Home Builder Profit Margins Explained
Most of us are keenly aware of the sharp rise in the housing market over the past few years. Most industry experts credit basic economics and poor logistics for the sharp rise in lumber prices, and consequently, home prices.
Along with the rise in the value of the housing market was a rise in custom home builders’ average profit margins. Profit margins have risen steadily for the last three years and remain on pace to continue increasing.
To be clear, these profit margins are averages, and not category specific. Some custom home builders saw higher than average profits while others experienced a down trend. Housing markets tend to be local, so some builders benefit more than others.
A profit margin is the percentage of total amount charged that a home builder will receive after overhead and constructions costs are paid
According to the National Association of Home Builder’s Cost of Doing Business Study, the net profits for the average builder in 2020 fell to about 7%. Although gross profits were closer to 18%, operating expenses consumed over 11% of the profit. The authors also note that the 2020 results were not normal and were greatly influenced by the pandemic.
Combined with never-before-seen logistical complications, the building industry has seen its share of turmoil, but higher profits as well, as often follows periods of unrest.
Keep reading to explore some common stages of the normal construction process and which stages tend to be profit centers for residential home builders.
Why are home builder’s profit margins increasing?
We can assign credit for home builder’s increasing profit margins on simple economics. The housing market is much like the textiles industry and the food business. Everyone on the planet needs food, clothing, and shelter, so when the supply is low, the demand is high. As a result, in 2021, some lumber prices at Home Depot were higher in the afternoon than in the morning.
Few need a reminder of the pandemic and the disaster it caused for the economies of many countries. At some point, the decision was made to assign special status to certain industries vital to our existence, like home builders. Obviously, these companies needed to provide essential services and follow special COVID-19 safety protocols to qualify, and many did.
The end result was that just like grocery stores and other businesses providing vital services, construction companies were allowed to continue operating, helping to prop up shaky economies. Once most of the safety protocols were lifted, these companies continued to benefit until manufacturing and logistics problems caused a lack of building materials.
Once the supply of materials began to trickle back in, what materials were available became very valuable. Some prices doubled in a matter of days and quadrupled in a matter of weeks. In turn, this allowed those home builders willing to pay more for the materials to continue to build, but of course, these home builders increased their prices to recoup their unusually large investment in materials.
Even so, the demand for residential housing far outpaced the supply available, so every step in the profit chain from lumber harvesters to floor polishers found themselves in a position to negotiate for a higher price. Of course, this led to runaway inflation, requiring the Federal Reserve of the United States to raise interest rates in an effort to slow borrowing.
How do home builders make money?
In the construction world, the best home builders can make money regardless of the state of the building industry. For example, when demand is low, like just after the financial crisis of 2008, home prices fell steeply, so custom home builders just did more remodeling. When clients can’t afford a new home, they often turn to upgrading the home they already live in.
As a result, residential remodels increased, so builders took advantage of the demand. Because labor was more plentiful, these builders could profit from the additional revenue provided by lower wages and lower lumber prices simultaneously. As often happens, some developers invested heavily in raw land, allowing home builders to provide a steady stream of housing to the rising demand.
The most successful of those home builders took full advantage of the emerging construction technology explosion, which saved them both time and money. Efficiency is key to home builder profits, especially when business is booming. Tracking shipments, lumber prices, and personnel can be a nightmare unless some form of construction management software is used.
Pro Tip: BuildBook has quickly become a favorite amongst custom home builders for its clean design and simple, quick, and easy to use features. Unlike other construction software, BuildBook only focuses on the features that are most important to home builders and provides a free trial to eliminate the financial risk of evaluating the software.
How much do home builders profit?
Potential clients can have misconceptions about builder profits, especially when they see a developer driving a $100,000 truck. The reality is that builder profits are as variable as the locations they build in. To increase profits in a sustainable way, the builder must maximize every opportunity in their market.
The most successful developers, general contractors, and owner/builders understand that small profits are as important as large ones. For example, material management, good expense tracking, change orders, and superior workmanship are among the highest profit centers for these builders. Because some home building projects can have significant size budgets, a small increase in profit can make a big difference in overall profitability..
