment property, it’s important to consider the impact it will have on your future cash flow, tenant demand, and maintenance costs.
Not all lots are created equal, and the lot you choose can directly affect your property’s rentability and long-term value.
- Lot Premiums with Some Builders – Some builders charge extra for premium lots, such as those with better views or more space. However, if you get in early, you might be able to secure a premium lot without the extra cost.
- Driveway and Sidewalks to Front Door Orientation – The direction your driveway and sidewalks face can matter more than you think. A north-facing driveway, for example, may accumulate more snow and ice, creating extra liability and maintenance costs in the winter.
- Slope (Including Backyard) – Pay attention to the slope of the lot. A sloped yard can make landscaping more expensive with retaining walls and/or may cause drainage issues.
- Backing To – Consider what the lot backs up to. A home backing to a busy road or commercial property might be harder to rent. On the other hand, a property backing to open space or a park could be more appealing to tenants.
- Corner Lots/Interior Lots – Corner lots often come with extra maintenance, like shoveling more sidewalk in winter or managing additional landscaping. They can also be less private with people walking and looking into your windows and yard from multiple sides. They also have increased parking—potentially both for the tenant and neighbors. Despite some of the downsides, some tenants have strong preferences for not having a direct neighbor and being on a corner lot.
- Cul-de-sac Lots – Properties on cul-de-sacs tend to offer more privacy and less traffic, which can be appealing to families or tenants with kids. However, they can also have odd shapes that limit backyard space, parking space and/or increase landscaping costs.
- Oversized Lots – Larger lots might seem like a benefit, but they come with additional costs. Fencing, backyard landscaping, and ongoing maintenance will all be more expensive. You’ll need to determine if the extra space will attract higher rents or reduce vacancy enough to justify the added expense. In many cases, you won’t be able to make up for the added costs with higher rents.
When selecting a lot, it’s important to think ahead about both the benefits and potential challenges. The right lot can make a significant difference in your property’s cash flow and long-term maintenance costs.
Extras to Buy
When buying a new construction property, you’ll likely have the option to purchase extras or upgrades.
Each builder is different in how they handle upgrades, so it’s important to know what to expect. Some builders will allow you to finance these extras into the purchase, while others won’t.
Financing the upgrades into the loan can improve your returns since it allows you to spread the cost over time without needing to increase your upfront investment.
However, keep in mind that some upgrades may cause challenges with appraisals. If you add a significant number of upgrades, the home might not appraise for the higher value. In those cases, you’d need to pay the difference out of pocket.
For example, with one local builder, these are the typical upgrades you might see, though your builder’s prices will vary. It’s also worth noting that prices tend to increase over time, so these figures may be outdated by the time you’re reading this. On average, these upgrades add about $21K to $22K over the base price:
- Air Conditioning – $5,000
- Backyard Landscaping – $5,000 to $6,000 (based on size of yard)
- Refrigerator – $1,200
- Microwave – $525
- Garage Door Opener – $350
- Blinds – $2,000
- Backyard Fence – $6,000 to $7,000 (based on size of the yard and type of fence required by HOA)
These extras can add up quickly, and if the property doesn’t appraise for the increased amount, you’ll be responsible for covering the difference. It’s important to consider the value of these upgrades for both tenants and resale, while also staying within the limits of what the property is likely to appraise for.
Make sure to weigh the costs of each upgrade against its potential to increase rent or reduce vacancy before deciding which extras to include.
Air Conditioning
When buying a new construction property, air conditioning is often an upgrade that’s not included in the base price. While it’s typically more expensive to have the builder install the AC than to buy it later, the advantage is that you can finance it as part of your mortgage. This means you’re spreading the cost over 30 years at your mortgage interest rate, which helps improve cash flow, even though the AC itself won’t last 30 years.
Another benefit to having the builder install the AC is that it’s usually included with the builder warranty. This can save you from dealing with warranty claims or repairs through a third-party installer. The convenience of having the builder handle the installation also means less hassle for you—everything is done before you close on the property.
