BRRRR vs. New Construction: Which Makes More Money in 2026 (I Did the Math)

Is it better to buy an existing property with value-add potential or a new construction home in 2026? For years, there was no debate. The ability to buy a property at a discount, add value through renovations, force appreciation, and recycle your money made the BRRRR method a no-brainer for most investors. But in 2026, things are a little different. Builders are sitting on inventory, which means new homes are being sold for less than we’ve seen in years. Not to mention, builders are giving buyers massive incentives like mortgage rate buydowns, closing credits, and even price reductions—just to get these properties off their books. But are these perks enough to make new construction a better option than the BRRRR strategy? Today, we’re going to put them head-to-head and find out. I’m comparing two real estate deals in the exact same market—a new construction home and a value-add property. We’ll crunch the numbers and see which strategy actually comes out on top from a cash flow and appreciation perspective. The answer may surprise you. In This Episode We Cover Three scenarios when you might prefer a new build to a fixer-upper A head-to-head comparison of two real estate deals in the same market How to negotiate huge builder incentives when buying a new home How to choose the right investing strategy for you in 2026 The biggest pros and cons of buying a new construction home And So Much More! Check out more resources from this show on ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠BiggerPockets.com⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠h⁠⁠t⁠t⁠ps://www⁠.biggerpockets.com/blog/real-estate-1323. Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠[email protected]⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Dave Meyer?

  Should you buy a fixer-upper as an investment property or a brand-new house? For years, we'd never even asked this question. Buying a property, fixing it up to increase its value, and renting it out was the obvious choice. But the market has changed, and renting out a newly-built home is more appealing than it's ever been before. We're seeing dropping prices, mortgage rate buydowns, and new properties don't come with maintenance worries. It is an outside-the-box option, but savvy investors are taking notice. But of course, renovations with the BRRRR method can still be one of the most powerful scaling tools available to investors. So which one should you pick?

• 0:42Dave Meyer?

  At the end of the day, it really just all comes down to the math. So today on the show, I'm going to analyze two deals in the exact same market. One new construction, one BRRRR deal, and we're going to put them head-to-head to see what's a better investment in 2026. New construction or value-add? The answer might surprise you.

• 1:07Dave Meyer?

  Hey, everyone. It's Dave. Welcome to the BiggerPockets Podcast. We've got a fun show today. I am really excited about it. We're actually just going to compare two different types of investments and decide which is the best one in 2026. We're going to first look at a classic kind of investment, a value-add deal, kind of like a BRRRR, where you renovate an existing home, rent it out, build some equity. It's a classic. We're going to compare that to buying new construction, which may not be a strategy you've thought of before. But I think as we go through this episode, you'll see that the pros and cons and the trade-offs of each strategy really might surprise you. If you had asked me before COVID, should I go out and buy new construction?

• 1:52Dave Meyer?

  I would have said no in one second. I wouldn't have even really thought about it. As an investor myself, it never crossed my mind for at least the first 12 years or so of my investing career, because buying a property that needed some repairs, even just a cosmetic update, was just a no-brainer way to build equity in your portfolio. That was basically the whole job of being the investor, was doing the BRRRR over and over and over again. But there are things in the market going on right now that make it intriguing to buy new construction. And there are four things you should know about why investors should consider new construction right now.

• 2:33Dave Meyer?

  The first one is that builders are sitting on a ton of inventory that they've already built and haven't sold yet. All of this inventory means that builders are willing to cut deals, because builders just have a different business model than a home seller. If a regular homeowner doesn't like their price, they might just choose not to sell. But the way a builder's business model works is they have to move this inventory. Otherwise, they're just paying for it indefinitely, and that doesn't work for them. And so they are offering all sorts of incentives to get these homes off their books. These incentives come in the form of rate buydowns, which we're going to talk about a lot right now. A lot of them are advertising 5.5% mortgage rates on their websites right now.

• 3:16Dave Meyer?

  They're also doing seller concessions, which can reduce the cost of your closing costs, for example, or you can negotiate better finishes in their home. And sometimes, they're even willing to drop the price. The second thing is, and listen to this, because it's kind of crazy, to go out and buy a newly-built home right now is cheaper than buying an existing home on average across the United States. There's actually an analysis that the National Association of Home Builders did, and they found that the median home price for a newly-built home was $1,400 less than an existing home. Now, $1,400, grand scheme of things, not that big of a deal, but this is not normal.