The most profitable builders keep their material waste below 5%, encourage profitable change orders if they occur, and do excellent work. Clients are usually willing to pay for quality, so the builders that a client feels will produce the best work usually win the bid. In other words, the better the work, the more willing clients are with paying more to receive it.
Each stage of a new home construction project will have different profit margins, but on average, most home builders will earn between 10%-20% gross profit. Some stages will be physically larger, but less profitable, while others may seem unusually expensive. Generally, the more skill required to perform the work, the more the home builder will have to pay subcontractors to perform the job.
Want to see how much revenue you need to generate as a home builder to achieve a desired net profit? Use the calculator below to adjust the numbers and see the results.
Home builders profit margins
Site Preparation Profit Margin: 15% – 25%
Site preparation may be minimal on tracts and lots with utilities already installed. However, subcontractors with backhoes and bulldozers will still be needed to create the house seat, disturbing at least some ground. Most builders will add 20%-25% gross profit to smaller jobs, but larger projects may get a 5%-10% discount.
Site Preparation also often requires the services of a civil engineer or transit operator to establish boundaries, set corner pins, and provide temporary drainage. Home builders will often add 10% to whatever the professional charges as a supervisory fee, because if there is a problem, the home builder will have to get involved.
Footings and Masonry Profit Margin: 10% – 15%
Footings involve the trenches needed to establish a solid foundation below the frost line. Backhoe operators are often tasked with this project. In the majority of cases, the backhoe operator will also pour the concrete footings if the structure requires them. Home builders will often add 10-15% to this stage of the project.
After the footings have been inspected and poured, a masonry company is often hired to install a block foundation. Most masonry companies do not work by the hour, nor the square foot, but rather the unit. Lightweight cement blocks, for example, are often priced by the block, while bricks are often priced by the thousand. Home builders usually add 10% to this stage, but many will add closer to 15% if they also provide the materials.
Builders can improve the net profits on masonry projects by using careful materials management and attention to detail. Masonry problems can be expensive to correct, so the most profitable masonry contractors waste little material, move quickly, and work efficiently.
Sub Floor, Framing, Sheathing Profit Margin: 10% – 15%
In most residential construction projects, the same subcontractor will install the floor system, framing, and sheathing on the structure. Home builders commonly add 15% to the framing stage. However, some custom builders start out adding only 10% to the project, because they anticipate many change orders to which they may add 25%-30% profit margins. Most will also install the house wrap as part of their construction proposal.
Some home builders will also hire the framing subcontractor to install the windows and doors. Doors and windows provide better profit margins for home builders because they often are sold in quantity and can be quite elaborate. Projects requiring sophisticated skills to install, like windows and doors, tend to offer profit margins in the 25% range for the custom home builder.
Framing contractors can increase their profits with efficient framing techniques and materials, such as using trusses, manufactured I-beams, and laminated veneer lumber (LVL) wherever possible. Tools like pneumatic nailers often require air compressors and hoses, but the time they save overall is more than worth the investment.
Exteriors Profit Margin: 10% – 25%
Exteriors are a common profit center in residential construction. It might be surprising to learn that contractors can make as much profit margin installing vinyl siding as they can installing brick. For example, a typical vinyl siding project will reap about 25% in gross profit, while a brick project may only produce a 10%-15% profit margin.
In general, exterior facades that can be installed quickly are more profitable than those that require substantial labor and time. This is why you see more paint and siding companies than you do stucco and brick installers. When you add in vinyl soffit and aluminum fascia cap to a vinyl siding project, the profits can reach 30% or more.
Profit margins for exterior projects can be increased with excellent materials management and having the proper tools. As mentioned earlier, vinyl siding projects can be very profitable, yet made more so by employing tools designed for the job. Hand tools for making small adjustments, for example, can save material, avoid trips to the ground, and increase the speed of the project.
Roof Profit Margin: 10% – 15%
Roofs can be a good profit center for a home builder if the structure requires a sophisticated roof, like synthetic slate or synthetic wood shingles. However, most roofs are made from fiberglass/asphalt shingles. Due to the popularity of this style of roof, roofing installers abound, so competition can be fierce.
