Profile picture for jen mccarter

New Construction or Fixer-Upper?

My spouse and I live and work in the DC metro area. We both work in non-profits and have a small child, so saving for a down payment has been difficult. While we're not considered low-income, we do qualify for the DC Opens Doors program (http://www.dchfa.org/DCHFAHome/Homebuyers/tabid/57/Default.aspx).

Just recently, a family member came forward and offered to invest in our first home. This would be an investment, not a loan, and we could use the money as we see fit. We are looking for a space where we could live for the next 5-10 years, and would see a good return on our investment. Initially, we considered going through the DC Opens Doors program to buy a fixer-upper in the Woodridge/Michigan Park area, and using our family member's contribution to make improvements to the home. Alternatively, we've been looking at the new construction in Hyattsville (Arts District), which is also experiencing an increase in retail and commercial businesses. 

While we love living in DC, we are enticed by the idea of not having to worry about making improvements on our first home purchase. With that said, if buying a fixer-upper would yield a stronger return on our investment, I think it is an option we shouldn't pass up. So my question is: what sounds like a better investment in the long run? 
  • January 23 2014 - Woodridge
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Answers (7)

Jen,

Great question.

This is a very personal answer - one only you ultimately can answer, but kudos on gathering the info to make an informed choice.  Also, what defines a "Better Investment" for you?   Make Money/Equity after all is said and done?



Many things to consider, but having spent 20 years in renovation lending, I'm biased of course.   In my opinion, you will ALWAYS yield a better equity position gained through doing a renovation loan ( buying a not so perfect home ), as compared to paying full price in a turnkey situation.   There are many caveats to this of course, but the bottom line is this:

Why take on the stress, work and wait buying a home in LESS THAN PERFECT condition, unless you are GAINING something when the work is done?  


Would make no sense otherwise.    So just by virtue of this alone, I would lean towards the Reno loan/rehab house as being a "better investment".


You probably have some personal circumstances which factor into this decision.  I'd be glad to help you with that as well if you would like - feel free to reach out to me via the contact information in my profile and I'd be delighted to answer whatever other questions you may have.

All the best!

b
  • January 23
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Jen,

Both options are appealing. The biggest challenge you will face in trying to purchase a fixer upper in the district is competition. There is no shortage of cash investors in the area who are aggressively purchasing all of the deals that will yield the most profit. This presents a challenge for you because when you find a potential home and make an offer, you'll be competing against other offers that are all cash, no contingencies. Obviously, if you are using financing, you will have to have some built in contingencies and your closing time frame is going to be longer than a cash buyer who is ready to close in 7-10 days.

On the flip side, if you purchase new construction in the Hyattsville Art District, you won't be competing against other investors for the most part. Your profit potential will be based primarily on the local area and the growth the area will experience over the next 5-10 years. This may be a better option and an easier one at that.

There is a lot more that goes into it, but the bottom line is if you are thinking like an investor, then you have to approach any purchase from a numbers standpoint. Do the numbers make sense? Which leads to the next point, you have to really dig down and analyze each property and all of the costs associated with the acquisition and renovation to determine what your projected profit yield would be from the the day of purchase. You make your money going into the deal. If you are looking at the new construction angle, what has been the rate of appreciation in the area for the last 3 years? 3%, 6%, 10% annually? This will help you in projecting how much your home would be worth in 5 -10 years but don't forget to account for the cost associated with selling the property once the 5-10 years are up.

If you purchasing an investment and you are novice so to speak in the field, you need to work with someone who knows how to do the analysis so they can assist you in making a more informed and accurate investment decision.
  • February 12 2014
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Profile picture for Djana Morris

I'm a realtor in DC, licensed in DC, MD & VA, and am familiar with the DC Opens Doors Program.  I also work with lots of first time home buyers, investors, and currently have a client purchasing a Pulte property in the Hyattsville Arts District, so I know exactly where you are coming from and your options. 

In my opinion, DC is the best place for your investment dollars if you can afford it and if you can find a property where the purchase price makes it possible to fix up the property and still be under valued.  However, as DC becomes more expensive, I believe areas like the Hyattsville Arts District are going to be a very popular and viable option.  There is a lot of development coming to that part of Hyattsville, which is only minutes from DC.  Now is a good time to get in, before it turns into another H St NE.

It's difficult to generalize without knowing the specific properties you are looking at and what make sense for your family and your future plans and goals.  I'd be happy to help you with that process.  Contact me if you'd like to talk about this in more detail. 

Best,
Djana

Djana Morris Real Estate Group
Keller Williams Capital Properties
(202)309-0146

  • January 24 2014
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Buying the new home.

We don't know what the numbers are, and investment analysis is all about the numbers.

Generally speaking, I think that your real estate investment should be separate from the place that you live in. If you compromise on your living situation to make a buck, you've basically turned your life into a full-time job with no escape. That's not my definition of, "home."

Also, generally speaking, it's rare to make actual money fixing and rehabbing properties. People will tell you how they did it, and it usually involves them being a contractor or trades person. Buying construction services at retail - especially to the finishing standards for your own personal residence - is generally prohibitively expensive for investment purposes.

All the best,
  • January 23 2014
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Profile picture for sunnyview
I would choose DC hands down. DC is likely to stay strong and a fixer inside the beltway is the way to go for best long term potential. You may need to deal with issues that you wouldn't in a new home, but I have yet to talk to someone who bought in the beltway as opposed to out of it that is unhappy they did.
  • January 23 2014
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I'm not familiar with your area, however, the conventional wisdom says to purchase the worst home in the best neighborhood. If you have the skills to do a lot of the improvements yourselves (and can survive living in a construction site), you will probably fare better in a fixer-upper.  

Purchasing new construction can reward you with quick equity as well. In my area, if you are able to purchase very early in the development or  the very last home in a development you can elk in with equity.  As projects are built, the prices will rise rough out the development stage, so early purchasers are rewarded with the same model selling for thousands more in just a few months.  As the project comes to an end, the builder will want to unload his last home or two so he can move on to the next project and the lower sales price of the last home won't have an effect on any other sales.

Good luck with your decision.  I strongly suggest you find a very experienced agent to guide you.
  • January 23 2014
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Hi Jen,


Former DC Metro resident here.  Sorry about the traffic.

It could really go either way, but as you pointed out buying the fixer upper is probably a more prudent investment.  That, of course, will depend on how much cash you'll have to put into the home in order to make it livable for you.  The biggest advantage of new construction, in my opinion, is that you can add upgrades (e.g., Stainless Appliances) through the builder and add them into the purchase price.  The advantage here is that you can effectively finance any improvements you want to include over and above the "base" floor plan that you choose. 

You're right, this is an investment; especially since you'll have what boils down to a partner investing in the property with you, but don't forget that you're also going to be living in the home so make sure to get something you're happy with! 

Hope this helps! 


Thanks,
Aaron
  • January 23 2014
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