• 4:01Dave Meyer?

  Usually, new construction, to go out and buy a new home, is a lot more expensive than going out and buying the existing home. But the opposite is true right now, which is exactly what makes this so interesting to look at. So those are two things that are sort of happening right now in 2026. Then on top of that, there are some benefits that are always there. A newly-built home is going to have lower maintenance and repair costs, especially in early years, which allows you to build up reserves and save up for your next purchase. That's a great thing for your portfolio. And then the second thing, that is not true in every situation, but in many situations, new construction is going to have higher renter demand.

• 4:45Dave Meyer?

  People will be attracted to a new home with modern amenities more than a dated home. So that means, one, you may have lower vacancies, but two, you can probably charge higher rent. So when you put all those things together, the fact that builders are willing to cut deals, that new construction is cheaper than existing homes, the lower maintenance and repair costs, and higher renter demand, it makes it worth looking at. For the first time, maybe, at least as long as I've been an investor, but probably for many decades, for the first time, it's actually worth looking at. With that, let's jump into the analysis. And for this analysis, we're going to look at two properties in the exact same market.

• 5:30Dave Meyer?

  And I picked, not entirely randomly, Sherman, Texas. Why Sherman? I wanted a good area where I could find a solid deal for both kinds of investments. New construction is not everywhere. Builders tend to build sort of in pockets. I went on Lennar. They're one of the biggest home builders in the country. They actually have an investor marketplace. So I went on there, looked for deals that I liked new construction for, and I found a deal in Sherman, Texas, that I like. And I like Sherman because it's near Dallas, which is a very good investing market, some of the best jobs, best population growth in the country. And Sherman, in particular, which is a suburb of Dallas, or a small city outside Dallas, in particular, has huge investments in chip manufacturing.

• 6:14Dave Meyer?

  Texas Instruments actually is investing $60 billion into the area. It's creating thousands of new, high-paying jobs. That leads to the needs for more work for housing. So it's a good area. It's also super affordable, which I really like. It's about half the national average in terms of price. So I genuinely like Sherman, and I was able to find what I think is a good BRRRR deal and a good new construction deal, so we can get a true test of which one's better. All right, so first up, I am going to analyze the new construction deal, but we do have to take a quick break. We'll be right back.

• 6:50Henry Washington?

  Here's a strategy that most W2 employees have never heard of. Normally, if you want to write off a rental property against your regular income, you need real estate professional status. That means tracking hundreds of hours a year. Rent to Retirement just launched a program that skips all of that. It's called the STR loophole tenant placement program. Here's how it works. You buy one of Rent to Retirement's Class A new construction investment properties. You set up an Airbnb listing and self-manage it for the remainder of the year. Rent to Retirement then rents the home as a short-term rental to establish it as an STR for the year, no furnishing required, making this the easy button to save five or six figures in taxes this year.

• 7:32Henry Washington?

  And because you're the sole manager, there's no hourly minimum to meet. That lets you use a cost segregation study to accelerate the depreciation and potentially write off over $100,000 against your income, even on your first rental. Add in cash back up to 13% of the home price, which exceeds $60,000 on some properties. With this massive cash-back incentives, investors are seeing total returns up to 126%. New construction, A-class properties, and inventory is limited. Learn more at biggerpockets.com/retirement or text REI to 33777. Again, text REI to 33777.

• 8:14Dave Meyer?

  Summer bookings sound great until someone slips by the pool, gets hurt on your dock, or damages your property during a long holiday weekend. A lot of short-term rental investors don't realize their standard policy may leave gaps when it comes to short-term rental activity. That's why investors use Steadily. They offer landlord insurance built for real estate investors, including short-term rentals. And if you're a BiggerPockets Pro member, you'll also get 5% off your landlord insurance premiums. Visit biggerpockets.com/landlordinsurance to learn more.

• 8:46Henry Washington?

  Quick word about a new pro perk you'll want to know about. Aven. If you're a homeowner, there's a good chance you're sitting on equity that you're not using. The problem is tapping into that usually means a cash-out refi, a traditional second mortgage, or weeks of paperwork just to get approved. Aven built something different. It's a credit card, but it's backed by your home equity, so you get a lot of the rate benefits of a HELOC with the flexibility of a card you can use anywhere. Rates are typically well below a standard credit card. Approval is fast and mostly online, and you can use it for anything. A renovation, paying down high-interest debt, or just have more breathing room in your budget. And if you're a BiggerPockets Pro member, there's an extra reason to check it out. Get approved for the Aven card, and you'll get a $400 statement credit after spending

• 9:30Henry Washington?