As a result, typical roofs are not a reliable profit center for home builders or remodelers, so most expect the standard 10% premium. As mentioned previously, some builders will aim for a 10%-15% base profit margin and hope change orders will increase the overall profit margin.
However, those roofing contractors willing to invest the time and money to receive specialized training can earn much larger profits. Most manufacturers of new products like synthetic slate tiles, or composite shingles offer specialized training to roofing contractors in an effort to create a service network of qualified installers.
These roofing contractors tend to work on upscale projects, which can earn profits of 25% or more. Complex roof lines and architectural concerns can also add to the complexity of using these materials, so the contractors with the most experience will often earn the highest profits.
Doors and Windows Profit Margin: 20% – 25%
Doors and windows are one of the top five profit centers for home builders. Normally, the more elaborate the door or window, the more profitable it is for the home builder. For example, a $150.00 steel door and $50.00 lockset are perfectly suitable for most door openings.
However, a very expensive mahogany door and lockset will fit the same opening, so why does one cost a fraction of the other to install?
In many cases, oversized, heavy doors will require special tools and knowledge to install, so the home builder can charge a premium for the expertise and equipment. Sophisticated locksets usually require special tools to install as well, in addition to specialized training from the manufacturer.
Door and window installers looking to augment their net profits will often commit to one or two brands and support them fully, as opposed to just shopping around. Door and window manufacturers are known to offer exclusive products and better pricing to those contractors committed to supporting the brand.
Electrical, HVAC, and Plumbing Profit Margins: 10%- 15%
Much like the roof, most home builders don’t expect to make more than the standard supervisory 10% profit margin from electricians, HVAC contractors, and plumbers. Plumbers and electricians are licensed professionals, so there really isn’t much expertise a home builder will add to the project. However, home builders will add 10% to whatever those pros charge as a supervisory fee.
Insulation, Drywall, Painting Profit Margins: 10% – 15%
In general, home builders do not expect to add more than a 10% – 15% profit margin to insulation, drywall, and painting projects. There are exceptions of course, like projects using closed-cell spray insulation and designer paint schemes.
Insulation upgrades like closed cell spray foam can add an additional 30% beyond standard fiberglass batting, so builders are usually more than willing to add it to a project. Special paint techniques, like orange peel and knockdown can add another 25% gross profit to the custom home builder’s bottom line as well.
The most profitable insulation, drywall, and painting contractors will offer the latest in technology and explain the value. Most of these projects only get performed a few times over the life of the home, so it is important to get the best available at the time.
Floor Coverings Profit Margins: 10% – 20%
Floor coverings are a common profit center for home builders. Home buyers tend to upgrade their new homes, and after kitchen cabinets, floor coverings are often upgraded next. Basic floor coverings like vinyl sheet flooring and laminate flooring are common. Often these projects will only include the standard 10% home builder profit margin.
However, floor coverings can be something as simple as vinyl sheet flooring, or as unique as cork parquet. Again, the more luxurious the flooring, the higher the home builder’s profit margins will likely be.
Finished hardwood, engineered wood, cork, bamboo, and other flooring materials can provide the home builder with a profit margin of up to 20%. Tile, stamped concrete, and other flooring materials can also profit a home builder an additional 15% -20% profit margin.
Security, Energy Conservation, Home Automation Profit Margins: 20% – 25%
Other systems within the home can provide unique features, like recirculation pumps, home automation, and security. These individual systems are usually provided by a licensed subcontractor, so the home builder expects a minimum markup of 10%.
Some builders opt to not take responsibility for these systems for the minimal profit they might receive. In these cases, the home builder often pre-wires for security and home automation and/or plumbs in a recirculation system during the framing stage.
How do clients know if a home builder’s price is fair?
Successful home builders and remodelers usually determine their prices based on their overall profit goals and the market price for the service. Generally, most contractors offering a similar service in a similar area will charge about the same price, assuming they pay the same price for the materials.
Profitable home builders and remodelers will take advantage of every profitable opportunity. They work at night, personally deliver materials, and make sure expensive mistakes are kept to a minimum. However, they will not price gouge, cut corners, or do sloppy work.
