Given the rapid technological changes in the construction industry and the growing list of codes and compliance regulations, the age-old question of renovation versus new construction has become increasingly relevant. But which option is the best choice for your property? On a tight budget, are renovations always the more cost-effective, better option? Is new construction far more expensive than rehabbing an existing space? Before making this important choice, we’re here to debunk four myths regarding renovations and new construction.
Myth #1: You can purchase an existing property, renovate it, and you will receive a good rate of return on your investment.
This might have been true at one point in time, especially in old, congested towns and cities where undeveloped land was scarce. But it’s not the case anymore. If you are looking for a good rate of return in 2017, you’re more likely to have a positive outcome if you build new, rather than renovate an existing structure. Why? When constructing a new building, you can be sure you’ll be compliant with all current codes – electrical, handicap, environmental, etc. When renovating an older structure, your upfront investment may be less, but if the cost of your renovations exceeds 30% of the assessed value, you are required to bring the entire property up to all current building codes. Depending on the age and condition of the building, this could require significantly more money and precious time in determining how to upgrade the existing structure to be code-compliant.
Myth #2: Renovation is faster, less expensive and hassle-free.
Depending on the extent of renovation, it’s possible to be faster or less expensive, but no construction project is hassle-free. There are so many unknowns and potential for surprises when working with an existing structure. You have no idea what might be hiding behind the walls – asbestos, mold, bad wiring, poor insulation – and once you find it, you have to fix it. Upgrading old systems or abating toxic materials is very costly and time-consuming and is often much more complicated than installing new systems in new construction.
If you are planning to add an extra floor or expand the footprint, you may want to reconsider. Additional square footage will likely put a strain on existing systems, such as HVAC and electrical. Even if you decide to upgrade these systems, you’re still stuck with old ductwork, plumbing, and pipes unless you completely gut the structure. Each situation is unique, but it’s often less of a headache to demolish an existing building and start over from scratch. New construction and design technologies now enable contractors to complete new buildings much faster and more efficiently than a renovation of an existing property.
Myth #3: Once I have renovated the property, the valuation of the building will definitely go above the price I paid for the building.
This is certainly not a guarantee. If you have not done your homework and looked at the numbers carefully, you may have spent more money for less valued property. There are too many fees and surprises in the building industry and they can be catastrophic to investment. Also, the real estate market fluctuates often and is beyond our control. If you buy when the marketing is high and then the market softens, you’ll almost certainly be upside downon your property. The market drives so many factors – construction costs, interest rates, fees, etc. This is always a risk when dealing with real estate and should be a consideration when deciding how to move forward with your project.
Myth #4: Moving your operations to a brand new development is always the better option.
Not necessarily. Remember three mantras of real estate: location, location and location. Carefully analyze the pros and cons of your current location to determine the best action plan. Some locations cannot be created from scratch and staying could end up being more valuable to you in the long run, even if project costs are more expensive in the short term.
The most important thing to understand from all this is each situation is unique and presents its own set of challenges. Sometimes renovations are the better and more affordable option, but that’s not always the case. Doing your research and being informed is imperative for a successful project and will make for a much smoother and less stressful experience.
(Bob France is the President and CEO of Senate Construction Corp.)