Is new or used better for an investment home

Dear Expert:

Which is considered the better investment, a new home or an existing home?

Invested Interest

Dear Interest:

Your question reminds me of the old trick question: Which is heavier, a pound of lead or a pound of feathers?

Your question is very common, but first I have a series of questions for you, the buyer, that I always ask my clients: What is your goal in buying a home? What is your five-year plan? Is this strictly an investment? Is it strictly about price? Is this your first home? Is it a starter home with plans to move up as your family grows or changes? Does this home “get you on the dance floor” versus paying rent (which is really paying someone else’s mortgage)? Is this a retirement home? Are you downsizing? How are you financing this home and do you have enough finances to pay the down payment and the closing costs? Paying cash? Do you have extra cash for changing the carpet and painting the inside?

Strictly looking at investment potential, when you buy a new property, you’re not only paying for the actual building, you’re also handing over a large chunk of money to the developer. In order to make a profit, developers build not only their margins into the price, but their marketing costs. Therefore, you end up paying a premium for your new investment, which will invariably come with a hefty price tag. Essentially, you are handing your first few years’ worth of capital growth straight to the developer. The situation is reversed with established properties when you “buy well” (either at or below the property’s intrinsic value). When you invest in established real estate, you have the potential to negotiate a great deal and pay a fair price, as well as enjoying immediate capital growth in most instances. Additionally, buying an established property that needs some TLC can mean paying substantially less than it might be worth.

On that note, be careful with an investment in a foreclosure. If this is your first home purchase, I suggest you think long and hard and have a plan and a strict budget. These rehab projects don’t happened like they do on TV, especially if it’s your first go at it. Could be very costly in the long run.

Also, overuse of a credit card in a home deal can erase your investment gains. It really makes “a deal home” expensive in the long run. When you are financing, run the comparison on loan interest rates. There are programs that let you buy the rate down for a lesser payment on a more expensive home. I have put many first-time home buyers in homes using down payment assistance programs. This is an excellent tool if you know how to navigate the system.

Take your time and compare resale versus new on a yellow pad. Finally, my best advice is if you like the home and it meets 85 percent of your criteria, consider buying it.

Happy house hunting.

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