For example, if you buy air conditioning with the builder, it might cost around $5,000. If you purchase it separately after closing, it could be around $3,500. While it’s cheaper outside of the builder, you won’t have the option to finance that $3,500 over 30 years. With the builder, you’d only need to make a down payment on the $5,000 upgrade, which adds a small amount to your monthly mortgage payment.
Let’s look at an example: if your down payment percentage is 20%, you’re only paying $1,000 upfront for the $5,000 AC unit, and your mortgage increases slightly. On the other hand, buying after closing requires you to pay the full $3,500 out of pocket, which might impact your cash reserves.
Similar Math Also Applies To…
Similar math applies when considering whether to purchase other things from the builder or after closing. In many cases, you can buy these items for a lower cost after closing, but you lose the ability to roll them into your mortgage and finance them over 30 years.
For example, backyard landscaping, fencing, appliances, blinds, and garage door openers are all common upgrades that you can either purchase from the builder or handle on your own after closing.
If you buy these upgrades from the builder, they are likely more expensive but come with the convenience of being completed before you move in, and you can spread the cost out as part of your mortgage.
If you buy them after closing, you’ll typically pay less out of pocket, but you’ll need to cover the full cost upfront, which could reduce your available cash for other investments or contingencies. Just like with air conditioning, it’s important to weigh the trade-offs between upfront costs and long-term financing when making your decision.
Fencing
When it comes to fencing on a new construction property, you have a couple of options.
The first is to roll the cost of the fence into your mortgage, but this may or may not be possible depending on the builder. If the builder allows it, rolling the cost into the loan means you can finance the fence over 30 years at your mortgage interest rate, spreading out the expense.
On the other hand, it might be better to wait and pay for the fence outside the loan.
One benefit of waiting is that you could potentially split the cost with your neighbors. If you wait until after closing, you might find that your neighbors are also looking to install fencing and are willing to share the expense for the sections that border their property. This could lower your overall cost, though it requires coordinating with your neighbors and having cash available upfront.
As a real estate investor, it’s important to balance the cost with the potential impact on rentability. A fenced yard can be appealing to tenants, especially those with pets or children, and could reduce vacancy. However, rolling the cost into your loan will slightly increase your monthly mortgage payment, while paying upfront could deplete your available cash for other investments.
Customization
When buying a new construction property, customization options will vary depending on the builder. Many builders, especially in the lower price ranges that investors tend to focus on, offer limited or no customization at all especially for larger things like floorplans. These builders often stick to standard finishes and materials, which can help them keep costs down.
If you’re purchasing early in the construction process, some builders may allow you to make design center selections, where you can choose options like flooring, countertops, and paint colors. This flexibility depends on the builder and how far along the home is in construction. It’s worth noting that these options are often limited to cosmetic choices, and the cost of upgrades can add up quickly.
As an investor, customization may not always be necessary, especially if you’re focused on properties that will cash flow. Standard finishes are often durable enough for rentals, and upgrades may not significantly increase rentability or property value in many cases. However, if you do have the option to choose more durable materials, it might be worth considering if it fits within your budget and aligns with your long-term strategy as it can reduce over maintenance on a property.
Radon
Radon is a naturally occurring gas that forms from the breakdown of uranium in soil, rock, and water. It’s a concern because it can seep into homes through cracks in the foundation, and long-term exposure to high levels of radon has been linked to lung cancer. Radon is more common in certain markets, especially in areas with high levels of uranium in the soil, such as the Rocky Mountain region and parts of the Midwest.
Many new construction homes in these markets come with passive radon systems already installed. These systems are often required by city building codes in areas where radon is a known issue. A passive radon system is essentially a venting system that allows radon gas to escape from underneath the home, but it doesn’t include a fan to actively pull the gas out.
You may hear about passive systems versus active systems. A passive system relies on natural airflow to reduce radon levels, while an active system includes a fan that actively pulls radon from the home, making it more effective at lowering radon levels.
If you decide to test for radon after purchasing your new construction property and find that radon levels are high, your builder may handle it in a few different ways:
- Install an Active System – Some builders will install an active radon mitigation system if radon levels are elevated.
