Your castle, sanctuary, nest; your largest investment, the place where you store your stuff to keep it from getting rained on: owning a home is the ultimate or at least medium-term financial goal of many. This kind of heartfelt enthusiasm is exactly why it’s important to keep emotion out of major financial decisions. Remember, a house isn’t the same as a doughnut to cheer yourself up after a rough day.
Is it cheaper to build your own home than buy one? As it turns out, it’s not that easy to compare the cost of buying land and building a house vs buying a house either from a developer or its current occupant. Complicating things further is the fact that a lot more than money is at stake here: your future comfort, plans for a family and even your health all depend on making the right financial choices. We don’t claim to have all the answers here, but hopefully, the following 5-minute read will make the differences between building or buying a house a little clearer.
Table of Contents
- 1 Building Your Dream Home on a Budget
- 2 The Main Costs Involved in Building a House
- 3 Additional Costs to Keep in Mind
- 4 Advantages of Building a House
- 5 Buying an Existing Home
- 6 Advantages of Buying a Home
- 7 Is It Cheaper to Buy or Build a Home? Or Is Renting the Best Option?
- 8 Time, Energy and Money
- 9 Should I Build or Buy a House for My Family?
Building Your Dream Home on a Budget
How much does it cost to build your own house? Who can you turn to for help, and where do you even start?
Seen from the outside, the whole process is so intimidating that building your own home vs buying seems like a lunatic’s choice. While it’s true that there are a few hoops to jump through and some risks you should be aware of, getting it right is not all that difficult – and it may work out much cheaper.
Old buildings’ value is determined by how useful they are now, not how much it cost to build them. Is building your own home cheaper than buying, then? Maybe: some decades-old houses have been increasing in value year after year, making them unaffordable. At the same time, their plumbing and roofs may be on their last legs, the location may be rapidly de-gentrifying and the local property market heading for a slump – factoring in a building’s maintenance expenses and future resale value often makes building the more attractive option.
What’s also worth thinking about is that there are now cheap ways to build houses that weren’t common just ten years ago. These range from new materials to techniques like modular construction. Automated and more user-friendly machinery means lower labor costs, while innovations like the use of virtual reality in the design stage make everything run more smoothly.
So, don’t be fooled by knee-jerk responses to the question “Should I build or buy a house for my family?” – building is definitely an option worth considering, even if you’re living on $1,000 a month. Evaluating this has to be done on a case-by-case basis and requires a little research, effort, and judgment. If you’re thinking of investing $300,000 in your future happiness, this will often turn out to be time well spent.
The Main Costs Involved in Building a House
At present, nobody knows how to build a house with no money unless you’re willing to embrace the Walden Pond lifestyle with a cottage in the woods. Assuming that you have a job, you’re bad at hunting and don’t like mosquitoes, you’ll almost certainly want to build your house in a populated area. You’ll have to spend something, and knowing how much before you start will save you a ton of grief.
This, of course, means drawing up a budget. While you’re still just building castles in the air, you can estimate the costs for each of the following items, but you’ll definitely want to refine your figures as you get closer to making a commitment.
- Architect’s Drawings
Expect to pay around $5,000 in total for a custom design from an experienced architect. This, for a fact, is money well spent: in addition to making a home more attractive, comfier to live in and easier to sell at some point in the future, a good architect will actually save you money on materials, labor and as a liaison during the actual construction. If you like, you can also search for free blueprints from well-known architects made available as a public service; in this case, you only need to pay a licensed architect to review them for compliance with local building codes.
- Assorted Permissions
A building permit, impact fee, land inspection and another government skulduggery should run to about $7,000. This varies significantly depending on where in the U.S.A you live; you might want to find out before you even consider building your own house.
Unsurprisingly, a major portion of both the cost of building a house vs buying a house is the land itself. This depends on how large the plot is and where it’s located: a single square foot in Manhattan may sell for as much as $10,000, while the same sum can get you 60 whole acres in Nevada. They aren’t exceptionally beautiful acres, though:
Plots on inclines are sometimes cheaper than those on level ground, even though many expensive neighborhoods lie on hilly terrain. This is because shifting around several tons of rock and earth to create a level, the stable building site is not cheap. The cost of excavating the foundation and basement (if any) can go in here too, and because it’s difficult to get a mole’s-eye view until you actually start digging, there may be a big difference between the initial estimate and the final bill.
- Top, Bottom, and Sides
Your house won’t be much fun to live in if it doesn’t keep the rain and wind out. There are dozens of ways to accomplish this, though: do you want a wood frame or perhaps brick walls? What about the roof, flooring, and windows? Changing your mind once these are in place is pretty expensive, so choose carefully. There are a number of websites that will help you estimate how much each option will cost.
