Deciding if you should renovate a home or build a new custom home is a complex dilemma and a very personal question to evaluate. Making a well-informed decision requires a comprehensive study of the local market real estate factors, a good idea of how you want to renovate a home, general new custom home construction cost, and your personal resources that can be applied toward the project.
Gathering this data is far more difficult than you might expect. It is best to acquire the services of a professional adviser to guide you through the decision-making process. Your advisor should be educated in local housing market conditions and new construction costs as well as home renovation costs.
The first step in this process requires intense research of both land prices and current market housing prices to determine the financial feasibility of a specific property.
It also requires a close examination of your personal and family needs to determine what is the best course of action for each individual case. Determining whether to build a house or to renovate your existing home has many moving parts.
Breaking down this decision into bite-size pieces is extremely helpful in processing the many factors. Compartmentalizing the relevant and important contributing items will assist in both organizing and prioritizing these factors. Clearly understanding your longer-term needs and wants is important to this process.
Learn about the many factors included in deciding to renovate a home vs new home construction
Researching a home renovation requires understanding the home renovation cost and the existing house value to determine the future value to renovate a home. With the renovated home value, the owner can compare the house renovation cost to the cost to build a house provided by your general contractor.
Discussion Index
- Financial Considerations
- Cost to Renovate Home
- Preservation of Home Equity
- Cost of Construction of New Custom House
- Construction of New Custom House Pros & Cons
- Renovate Home Pros & Cons
- Conclusion
Financial Considerations
At face value, if you are making your decision on financial considerations only, it is generally more cost-effective to build a new home than to invest in a whole home remodel.
Although with that said, the total amount invested will be greater total amount in new home construction than in a house renovation. That is to say in simple terms it cost more per square foot to renovate than to build ground up, but the renovation will be a smaller total investment.
Unfortunately, in real terms, your own personal investment situation may not be as simple as calculating a dollar per square foot times the living area.
In some cases, solving your house’s challenges could require renovation and adding a home addition for more living areas. In this strategy, the renovation cost would be a mixture of new home construction and renovation cost elements.
The total amount of a project with major remodeling and a home addition will rival the total cost of building a house.
Cost to Renovate Home
So why is it more expensive per square foot to renovate a home than to build a new one? There are a number of reasons.
First, you must normally be required to demolish existing portions of the house before you can begin to renovate the home.
Secondly, there are always unforeseen items that materialize during a major renovation that was not expected, especially in older homes.
Thirdly, there are the non-construction factors associated with renovating the house, like storing your belongings and the need for temporary housing if you are living in the dwelling.
These are costs associated with your maintaining two households, (mortgage payments, insurance, property taxes) and the additional cost of living outside the house during renovation.
Gathering these anticipated renovation cost estimates can be a bit tricky without construction documents. In the event you do not have access to a general contractor, you will need to develop this cost through estimating.
Depending on your product finish schedule, the owner will need to either develop this estimated cost by using a dollar per square foot or by simply establishing a target investment budget.
The primary factor for a higher dollar-per-square-foot cost of renovation often has to do with the size and scope of the project. For instance, a kitchen may only represent several hundred square feet, but the construction cost of a kitchen represents nearly triple the cost of building a house.
This is also the case of remodeling a bathroom. All in these two areas of the house the most expensive finishes per square foot.
Preservation of Home Equity
One of the most important attributes but often the least considered factor is the preservation of the owner’s house equity. If the owner has been living in their house for 10 years or more, they have normally accumulated both owners’ equity and value appreciation in the property.
When they sell that property to acquire a replacement house property, they are transferring their equity away. They are in effect forfeiting their accumulated appreciation equity in their current property for the new property.
When an owner renovates a home, they are reinvesting in its future value but preserving both their financial equity if mortgaged and the value appreciation that the property sustained in the previous years.
The actual amount depends on the location of the property. Urban area properties typically grow in value at a faster pace than rural properties. In addition, metro areas of major cities grow much faster the suburban areas.
Cost of New Custom Home Construction
As mentioned, the price per square foot of new custom home construction can normally be less than it would be to renovate a home. Although the total cost of new home construction for a similar house renovation in most cases will be a far more total investment required.