- Credit for Installing Active System – In some cases, the builder might offer you a credit toward installing an active system yourself.
- Do Nothing – Depending on the builder’s policy and local regulations, they may not be required to do anything if the home already includes a passive system.
As an investor, you’ll want to check if radon is a concern in the market where you’re buying. Testing and addressing radon can be important for the safety of your tenants, and it might be a factor in determining the property’s long-term value and appeal.
Sewer Scope
When buying a new construction property, sewer scope is something that often gets overlooked, but it’s important to check the condition of the sewer line.
Even though everything in the home is new, there can still be issues with the sewer line caused by construction debris, poor installation, or tree roots growing into the line over time.
It’s a good idea to check the sewer line before you buy the property. Having a professional run a camera through the line will give you peace of mind that there aren’t any hidden problems, which could be expensive to fix later.
You should also consider having the sewer line inspected before the builder’s warranty ends. Sewer issues can take a little time to develop, and if there’s a problem, catching it while the home is still under warranty could save you from a costly repair.
Another option to protect yourself is to purchase sewer line insurance. This insurance can help cover the cost of unexpected sewer line repairs down the road. While it’s an added expense, it can provide significant savings if something does go wrong with the sewer system.
For investors, sewer issues can be particularly problematic, so it’s smart to be proactive about getting the line checked and ensuring you’re covered in case of future problems.
Inspection
When you’re buying a new construction property, it’s important to understand how inspections work.
During the build, parts of the home will be inspected and signed off by local authorities, such as city or county building inspectors. These inspections ensure the home meets code requirements, but they are not the same as a full home inspection that you’d typically get with a resale property.
You usually have the option to get a home inspection done while you’re under contract, before you close on the property. This can help identify any issues that may have been missed during the builder’s process. However, keep in mind that most builders’ contracts don’t include an inspection objection clause. This means you usually can’t cancel the contract based on what your inspector finds, and the builder may not be obligated to fix anything before closing or at all.
Another strategy is to have an inspection done about one month before the end of the builder’s warranty. This approach allows you to catch any issues that may have developed after you’ve been living in the property for a while. If your inspector finds problems, you can submit warranty claims before the builder’s warranty expires. Many investors opt for this strategy, as some issues may not become apparent until after a few months of use.
Of course, you could also choose to do both inspections—one before you buy and another before the warranty ends—to be thorough. While this approach provides more peace of mind, it does come with additional cost.
Since most builders don’t have standard language in their contracts about inspections, it’s important to manage your expectations about what can be negotiated or addressed during the process. The inspections you choose will ultimately depend on your comfort level and how you want to approach your investment in the property.
Builder Walk Through
The builder walk through process can vary widely depending on the builder you’re working with. Some builders have very detailed processes, while others are more relaxed. As an investor, it’s important to know that most builder contracts allow the builder to finish certain items after closing. This might include things like landscaping, which is often delayed if you’re closing during the winter months. In some cases, incomplete landscaping can cause challenges with the appraisal, as the property may not look finished when assessed.
It’s also not uncommon for there to be some unfinished work inside the home as well. The builder might have small items that still need to be addressed, such as touch-up paint, minor repairs, or fixtures that haven’t been installed yet. Be prepared for some of these details to be completed after closing.
One thing to keep in mind is that your idea of what’s considered clean may not match the builder’s or their cleaning crew’s standards. The property may not be spotless by your standards, especially if the cleaners are in a rush to meet deadlines. It’s important to set your expectations accordingly.
Most builders will do a blue tape walk through, where you and the builder walk through the property, and you mark any issues that need to be fixed using blue painter’s tape. You’ll note things like paint touch-ups, uneven surfaces, or areas needing attention. You might also make a list of any larger issues that need to be addressed. The builder will then work to resolve these items, though it may take time depending on their schedule, supply chain issues, contractor availability and other resources.