- Fittings and Trim
Some people are surprised to learn that the interior of a house (meaning the pipes, wiring, cabinets, painting, bathroom, carpet, etc.) usually costs more than the foundation, walls and roof combined. When you’re building your own house, this expenditure is at least partly under your control, though you’ll probably end up disappointed if you scrimp too much. When buying, on the other hand, you effectively get the interior fittings at a discount: they’ve been used and worn to some extent, and no seller is going to inventory them individually. (A pre-owned home with very good trim does normally sell more quickly or for a higher price, of course).
Additional Costs to Keep in Mind
Is it cheaper to build or buy a house? Unfortunately, as some people have found out to their cost, this question can’t be definitively answered before you finish. Some expenses, either not related to the actual building process or contingencies you’re hoping won’t happen, must be included in your budget, even if it’s only stuck on it with a Post-It note. Life, as the saying goes, happens.
- Financing Expenses. Construction loans have a higher interest rate than mortgages to reflect their shorter lifespan and the risk that the house may never actually get built. This rate is variable, too, meaning that the Fed doing something weird may mean you end up paying more than you expected.
- Land Clearance. We’ve covered earthmoving, but before the bulldozers can start rolling in, dense vegetation (and the spiders and snakes it contains) will have to be removed.
- Furnishings. If building a house as a rental property, you may also have to install certain appliances, which jacks up the effective cost. Contrary to popular belief, this isn’t a legal requirement, but most potential tenants will turn up their noses at any rental without at least the basics.
- Utilities. Hooking up water and power to a new building usually carries a fee, especially if the city or utility company has to run a new pipe or cable to reach your property. Installing a septic tank or borehole may be cheaper.
- Cleaning Services. A newly-built house often looks like, well, a construction site. Normally, you won’t have to worry about this if you’ve used a reputable builder, but you may need to spend some money on making it habitable. A new car smells nice, a new house not always.
- Repairs. Substandard work discovered only after you’ve signed off on the invoice will normally be your responsibility to repair. Depending on the area, empty buildings are also at risk of casual vandalism or people stealing wiring and pipes right out of the walls (kids these days).
Never, ever use a contractor that’s not insured and licensed in your state. This is almost always a false saving that will lead to cardiac distress.
- Landscaping. Congratulations! Your house now stands proudly, but on a patch of weeds and cigarette butts. Unless you plan to establish a garden from scratch yourself, which takes months and plenty of sweat, you will want to get a well-equipped crew in to do it for you. They don’t work for free, though, and sod rolls, saplings and topsoil can end up costing a bundle if you plan to cover 5,000 sq ft or so.
- Decorating. Simply living in a building doesn’t really make it home. You may feel that you just can’t deal with the original color of the walls once you see it, or find that some of your old furniture doesn’t fit. Sprucing the place up a bit is an optional expense, but it will be money well spent if it makes you and your loved ones feel more comfortable.
Advantages of Building a House
Building a house is not for everyone. If you’re too busy or unwilling to field phone calls demanding immediate decisions, visit the site periodically to see what’s going on, spend time learning new things and generally take an active hand in the process, buying might be better for you. If, however, you think you’re up for it, building can be very rewarding and, in the end, you’ll end up with something owned by you in every sense of the word.
- You can choose exactly the floorplan and design that suit you, which is probably the single best reason to build rather than buy. It’s recommended, however, that you just give the architect the general idea but follow his lead on specifics; no professional likes backseat drivers.
- You’re less likely to be hit with unexpected repair bills soon after moving in. Inspections are essential when buying, but don’t turn up every problem every time, which is something to keep in mind especially when buying old houses vs new houses.
- In areas with a housing shortage, sheer competition between buyers may have pushed up prices beyond what’s reasonable or sustainable. Assuming you can wait about 7 months for a new build, you can sidestep the market.
- Financing can be done in stages, potentially saving you money. You could, for instance, buy the land out of savings now, get a construction loan later (at any point, you’ll be paying interest only on the amount you’ve actually used), look over personal loan websites in case you need a top-up, then finally refinance the whole caboodle with a mortgage at a lower interest rate.
- Though older houses can sometimes be retrofitted to be more environmentally friendly, planning energy saving technology from the start is usually much cheaper.
Buying an Existing Home
Building your own home vs buying is a much more complicated process. When buying, you can browse property listings online, talk to real estate agents whose job is literally to help you, use lawyers that specialize in these transactions, get walked through the mortgage application process, use building inspectors and other specialists you can trust… At every single step of the way, there’s someone to hold your hand (for a fee). For this reason alone, most first-time homeowners faced with the choice of building or buying a house will like the latter much better.
