Home BuyingInvesting

How Much Does It Cost to Build a House?

How much does it cost to build a house? Firstly, land, in itself, is valuable. Property owners may build a home and grow agricultural products on vacant land. Similarly, it could be utilized as an investment. However, creating this value is time consuming and, equally as important, expensive. For instance, hiring construction workers and purchasing supplies can costs hundreds of thousands of dollars.

Yet homebuyers who are willing to put in the work themselves reap these benefits. That is to say, they could purchase vacant property and construct a house. This is much cheaper than a traditional mortgage. Moreover, they may sell the property for more and make a sizable profit after building the home.

How much does it cost to build a house on developed land?

An empty piece of land is much cheaper than property with a house on top of it. In fact, this may be the main financial advantage of building a home. The average residential property, nationwide, costs about $282,000. That is the equivalent of $153.00 per square foot. Meanwhile, several years ago, the University of Illinois and the University of Michigan published a joint study on the valuation of vacant property.

The researchers found that, on average, developed land cost $11.73 per square foot. To clarify, this price variation is just shy of 1,500% in difference. Even though the economists looked at values from 2010, vacant properties were still much cheaper than house prices during that year. In short, the average mortgage ten years ago was $170,000 or $104.04 per square foot, almost ten times as much as empty urban land.

To illustrate, here is an example: A family bought a 2,000 square foot property in 2010. If the house was prebuilt, it would have a price-tag of $208,000 (at $104.04 per square foot). Yet the land in itself would’ve only cost less than $25,000 (assuming that it’s priced at the $11.73 per square foot average). Their profit, after constructing the home, is over $180,000. While this difference seems unbelievably large, it is justified.

Investment Value: How much does it cost to build a house and resell it?

Firstly, home construction companies must obtain permits, hire workers, purchase large machines, and assemble supplies. Secondly, flooring, walls, and materials are just as expensive. All together, the cost of constructing a house (commercially) was almost $240,000 in 2017. A private individual, meanwhile, doesn’t incur any employee expenses when they build a home. Moreover, companies deploy large trucks and machines in order to save time. Families and nonprofessional builders are more flexible in that regard.

Many people build houses for the sole purpose of selling them. To go back to our example, the family’s $180,000 in earnings is four times the average household income (in 2010). They could make a living out of building homes on vacant land. Even after we factor in the equipment and supplies, the profits are still enough to sustain real estate investors for a prolonged period.

Prefab Homes

A prefab house is prebuilt. Landowners may order one, and the supplier ships it directly to their location. Typically, prefab homes cost $200 per square foot, which is more pricy than a traditional house, let alone vacant land. Having said that, buyers could find much more affordable options. Moreover, adding a prefab house to an empty piece of land adds to its value.

That is to say, you may end up selling the property for much more than what it (and the home) cost you. This is especially important because prefab houses are new. Therefore, many buyers are willing to pay a higher price for them than previously-occupied homes.

How much does it cost to build a house? The interest and downpayment matter

Unlike traditional mortgages, vacant land loans have their own set of rules. Firstly, many lenders will require a down payment that’s 50% or more. In contrast, that of a typical mortgage is between 3% and 7%. Secondly, if you’re looking to build a house, the interest rate might be relatively high. Thirdly, most of the loans are limited to a ten-year term. Therefore, your monthly payments are costlier. 

Yet there are plenty of resources that investors can rely on to overcome these hurdles.

Alternative Lenders

The United States Department of Agriculture (USDA) has a program that particularly serves aspiring home builders. USDA loans have a three percent interest rate and property buyers don’t need to make a downpayment. Just as importantly, the Small Business Association (SBA) may offer assistance. For example, they can lend you money that covers half of the downpayment.

The SBA issues 20-year loan terms. As a result, the monthly installments are more manageable. The lender will still have to take care of the other half of the downpayment. However, keep in mind that vacant land is very cheap. At an average value of about $25,000, 50% or 25% of that amount is within many home builders’ grasp. Meanwhile, since the typical house’s cost was $170,000 in 2010, 3% to 7% would equal to $5,100 to $12,000.

In the same vein, financing vacant developed land with a traditional home equity loan is always an option, specifically if you plan to live in the house that you’re building. Either way, whether your construction goals are residential or commercial, there are many advantages to taking this route. That is to say, you can save money on the mortgage, secure a reduced interest rate, and, in comparison to home building companies, dramatically cut expenses.

How much does it cost to build a house? In short, plenty of time and planning. This will maximize your profits, regardless of what your objectives are.

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