This walk through is your opportunity to identify problems before closing, so take your time and be thorough. While some things will be fixed right away, others may not be completed until after you’ve moved in. It’s part of the process with new construction, but understanding how it works can help you manage expectations and plan accordingly as an investor.
Use Your Property as Model Home
When buying a new construction property, it’s common for builders to use your property as a model home while it’s under construction.
This means other potential buyers may walk through your future home as part of their own buying process. It’s a typical practice, especially if the builder doesn’t have a dedicated model home.
Since you don’t own the property until closing, the builder controls access to the home. This is something to be aware of, but it’s standard in new construction.
The builder will maintain the property during this time, and once you’ve closed, the property is entirely yours, and the showings will stop.
Visiting Under Construction Properties
When buying a new construction property, you may want to visit the property while it’s being built. Most builders don’t allow buyers on the construction site without permission, which is usually outlined in the builder’s contract. This is primarily due to liability concerns, as construction sites can be dangerous.
However, most builders are reasonable if you want to visit the site a couple of times during the process. The key is to always get permission first and have someone escort you. This can be your real estate broker or the builder’s representative. They’ll ensure the visit is safe and that you’re not interfering with the construction process.
PITA Clause
Many builders include what’s informally known as a PITA clause in their contracts. PITA stands for “Pain In The A**,” and it refers to buyers who cause unnecessary problems or interfere too much during construction.
If you become a PITA by constantly visiting the property, directing workers, critiquing the speed or quality of their work, or requesting custom changes outside of what was agreed upon, the builder may choose to terminate the contract.
Some builders may have the option to refund your earnest money and terminate the contract if they feel you’re being too difficult. In some cases, they might also pay you an additional $1,000 as pre-agreed upon liquidated damages. This allows the builder to avoid dealing with disruptive buyers, so it’s important to check the specifics in your builder’s contract.
The key takeaway is to avoid micromanaging the construction process. Let the builder do their job and refrain from making demands or requests that aren’t part of the original contract. This ensures a smoother process for both parties and helps you avoid triggering the PITA clause.
Walking Through Prior to Closing
As you prepare for your walkthrough prior to closing, it’s important to manage your expectations.
Likely, not everything you noted during your blue tape walkthrough will be completed by the time of your final walk. Builders often have a long list of items to finish, and sometimes things get delayed.
You might feel tempted to say, “I’m not closing unless it’s done.” While this is a natural reaction, the builder has probably heard this before.
If the market is strong and prices have risen since you went under contract, the builder might be willing to call your bluff. If you refuse to close, they could keep your earnest money and resell the property at a higher price.
Additionally, changing your financing this close to closing could be tricky, and if you’ve already lined up a tenant, they might be expecting to move in soon—whether or not the property is completely finished.
Instead of holding up the closing, it’s better to allow the builder to complete the things they’ve agreed to post-closing and/or submit a warranty claim for any incomplete items. Builders typically offer a warranty period that covers issues or unfinished work, allowing you to address punch list items after closing. This can keep the process moving forward while ensuring the work still gets done, though perhaps not on the exact timeline you’d prefer.
By approaching this walkthrough with patience and understanding the builder’s warranty process, you can still protect your investment while avoiding unnecessary delays.
Builder Home Warranties
When you buy a new construction property, everything is brand new at the time of purchase, which significantly impacts your maintenance costs.
With resale properties, many systems and appliances might be older or nearing the end of their useful life, requiring you to budget more and sooner for capital expenditures (CapEx). In contrast, new construction often comes with fewer immediate repair costs, and many potential issues are covered under the builder home warranty.
For this reason, the cost of CapEx is typically lowest when buying new construction which can help with cash flow.
Also, the builder warranty can cover various items like appliances, HVAC systems, and structural components for a set period. As a result, your cash flow may appear improved early in addition to the improvements from lower CapEx because you’re less likely to encounter expensive repairs.
The combination of new systems and warranty coverage means you won’t need to allocate as much money toward maintenance during the first few years of ownership.