That is to say that for a similar equal square footage of new construction compared to renovation square footage, the new home construction will be a less expensive dollar per square foot for the identical space.
As mentioned, this is generally due to the ability to spread direct and indirect costs over a larger square footage area. These custom home construction costs are averaged out over high intense cost areas like kitchens and bathrooms against bedrooms and general living areas.
The main difference in cost is in new house construction cost you have the cost of the structure to consider. Namely the foundation and frame structure.
Although you may be required in some cases to modify the frame and foundation structure in a renovation project, in very few situations will you have the need to replace the existing structure?
Land Equity
If you are fortunate enough to have an older property in a metro area that is highly sought after for land value, then giving serious consideration to tearing your older house down and building the ground up can be a financially beneficial prospect.
The land value of most cities grows at a faster rate than the actual construction cost composite annually. The construction cost composite indexes consist of a bundle of materials and labor costs similar to stock indexes. Some prices rise while other prices fall.
The land is a nonperishable item that is in short supply in most metropolitan areas. The price of this short-supply commodity just continues to increase over the long run much faster than the building.
If you have a vintage house in severe need of renovation or closely approaching ruins, you should compare neighborhood comps to understand the immediate land values.
Other than the financial concerns of building a new custom home, there are other matters to consider. Some of these items are advantages, while others may be a disadvantage depending on your personal situation.
Some of the factors that need to be evaluated are the location of your property, the general structural condition of your existing house, and how outdated the architectural style of your house may be.
The custom home building lot location is often a very high priority for families with children in school and strong ties to their community.
If you live in a neighborhood that is in transition with a mixture to renovate homes and tear-down houses, your property is like to be a good candidate for new custom home construction.
These types of situations lead owners to want to remain in their neighborhoods and provide motivation to build a new house instead of renovating it as a long-term solution.
Construction of New Custom House Pros & Cons
Construction of a new customs house is a lofty goal for most people, but if you have the resources and fortitude, building a new house is a once-in-a-lifetime event. There is a sense of accomplishment for the owner when they design and build a one-of-a-kind house.
Advantages
- The custom house can be designed specifically for your every need. When renovating there are often restrictive conditions of the existing structure.
- Building a new house reduces the cost and hassle of ongoing maintenance with an aging house. Everything will be new and have a warranty.
- Building a new residence is going to be much more energy efficient in the consumption of energy sources.
Disadvantages
- A far greater total investment amount than to renovate a home.
- The construction time for new home construction is often twice as long as renovation.
- The property taxes will be significantly more.
Renovate Home Pros & Cons
Non-financial factors that would lead a house owner to want to renovate a home instead of building a new custom house would be an architectural style that is renovation friendly.
Another factor would be that the house has been well-maintained and is not in need of major structural repairs.
Advantages
- A house renovation provides the owner with most of the advantages of a newly constructed house at a lesser total cost amount.
- The renovation construction time is generally far less than the timeline for building a house.
Disadvantages
- If the owner has not done a thorough job of planning to incorporate products and materials that have reached their service life, continued house improvements are likely to continue.
- It can be very inconvenient to have your family be required to move out of your house during renovation construction.
Deciding if you should renovate a home or build a new house is right for you requires a disciplined approach of carefully measuring the pros and cons of each option.
The owner conducting their research will set the table for the assistance of a real estate professional or professional general contractor. Consulting a qualified general contractor as a trusted advisor will contribute greatly to your final assessment.
Conclusion
Choosing between a house renovation verse building a house is difficult to completely assess without the facts. This requires having the estimated cost for renovation and new home construction to determine which is the best option from a financial feasibility perspective.
With a carefully prepared financial feasibility the owner can create confidence in which of these two strategies will be the best fit for their needs.
Of course, there are still personal aspects of this dilemma to take into consideration, such as school districts, the employment commute, and neighborhood factors.
In some cases when the decision isn’t pending on the financial aspects, the owner can simply work through personal matters to make the determination.
Although this is not normally the case, having financial feasibility can be the determining factor.