  $400 on your Aven card. Enough to cover your entire annual Pro membership. Head over to aven.com/biggerpockets to see if you qualify. Aven Financial, NMLS #2042345. Cards issued per 202 license from Visa USA, Inc. by Coastal Community Bank. NMLS #462289. Member FDIC, equal housing lender. Subject to approval. Terms apply. Visit aven.com for details.

• 9:51Speaker 02

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• 10:22Dave Meyer?

  Welcome back to the BiggerPockets Podcast. Today, we're doing a head-to-head between new construction and the BRRRR in Sherman, Texas. I'm going to start my analysis by just running the numbers on the new construction. So here's the deal I found. It is from Lennar, that's the builder. They're one of the biggest builders in the country. And they have this property listed for $243,000 and it's in Sherman, Texas. So if you look at it, it's a little bit outside Sherman, but it's really not on the outskirts. So I like that. That is something you really do need to look for in new construction. Sometimes they kind of build in the middle of nowhere and you definitely don't want that. Now, I wish they had better pictures on the website, but they don't.

• 11:05Dave Meyer?

  But you know, you can go on their website and look at some of their stock homes. It's pretty nice. It is builder grade. It's not super high-end finishes, but it is going to be a pretty nice home. Like if you walked into it, you'd say, this is a nice house. It has all the amenities I was expecting. Now, I did go onto the street here and what I saw, I was doing the street view, is that it's sort of, you know, it's not super developed over here. It's going to be in a subdivision with a lot of similar homes, which we'll talk about for rents in just a minute. But some of the specs on this house, four-bed, two-bath, great for almost anyone, for families. It's 1,700 square feet, so not huge for four bedrooms, but still a very nice-sized home.

• 11:50Dave Meyer?

  It's a one-story ranch, which is super convenient and appealing to a lot of people. And it has a two-car garage, also a big selling point. All right, so now that we've combed through the listing a little bit, I'm going to move over to the BiggerPockets Calculator. If you want to follow along here, go to biggerpockets.com/calculator and check out how to do great deal analysis really quickly. So what I'm going to do here is just put in, for now, I'm going to assume I'm paying full asking price for this. So that was $243,000, so I'll put that into the calculator. And they actually, one of the nice things about buying from a builder is they've figured out a lot of the cost for you and they put their own closing costs at $3,500, so you know that's what you're going to be doing. You're not going to be rehabbing this property, right?

• 12:34Dave Meyer?

  So there's no opportunity for value add in new construction. That is one of the cons or the downsides to this, is you can't build equity, right? There's nothing to fix on this property, it's brand-new. And so the analysis is actually pretty straightforward here because we know what we're buying it for, $243. I'm going to assume that you're buying this as an investor and putting 25% down. And on their website, you might have noticed that they were advertising 5.5% mortgage rates. So they're saying that, they're just telling you right off the bat, you don't even need to go out and negotiate this. They're offering you right off the bat, 5.5% interest rates.

• 13:14Dave Meyer?

  Now, right now, as of today, when I'm recording this, mortgage rates are around 6.6-ish for a primary. So for an investor, you're probably looking at something like 7%. And so that's very significant savings, having 1.5 percentage points off your mortgage rates. Next, we're going to put in rent. I did some comps before this and what I was looking at is around $2,000 is what I think we can get. That's pretty good. If you're looking at the rent-to-price ratio, getting two grand in rent for a property you're buying for $243,000 is pretty good. So I'm already thinking this property is going to cash flow. But, we're in Texas. And this is where things start to hurt a little bit, is where you get your property taxes.

• 13:59Dave Meyer?

  Texas has one of the highest property tax rates in the entire country at 2.2%. They don't have an income tax, so they got to get their tax somewhere. But that means that for this property, even though you're just buying it for $243, the annual taxes are $5,346. So that's going to take a bite out of your cash flow, but that's just what it is. For insurance, actually, Lennar has scoped this out for us and it's $1,280. So those are our fixed costs, right? We know our mortgage, we know our taxes, and we know our insurance. That stuff's not going to change over the lifetime of our hold. But now we move on to what are called variable costs.

• 14:41Dave Meyer?