Compared to a resale property, where you might face more frequent repairs or upgrades, a new construction property with a builder warranty can provide more predictable expenses and potentially better initial cash flow. Sometimes, this is when you need improved cash flow most as most properties see improved cash flow the longer you own a property with the same financing.
However, it’s important to review the specific terms of your builder’s warranty to understand what’s covered and for how long. This helps ensure you can plan accordingly and take full advantage of the warranty period.
Warranty Claims
When purchasing a new construction property, it’s important to understand the process of making warranty claims.
Each builder will have a process for handling warranty issues, so find out from your builder how to submit claims.
Typically, you’ll be provided with instructions or a portal for reporting any problems that arise. Some builders require you to report issues through a formal process, often submitting photos and descriptions of the problem. Others may have you work directly with their customer service or warranty department.
Keep in mind that not every warranty claim will be approved. Builders are not obligated to address issues that aren’t explicitly covered in the warranty.
For example, normal wear and tear, damage you cause (such as while moving in), or issues outside the scope of the builder’s warranty may be denied. It’s common for builders to reject claims if they feel the problem isn’t their responsibility or if it falls outside of the warranty’s coverage.
Knowing what your warranty covers and following the builder’s process for submitting claims can help you address problems effectively. Always be sure to document everything, follow up on unresolved issues, and submit any claims before the warranty period expires to maximize your benefits.
Concrete
When it comes to concrete, there’s a saying you should know: “There are two types of concrete: concrete that is cracked, and concrete that will crack.”
It’s almost inevitable that at some point, you’ll see small cracks in the concrete around your property. While these minor cracks are normal, it’s important to seal them to prevent further damage, especially from water infiltration during freeze-thaw cycles.
If the concrete starts to heave—a situation where the concrete moves or shifts due to ground movement—it could be more than just a minor crack. If you’re still within your builder’s warranty period, this is something you’ll want to make a warranty claim for.
To catch this in time, check the concrete carefully about a month before your warranty expires. This allows you to report any significant issues and ensure they’re covered by the builder.
If you notice significant heaving after the warranty period has ended, you can still consider filing a claim. However, the builder is likely to deny the claim if the warranty has expired, especially for something as common as concrete issues. That’s why it’s crucial to inspect your property’s concrete regularly and address problems before they become more costly.
Taking Photos For Rental/Sale
When investing in new construction, capturing high-quality photos of your property is essential for marketing it effectively, whether you’re planning to rent or sell.
- Hire a Professional Photographer – Consider booking a professional photographer to visit your property immediately after closing. This ensures you get top-notch images when the home is in pristine condition.
- Capture the Property Vacant – Take photos of the empty property before you or any tenants move in. This showcases the space at its best and allows potential renters or buyers to envision themselves in the home.
You might face challenges if the property isn’t fully complete on closing day. Here’s how to handle common scenarios:
- Unfinished Landscaping – If the backyard isn’t finished, focus on interior shots and any completed exterior areas. You can always update your listing with new photos once the landscaping is done.
- Missing Fencing – Highlight other property features in your initial photos. Add fence pictures later when installation is complete.
- Blue Tape Marks – These are common in new builds to mark areas needing touch-ups. Try to remove them before the photo shoot, or ask your photographer to edit them out in post-processing.
To get the most out of your photography session:
- Highlight Key Features – Ensure the photographer captures any upgrades or special features that set your property apart.
- Get a Variety of Shots – Include wide-angle room shots, detail photos of high-end finishes, and exterior views that showcase the property’s curb appeal.
By investing in quality photos from the start, you’ll have a valuable marketing asset that can help attract tenants or buyers quickly, potentially reducing vacancy times and improving your return on investment.
Property Tax Delays
When investing in new construction, property tax delays can significantly improve your cash flow, especially in the first year. Understanding how these delays work can help you better plan your finances and potentially benefit from lower initial costs.
Your newly built property might not be reassessed as a single-family home for several months after completion. This means you could be paying taxes based on the value of the vacant land for a while, which is typically much lower than the improved property value.
Before making any assumptions, call your local tax assessor’s office to verify how they handle new construction assessments. Policies can vary widely between counties and municipalities.