Just because the proceedings are streamlined doesn’t mean it’s easy, though. While building a house gives you a lot more to figure out, there’s still an art to selecting the right property to buy, knowing how to negotiate, dealing with financial issues and much more. It’s essential to do your research, know your rights, and be willing to walk away from a bad or unsuitable deal instead of getting sucked in by all the excitement.
There’s a well-known proverb in the real estate game: the most important factors are always location, location, and location. A simpler way of saying the same thing is: “Don’t buy the best house in the worst neighborhood, go for the worst house in the best neighborhood you can afford.
Advantages of Buying a Home
Apart from simplicity, buying a new home rather than building one has a number of important perks:
- Applying for a mortgage (and keeping up with the payments) is a great way of improving your credit score, which has numerous benefits. It indicates to banks that you’re planning for the long term and have a handle on your month-to-month finances.
- The process of buying property occasionally runs into snags, but it’s way, way more predictable than new construction. When building, unexpected sub-surface conditions, problems with building permits, an endangered species of rat found on the property or contractor difficulties (whether their fault or not) frequently cause cost overruns or delays that may leave you looking for short-term rentals.
- If moving a long distance, buying will almost certainly work out cheaper than building. This option has real financial implications: should you be lucky enough to have a job you can do anywhere, simply living outside the city will save you an average of $5,000 per year on housing costs.
- It’s difficult to find a vacant lot in a well-established community and neighborhood, which is typically where the best schools, stores, and restaurants are. Unlike buying, building may require you to adjust your lifestyle a little.
- You’re not totally without options when it comes to transforming an existing home to something that suits you better. You can, for instance, make even an older house look less like the Bates Motel with some cheap bathroom remodel ideas.
Is It Cheaper to Buy or Build a Home? Or Is Renting the Best Option?
Construction costs differ based on factors like the local median wage and time of year, especially in Northern latitudes. Prices of existing properties vary based on demand, which depends heavily on interest rates and whether the local economy is expanding or shrinking. Once in a while, a house or a vacant plot comes on the market at a ridiculously low price, perhaps due to foreclosure or the owner needing to convert it into cash quickly.
This whole question is a minefield, and there probably aren’t too many people you can turn to for a reliable answer. Estate agents will generally tell you to buy, builders will tell you to build. As a TL;DR, however, we can give you the following pointers:
- Building a house requires the most commitment and carries the greatest risk. You may, for instance, go into debt grabbing up a piece of a new subdivision, only to have property values tank once construction is complete.
- Buying is much faster and rarely a bad option unless you simply can’t find the kind of house you’re looking for. The major trade-off is that you’ll end up paying more than a savvy individual who chooses to build their dream house instead.
- Renting, on average and over the long term, costs more than either since the landlord expects to make a profit. In terms of risk and flexibility, though, it’s by far the best, while constant monthly payments mean you won’t get hit with a bad repair bill at the worst possible moment.
There is a middle way between buying and building: getting a fixer-upper, even if this means keeping your current home and tearing the new property down to the studs. This isn’t for everyone and can be risky, but may also net you $1,000’s in profit if you’re willing to do some of the work yourself.
Time, Energy and Money
Just as important as the financial aspect is the question of whether or not you have the time and tenacity to see a building project through. Some builders offer a full turn-key service, but it’s more likely that you’ll have to deal with plumbers, carpenters and a whole mess of contractors yourself. Stress and frustration are part and parcel of the experience.
Also, before you decide to build, be aware that you’re not allowed to quit halfway through. At worst, whatever you’ve accomplished up to that point will be lost to the elements; at best, you’ll tie up a huge chunk of money in something you can’t use.
Should I Build or Buy a House for My Family?
Look before you leap! Human nature is weird: the same person who will spend months researching which type of car they want to buy, down to the kind of tires they want, will sometimes take the first auto loan offered to them. The choice between building or buying a home is far more complicated: in one neighborhood, market prices may have dropped recently due to a number of people moving out around the same time, making buying the more economical option. Just across the highway, building might be cheaper.
Comparing your options, in numbers, can save you a ton of money. This takes a little effort, but there are plenty of resources available to help you. Even if designing your own dream home is your lifelong dream, you might find you’re better off waiting a few years or exploring other options.
Frequently Asked Questions
- Do you prefer the flexibility of a custom-built house over the shorter build time of an IKEA option?
- Is your location likely to experience extreme weather while construction is going on? If so, modular is less of a risk.
- How do the resale values and warranties compare? A high-quality modular home may do as well as a conventional house, but “stick-built” is still preferred.