  So these are things like repairs and maintenance and capital expenditures. Capital expenditures are similar to repairs and maintenance, but it's big-ticket items. It's like repairing a roof or adding a new unit or adding an HVAC system, air conditioning, something like that. It's treated differently by the IRS, so we separate them. Now, this is where new construction really starts to shine. For repairs and maintenance, a lot of times, they come with warranties for several years. And there's really going to be, there should be no capital expenditures in my mind for eight years. First thing you'll probably have to replace is a water heater. Hopefully that's eight to 10 years from now.

• 15:22Dave Meyer?

  But your HVAC should be good, your roof should be good for 20 to 30 years. All of your electrical and plumbing, none of that's going to have problems. Siding shouldn't have any problems. So you can put the numbers here for your repairs, maintenance, capital expenditures, which are really big things, a lot lower. Now, I'm not going to put them at zero. And in fact, I'm going to keep my repairs and maintenance at 3%. And I'm going to put my capital expenditures at 2%. So I'm going to keep total 5% in reserves. Now, the reason I'm not making it zero, even though it should be zero for several years, is because I want to build up a cash reserve. And sometimes things break. Now, with a builder, when you're negotiating, you should get that warranty, right?

• 16:06Dave Meyer?

  And so you're doing no repairs and maintenance for the first two years. But I just want to put away some of my money so that in year five, six, seven, when I get to the point where I have to replace that water heater, I've put some money aside. But hopefully you're not touching that cash reserve for a long time because this stuff is so new. The one reason I do have repairs and maintenance is not because I expect something to break. It's actually because there are turnover costs. Like if you have a tenant for two or three years and they move out, you're going to have to touch some stuff up. So I like putting money away for that, even though I'm not going to have to like really repair any big things. Because a warranty is not going to cover that. So that's why I keep it at around 5%.

• 16:49Dave Meyer?

  Vacancy, I'm going to put at 5% as well. And then property management fees, as an out-of-state investor, I usually pay about 8%. Now, that's it. This is a single-family home, so I'm not planning, as the property owner, to pay for the utilities. I'm going to just have my tenants sign up for electricity and gas, water, garbage, all of that, right? I don't have to think about that. So I'm just going to hit finish analysis and let's see how this deal does. All right, so here's what we got. For our property in Sherman, Texas, just analyzing it the way I did it, we had $53 a month in cash flow for a 1% cash-on-cash return.

• 17:30Dave Meyer?

  Not great, but that's a cash-flowing rental property that's going to have very little work. But if this were me, if there's no value-add opportunity, a 1% cash-on-cash return is not good enough. But luckily, this is not how we have to buy this deal. Remember, when I did this analysis, I just put in things as they were asking for, right? They were asking for $243. There's all that inventory on the market. Remember, this is the time to negotiate. And so there are a couple of things I would try and do if I were going out to buy this property. When you go to negotiate for new construction, you need to keep in mind, again, the business model of the builders.

• 18:14Dave Meyer?

  In this area where this home is, they're probably building dozens, if not hundreds, of homes. And so when you go out and negotiate, think about what the builder is thinking. They want to, at almost at all costs, maintain their comps. Because if they offer you 5% off this home and sell it to you for $220, now, that is a comp that everyone else is going to see. So every other home they go and sell, potentially dozens or hundreds of more homes, are going to be comped against that lower price. Texas, where we're buying this, this is a non-disclosure state, but in most states, other people are going to see that. The point here, though, is that builders are going to try and preserve the purchase price more than anything else.

• 18:57Dave Meyer?

  So even though you should try and negotiate price, and you can usually get it down a little bit, but they're going to be more stubborn on that, what you want to really try and do is get other types of seller concessions. And the things I would focus on are, one, a rate buy-down. And two, getting rid of all of your closing costs. That can lower your expenses, right? But then on top of that, you can maybe negotiate for a longer warranty to control your repair cost, right? Or better upgrades, like nicer appliances or something in the unit. Now, as an investor, I would actually go in that order of priority. For me, personally, I'd want to get my rate down first, then I'd try and get rid of the closing costs, then I'd try and get the longer warranty, and then I'd go for the nicer fixtures.

• 19:40Dave Meyer?

  So they are advertising on their website a 5.5% mortgage rate. I actually bet you can probably negotiate a 3-point buy-down right now. I bet you can get it to about 4.5%. That's like a 2.5-point buy-down. So now, I'm going to go in and just assume I can get a 4.5% interest rate and I can negotiate this down. And I'm going to put my closing costs at zero, because I'm going to assume they're willing to give up $3,500. So if I do that, that saves me $3,500 and that gets our cash-on-cash return up to 3.25. So honestly, I think this is pretty good. In most markets, you just can't find a 3% cash-on-cash return deal. You just can't.