The most profitable home builders understand that construction services aren’t something most clients only need once. Advertising and marketing expenses are significantly reduced by positive word of mouth referrals, so those costs go down. The best home builders can also choose the most profitable jobs for their company, based on the way they do business.
Clients want their home builder to be profitable
It is usually in the interest of any client for their home builder to be profitable. Savvy homeowners are also investors, so they want home builders and remodelers to make a profit. Home warranties and good customer service are hallmarks of a great home builder, but only if they remain in business.
Some home builders have been in business for generations, navigating changes in financing, home designs, and recessions, and they keep turning out incredible work. These companies make a steady profit regardless of the market conditions by understanding where their profit comes from and maximizing it, while providing superior customer service to their clients.
How Much Profit Can a Self Builder Make?
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(Image credit: getty images)
Building a home is likely to be the single largest expenditure anyone will make in their lifetime. Some self builders will be motivated by a desire to create their forever home and be less focused on profit margin, while some will choose to focus on location and financial benefit.
To better understand the self and custom build market, Homebuilding & Renovating commissioned and produced the Self & Custom Build Market Report following a comprehensive consumer survey of 500 self builders who has either just completed or were about to complete their project.
- Typical profit that self builders can enjoy is 25%
- Less than 15% of the projects recorded in the survey had build and land costs higher than the estimated market value of the finished home
- Regionally, the likelihood of profitability seems to be higher in the greater South East (34%) and slightly less likely in the north and Scotland (typically 13%). In the West Midlands and Wales a margin of around 30% would be typical
- When it comes to the urban rural split in England, it seems that the more profitable projects are in semi-urban areas
- The survey results also hint that where land is a higher proportion of the costs, the profitability is higher too
What Factors Can Affect Profit?
With these statistics in mind, it is worth noting the factors that can affect the level of profitability a self build project has:
- Relative rise in house prices (higher rise in the south)
- Motivation. Those motivated to self build by location or financial benefit had a higher profit margin than those who were self building to realise a long held dream or those motivated by build quality
- Style. The survey data suggests that gross profit is notably higher for traditional-style builds
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Sarah is a journalist, editor and the former Web Editor of homebuilding.co.uk. She began her career more than a decade ago, working on the editorial team of Public Sector Building magazine, before joining the wider Homebuilding & Renovating team as Social Media Editor in 2012. Since purchasing her first house in 2015, Sarah has been adding to the ever-increasing list of home improvements she needs to make; including extending over the garage, resurfacing the driveway, replacing existing flooring and revamping the kitchen. Fortunately, her time with Homebuilding means she is not short on design inspiration or top tips to tackle or project manage these tasks herself.
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Investment projects with construction: economy class wins
In one of the previous articles, we talked about what an investment project is and why the uncertainty with Brexit will not affect profitability in any way. Today I want to talk about why building in the regions is no worse than in the capital.
Many years of experience in investing in real estate shows that the most profitable projects are economy class. Why? There is always a demand for economy-class apartments and houses, moreover, it is growing, regardless of the economic situation in the country and other external factors. We also prefer not to be limited to the capital and choose projects throughout the UK: we have construction sites in Wales, Scotland… It is difficult to buy a building plot in London, but it is possible: offers start from amounts can buy a much more impressive area.
Sell as soon as possible
For example, we bought a plot in the region with a building permit, invested in the construction of a house with several spacious apartments. Our task is to sell them as quickly as possible in order to recoup the project, make a profit and invest the funds received in a new one. In order for real estate to be sold faster, you need to set a slightly lower price, 5-10% cheaper than the average market value – then they will sell like hot cakes. And vice versa, if you overestimate the price, you can sell the object for two years, as a result of which the annual profit can drop significantly. And then our promised 30% profit for the year may turn out to be 15%.
All of our properties are covered by new build warranty insurance, which is valid for 10 years from the date of delivery of the property. It is easy to get a mortgage loan from a bank for houses and apartments with such insurance, which means that anyone can become the final buyer. Even those who want to buy their first property, but do not have an impressive deposit, can take advantage of the government’s Help to Buy scheme.