To illustrate the potential differences, here are two examples of how counties might handle new construction assessments:
- County A’s Approach
- Assesses property value on January 1st each year
- Bases tax on the percentage of construction completed at that time
- County B’s Method
- Determines property status on January 1st
- Charges 29% of the vacant land value if the lot is empty
- Applies 7.2% of the house value if construction is at least 10% complete
- County C’s Method
- When certificate of occupancy is provided the property is assessed at the full value.
- In this case, you wouldn’t get any tax savings for the first year.
These assessment delays can lead to improved cash flow in your first year of ownership, which is often when investors face the tightest margins. However, it’s important to remember that this boost is temporary.
- Plan for Increases – Anticipate higher property taxes in subsequent years and budget accordingly to avoid cash flow issues when the full assessment kicks in.
- Don’t Rely on Delays – While tax delays can be beneficial, they’re not guaranteed. Always run your numbers assuming full property taxes to ensure your investment remains viable in the long term.
By understanding and planning for property tax delays, you can potentially leverage this quirk of new construction to strengthen your investment’s financial performance in its critical first year.
Vacancy
Managing initial vacancy for new construction differs from resale properties. Finding tenants can be challenging before completion, as builders often limit property access until closing, hindering showings.
If you’re buying from a popular builder among investors, be prepared for potential market saturation. A surge of similar properties may hit the rental market simultaneously, creating short-term challenges in tenant acquisition and achieving desired rental rates. This initial flood typically subsides and normalizes over time.
Following the Nomad™ method—living in the property for a year before renting it out—offers advantages:
- Extended Search Window – More time to find quality tenants.
- Avoiding Market Floods – This timeline often helps you sidestep the initial surge of rental listings, potentially giving you an edge in a less saturated market.
To minimize vacancy in your new construction investment:
- Start Marketing Early – Advertise your property as soon as possible, even if you can only show floor plans or similar units initially.
- Offer Competitive Rates – Be ready to adjust your rental rates to attract tenants in a potentially crowded market.
- Highlight Unique Features – Emphasize upgrades or special features that distinguish your property from similar rentals in the area.
By understanding these vacancy considerations and planning accordingly, you’ll be better equipped to navigate the challenges of renting out a new construction property and position yourself for long-term success in your real estate investment journey.
Extended Home Warranties
As a real estate investor purchasing a new construction property, you might consider extended home warranties to provide additional protection beyond what the builder offers.
Home warranties are service contracts that cover the repair or replacement of major home systems and appliances. They’re designed to protect you from unexpected costs when these items break down due to normal wear and tear.
While your new construction home typically comes with a builder’s warranty, third-party companies offer extended home warranties specifically for new builds. These policies can extend your coverage for up to 10 years, providing long-term peace of mind.
- Cost-Effective Protection – Extended warranties for new construction are often relatively inexpensive compared to those for older homes, given the lower risk of issues in new builds.
- Coverage Beyond Builder’s Warranty – These policies can pick up where your builder’s warranty ends, ensuring continuous protection for your investment.
Most home warranty policies operate with a “service call” deductible system:
- Fixed Fee Per Visit – You pay a set amount (typically $50-$100) each time you request a service call, regardless of the actual repair cost.
- Cost Control – This system helps you budget for repairs, as you know the maximum out-of-pocket expense for each service call.
- Multiple Issues, One Fee – If multiple covered items need attention during a single visit, you usually only pay one service call fee.
By considering an extended home warranty, you can potentially reduce your long-term maintenance costs and protect your investment well beyond the initial builder’s warranty period. However, always read the policy details carefully to understand exactly what’s covered and any limitations that may apply.
Easier To Rent New vs Older Homes?
When considering new construction for your first investment property, you might wonder if it’s easier to rent compared to older homes. While new properties can be attractive to tenants, they come with unique challenges.
Investing in a new development means your property is in a construction zone for some time. This environment can deter potential tenants due to:
- Construction Noise – Early morning construction activity can be disruptive for residents.