• 20:22Dave Meyer?

  If you want to go out and buy a quote-unquote "turnkey" property where everything's done and you don't have to work and you could just kind of set it and forget it, this is a pretty good deal. You're in a good area that is likely going to appreciate long-term. You're getting a 10% annualized growth rate, which is about the stock market or better. And you're getting tax-advantaged cash flow at the same time.

• 20:49Dave Meyer?

  Now, this is a pretty good deal, in my opinion. Now, is it as good as BRRRR? We're going to look at that. But I think for some investors, this works. But at the same time, I would still try and negotiate down the price a little bit, right? Like, I'd like to get it to a 4%, 5% cash on cash return. That beats bonds, that beats most dividend stocks. So I think if I can get this for like $235, that gets you to a 4% cash on cash return. $200 bucks a month in cash flow. That's a good deal in today's market. So this is why I'm talking about new construction right now. Everyone says you can't find cash flow and cash flow is dead. But this is cash flow for a newly built property in a good area, right?

• 21:31Dave Meyer?

  The difference is, this rate buy down, getting that 4.5% mortgage rate instead of a 7% mortgage rate, goes from most deals on the MLS that do not cash flow, to a deal that does cash flow, that's going to have a warranty, that's going to have high demand, that's in a good area. This is why we're talking about new construction right now, because this is actually a good thing worthy of consideration for a lot of investors. But is it as good as the BRRRR? We're going to get to that analysis right after this break. You know, when I first started sharing my real estate journeys online, I didn't have a website. I had a spreadsheet, an Instagram account, and no idea how they'd ever connect.

• 22:16Dave Meyer?

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• 26:59Dave Meyer?

  Welcome back to the BiggerPockets Podcast. I'm Dave Meyer. We're doing our analysis head-to-head between new construction and the BRRRR. Before the break, I analyzed a new construction deal and found that we could get somewhere between a 3% and 4% cash on cash return for a newly-built home in a good area. That is pretty compelling. It's not the sexiest cash on cash return on earth, but in a good neighborhood for a newly-built home, that is a pretty darn good deal. So we got to compare that now and see if the BRRRR can do better. So for our analysis, I was just poking around on Zillow, looking for a deal. And I found in Sherman, Texas, in a good neighborhood.

• 27:43Dave Meyer?

  I actually think this is a slightly better neighborhood. It's closer to sort of the walkable downtown of Sherman, Texas. And I found it for $160,000. And the reason I picked this is, one, I think there's opportunity for a value add. It's a good BRRRR candidate, and it's very, very similar to new construction. So I really wanted to compare apples to apples. This property is four-bed, three-bath. So our new construction was 4-2, so this actually has a third bathroom. But it's about the same size. It's 1,700 square feet. This property, only a one-car garage, versus our new construction, a two-car garage. So these are important things when you're comping things out. But obviously, we're not going to find two exactly same properties.

• 28:28Dave Meyer?

  So I think these are pretty darn close. This property was built in 1961, which I like. Really like homes built in the 60s and 70s. And it's on a very nice-sized lot of 8,000 square feet. We can look at the pictures here. It's a nice ranch-style home. It looks like it's in pretty good shape. You can see at least in the living room, there are hardwood floors that can definitely stay. Those look pretty nice. I'm looking at the ceiling here. It's popcorn ceiling, so we're probably going to have to scrape that. Kitchen definitely needs to be renovated. It's definitely, it might be original cabinets in there. Some of it's been upgraded, but we're going to have to scrap that kitchen and start fresh there. Man, there's different kinds of floors in every single room in this house. So we're probably going to need some new flooring.

• 29:13Dave Meyer?