We work out all projects with construction in a year. It takes about a month or two to complete the documentation, another six months for construction, and three months remain for possible unforeseen situations. We start selling objects on the third month – from the start of construction.
Why is it profitable to build yourself?
Because with our experience and contacts we can do it not only with high quality and in the shortest possible time, but also at a very low price for the UK: we bring materials from Eastern Europe – they cost one and a half times cheaper there, we also work people from Poland and Lithuania, the cost of one hour of their time is cheaper than that of the British. All this allows us to save money and make our project very competitive.
Many novice investors fear that the project will not bring any profit at all. That is, for example, if we buy a plot for £500,000 and build it for the same amount, it is impossible not to sell it for at least £1.15 million — otherwise the profitability of the project will be zero or almost zero. And if this were true, then all construction companies would have to close down and not build anything else. Then a vacuum would form: there is demand, but there is not enough supply, and the price will start to rise again. Such extremes, of course, do not happen, developers always calculate “1 + 1 = 3”.
For investors who doubt the profitability of the project, we offer a special scheme when they contribute 10% themselves, but then they will receive 15% instead of 30% at the output, and the entire balance will be ours.
G7 is a professional construction company with over 11 years of experience: qualified personnel, reliable partners and suppliers, democratic pricing policy, more than 200 completed projects, a guarantee for work performed – up to 10 years
Calling a specialist is free. Call us today: 02038086949
8 Kew Bridge Rd, London, TW8 0FJ
9 0007 Is it profitable to invest in UK real estate now?
Real estate investment projects: Property Development or Property Investment?
Investment errors in real estate projects
Investment apartments and houses in the UK
Investing in real estate traditionally remains one of the most common ways to maintain and increase equity. Real estate in England, acquired at an early stage of construction, has special advantages – low risks and high returns in this area.
Thus, to invest in housing under construction in the early stages of construction, it is not required to attract a mortgage, assess the condition of the apartment and maintain it in a decent condition until the sale or for the purpose of renting. Also, when investing in new residential real estate, you can choose the most attractive and promising object both in terms of its location and in terms of layout, type and area of the apartment.
With extensive practical experience in investing in UK real estate, Prime UK Property experts recommend that their clients purchase apartments in new buildings at the construction stage or even before it starts – as soon as the developer receives project approval. In this case, the return on such an investment will be maximum.
Example Investment Properties
9% for 3 years
Jameson House is an excellent development in the heart of Sunderland.
View all properties
Minimizing risks, increasing profitability
growth potential, so our customers can be sure that the return on investment in new buildings will be maximum. On average, every year apartments in the UK rise in price by 5-10%.
This means that with a construction period of about two years, the investor can count on significant profits.
2. Verified developers
Reliable developers with an excellent reputation and sufficient funding, as well as risk insurance, allow our clients to have no doubt that their investment object will be put into operation on time, and clearly plan their further actions with real estate .
3. Low down payment and additional discounts
10-30% of the cost of the apartment is the first installment when buying an apartment in the UK. It depends on the stage of construction (at an early stage you can count on a discount) and the potential attractiveness of the object – the better the project and the more interesting its location, the higher the initial deposit will be. The Prime UK Property agency enjoys a well-deserved trust among developers, which is why it is often our clients who are offered discounts and additional benefits when making a deposit at an early stage of construction.
4. Possibility of resale at all stages of construction
The remaining part of the cost of the apartment, as well as the Stamp Duty, are paid after the completion of the construction of the object and putting it into operation. At the same time, in most cases, the developer provides an opportunity to sell the contract for the purchase of a finished apartment without paying its full price, and also allows the renewal of the contract before the completion of construction.
5. Decent quality
All houses and apartments are fully finished, including built-in kitchens and fully equipped bathrooms. The property owner receives a special construction quality guarantee for a period of 10 years from the National Housing Commission of Great Britain. This significantly expands the possibilities for further resale of the object.
Prime UK Property – Experienced Investment Adviser
Prime UK Property is ready to take over the selection of suitable investment projects throughout the UK.