- Increased Foot Traffic – Your neighborhood will see a higher volume of people, including sales representatives, potential buyers, construction workers, and inspectors.
These factors might make your property less appealing to some renters who value peace and privacy.
Another consideration is the potential for a saturated rental market. If multiple investors are trying to rent out similar properties simultaneously, you may face increased competition. To navigate this challenge:
- Start Early – Begin your tenant search as soon as possible. This helps you secure high-quality tenants before other properties become available and minimize or eliminate vacancy periods.
- Aggressive Marketing – Treat your property as if you’re always in a high-vacancy environment. Utilize multiple marketing channels to reach potential tenants, highlight unique features of your property to stand out from similar rentals, and consider offering move-in specials or other incentives.
- Understand Rental Cycles – Be aware of peak rental seasons in your area and plan accordingly.
While new construction properties can offer modern amenities and low maintenance costs that appeal to many renters, you’ll need to be proactive in your approach to overcome the challenges of renting in a developing neighborhood. By starting your tenant search early and marketing aggressively, you can position your new construction investment for success in the rental market.
Builders Saving Money
When investing in new construction, it’s important to understand that builders are constantly balancing quality with cost-effectiveness. This approach can sometimes conflict with your preferences as an investor.
Builders make numerous decisions to keep costs down, which might differ from the choices you’d make if you were overseeing the construction yourself. For example:
- Paint Quality – Builders often use standard-grade paint and apply it quickly. They might not take extra time for multiple coats or use premium paints, as this would increase labor and material costs.
- Flooring Choices – You might wonder why builders don’t use higher quality carpet or luxury vinyl tile (LVT). The answer often comes down to budget constraints and maintaining competitive pricing in the market.
As you build your investment budget, remember that builders face similar decisions. They must balance quality, aesthetics, and durability against overall costs to remain profitable and competitive.
Consider your own work habits: Do you always take extra time to perfect every detail, or do you sometimes settle for “good enough” to meet deadlines and budget constraints? Builders operate under similar pressures.
Understanding these trade-offs can help you make informed decisions about upgrades or future improvements to your investment property. You might choose to invest in higher-quality materials for certain features that you believe will add value or reduce long-term maintenance costs.
By recognizing where and why builders cut costs, you can better evaluate the true value of a new construction property and plan for any enhancements you might want to make to improve its appeal to tenants or future buyers.
New Construction Speculation
New construction speculation is a high-risk, high-reward strategy that some investors consider when entering the real estate market. Here’s what you need to know:
The basic idea is to go under contract for a new construction property with the intention of selling your contract before the property is built, ideally when prices have increased. In some variations, you might close on the property and immediately resell it.
This strategy carries significant risks:
- Earnest Money at Stake – You’re risking your earnest money if you can’t resell the contract or property.
- Market Speculation – Success depends on accurately predicting market trends and price increases.
- Builder Resistance – Most builders actively try to prevent this practice through contract clauses or restrictions.
Pros of new construction speculation:
- Potential for High Returns – If the market moves in your favor, profits can be substantial.
- Limited Capital Required – You’re leveraging a small amount of earnest money for potentially large gains.
Cons and risks:
- Market Volatility – A downturn in the market could leave you unable to sell and facing a loss.
- Legal Risks – Some builder contracts may have penalties for assignment or quick resales.
- Reputational Risk – This practice can damage relationships with builders and real estate professionals.
A variation of this strategy involves lease-options:
- Lease-Option Approach – Instead of immediately reselling, you rent the property for 1-3 years with an option for the tenant to buy.
- Tenant-Buyer Selection – In some cases, you might allow a tenant-buyer with a large down payment to select the property from the builder.
- Boosted Returns – Large option fees from tenant-buyers can significantly increase your returns.
This lease-option variation can provide more stability than pure speculation, but it still requires careful market analysis and tenant selection. It also comes with the responsibilities of being a landlord for the lease period.
Remember, while these strategies can be lucrative, they carry substantial risks and may not be suitable for first-time investors. Always consult with legal and financial professionals before engaging in speculative real estate investments.