  It's definitely going to need paint. Oh, this bathroom's nice. So one of the bathrooms has been upgraded, so that'll help save us some money. The second bathroom definitely needs to be upgraded. It's not terrible, but it can use some work. And then the third bathroom needs some work. Backyard's not awful. There's some weird pergola thing, but we're going to need to put some work into the landscaping here. So overall, I was looking a little bit into expenses of the area. My estimate is that we're going to put in $30,000 into this project. So not crazy. I actually analyzed it, it came to about $25,000. But, you know, I'm just looking at Zillow right now. I don't know if there's something lurking in the walls here. So I'm going to throw an extra $5,000 into the budget, because realistically, having

• 29:57Dave Meyer?

  done this a lot, there's probably something wrong here that I am not seeing. So I'm going to put another $5,000 in here. Now, the other reason I like this is because of the comps. Now, Texas makes comping hard because they are a non-disclosure state, which means that they don't post what things sold for recently, which is a bummer. But I was just looking around at other listings, similar listings in the area, and I found this one here for $285. This is a super-similar home. This is a 4-2 for 1,700 square feet. So this is very similar, and it's right around the corner. Now, we don't know if it will sell for this price, but I am guessing, let's just knock it down, that it's going to sell instead of for $285. Let's say it's going to sell for $275.

• 30:43Dave Meyer?

  But this looks like what I would try and get this property to. It has nice floors, fresh paint, a builder, sort of renter-grade kitchen, but it's solid, right? It's a solid spot. On top of that, I also found another one that was actually for 320. This is a little bit bigger home. It's about 2,000 square feet, but it's also a 42. It's in a little better shape, but it's not super modern. So I would peg this one, maybe it will sell at 300. So I'm going to put my ARV, my after repair value for this property that we're going to BRRRR at 270, 275. Let's just call it 270. We're going to be conservative on this.

• 31:24Dave Meyer?

  But we can buy this property at 160 and we're putting $30,000 into it. So I'm already liking what this property is going to look like. But to really tell, we're going to have to go to the calculator and run the numbers. All right, so we're going to do our analysis here. We're going to put in our property address and then go to our purchase price, which is 160,000. Purchase closing costs are going to be, let's call it 4,500 bucks. It's going to be probably a little more expensive than going with the builder. They usually pay for some of those expenses. And ideally, like we talked about in our negotiation, you're paying zero closing costs for new construction. So the thing you gotta do here, when you're doing a value add is click this tab.

• 32:04Dave Meyer?

  If you're watching on YouTube, click this tab on the BiggerPockets calculator and go and put in the after repair value. I'm going to be conservative here. Let's just call it 260, just in case we're low. And we're going to put the repair values. I said 30,000, let's just call it 35,000. I'm just going to be extra conservative on this deal. So I don't know that much about it. Next, we're going to move on to our down payment, which I'm going to put at 25% because we're investors and our interest rate is going to be 7%. That's going to be a really big, probably the biggest difference between new construction and BRRRR. And so 7% between 4.5%, that's going to eat into your cash flow a little bit. But on this property, I think we could probably get similar rents.

• 32:47Dave Meyer?

  I think it's actually maybe a little bit higher because of the location. Let's call it 2050 instead of 2,000, just because of the location. It's in a more mature neighborhood. For expenses, our taxes are, man, it's 4,800 bucks, super expensive here. Insurance, 1,200 bucks. Repairs and maintenance, I'm going to put 5% repairs and maintenance. I'm going to put 8% for our capital expenditures, just because it's an older home. Things are going to come up. Vacancy at 5%. Management fees at 8%. And then for our other variable costs, I'm not touching them because again, I'm going to just have tenant pay it, right? They're going to pay electricity, gas, all that. So with that, let's finish our analysis. What we get here, pretty darn good deal. Wow.

• 33:32Dave Meyer?

  So this deal right here would come out right off the bat, $218 a month in cash flow for a 3.3% cash on cash return. So right here, even without negotiating, we're getting about the same cash on cash return, pretty darn close to new construction. So this is actually, you know, I just did this analysis for the first time, but this is actually a really good head-to-head comparison. But the thing I want you to think about here is it's not just about cash on cash return. We have this other metric here on the BiggerPockets calculator that you should look at, which is your compound annual growth rate. This is how quickly you're benefiting from all the things that you benefit in real estate. Cause it's not cash flow. It's appreciation, cash flow, amortization, tax benefits.

• 34:17Dave Meyer?

  And if you remember back to the new construction, that was growing about 10%. But with the BRRRR deal, it's 17%. And it's not because of the cash flow. It's because you invested $35,000 to drive up the value of this property by nearly $100,000. That is the reward you get for going out and doing the work, taking on the risk, taking on the time commitment to go out and do the BRRRR. You get a very similar cash on cash return, but your equity is growing so much faster in the BRRRR. And that obviously helps if you want to stare at your net worth, but that's not why most of us are in it.

• 35:01Dave Meyer?

  Most people are looking to scale their portfolio. And by building that equity, that means you can refinance out of this, take it and go do another deal. Now, when you refinance it, you should know that your cash on cash return is going to go down, right? You're going to be taking out a bigger loan. And so your cash on cash return is going to go closer to break even. But that's a decision that you get to make. That's the beauty of building equity is you get to decide, do I want to hold on to this property that has good equity and get a higher cash on cash return? Or do I take a property that's still going to be breaking even or better? It's not going to have great cash flow, but I can take my money out and go do this exact same deal again

• 35:45Dave Meyer?

  so I can scale up and build our portfolio. This is what's so great about the BRRRR. So which one is better though, right? As you can see, both have their pros and cons. New construction is better because it's less work. It's far more predictable and you're going to have a lot less headaches. And actually, the new construction deal will probably have better cash flow than a BRRRR after you do your refinance on that BRRRR. So there's a lot to like about that new construction. But the BRRRR is better for scaling, right? If you want to build equity and you really place a lot of value on recycling your capital

• 36:27Dave Meyer?

  so you can keep using the same money to acquire more and more and more properties, the BRRRR is better. So here's personally how I would think about it. If you are early in your investing career and you want to acquire more units, I would go with the BRRRR still. And there's just the value of recycling your capital with the BRRRR strategy, just like really can't be replicated anywhere else. The opportunity to build equity is so valuable early in your career. If you're not starting with a lot of capital. So for me, if I were in that circumstances, I was early and trying to scale up, I would probably still do this BRRRR deal. In other circumstances though, I would do new construction.

• 37:11Dave Meyer?

  And I think there's sort of like three buckets of investors that this makes sense for. The first is you already have a lot of money. Good for you. If you've got a lot of money, I would just go out and buy these deals, right? It's going to be less headache. You can buy them pretty easily. You're not going to have to scour for tons of deals. It'll probably work really well for you. The second is if you work full-time and you have a longer time horizon. If you're comfortable building financial freedom, building your portfolio over the next 15, 20 years, I would do new construction, right? That property is going to still be in good shape 15 years from now. And that's really, really valuable. And if you're just like, I have a high enough income, I can put enough money away,

• 37:52Dave Meyer?

  or I can still buy a new construction deal like this for $240,000 every two to three years? That's pretty good. You're not going to have a lot of problems and it's going to be pretty darn sure. Like that's a lot of predictability about your portfolio. So if you're willing to take 15-ish years to do this, man, that is pretty compelling. BRRRR, like I said, if you want to scale aggressively, build up your portfolio, seven, eight, 10 years to financial freedom, that's what I was saying with the BRRRR. But there's also a third bucket, I guess, of people who I would consider new construction for. And as those are people in their harvest phase. I've talked about this before. It's, I've stolen this framework from Chad, Chad Carson. But he says there's a, there's a starting phase, a scaling phase and a harvest phase.

• 38:37Dave Meyer?

  Like I said, if you're scaling, I think BRRRR makes a lot of sense. But if you're in the point where you've built a lot of equity in your portfolio and you want to sell off some properties and maybe just make the management of your total portfolio easier, new construction is pretty compelling, right? You can go out and earn a cash on cash return of 3 and 3.5% right now. It's going to grow to 5, 6, 7% in the next couple of years. And I mean, that's pretty good to retire off of, right? Like if you could do that now and start harvesting, you're just going to have low maintenance deals that just produce more and more cash flow every year. That's also pretty compelling. So for new construction, I'd say people in their harvest phase, people who already have a lot of cash, or people who are working full-time and want to take 15-ish years,

• 39:22Dave Meyer?

  new construction can absolutely be the right option for you. So I hope this analysis is helpful for you when you're trying to decide what your next deal should be. I just think this is a really interesting question. And I actually thought of this question in an episode because I saw information about new construction in the BiggerPockets newsletter, which was just relaunched. It's awesome. It is called the Investor Brief and it is just chock full of information that help you get a leg up on your investing. Like a lot of people wouldn't know to look at new construction, but BiggerPockets is putting out news like this three times a week. That's the BiggerPockets Investor Brief.

• 40:05Dave Meyer?

  You can sign up at biggerpockets.com/newsletter. That's our show for today. Thank you all so much for watching the BiggerPockets Podcast. I'm Dave Meyer. I'll see you next time.

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