A Financial Guide to Investing in New Construction Properties

Investing in a new construction project can be very different than investing in a home that is already built. The process requires significantly more planning, and you won’t be seeing any of your returns until the property is sold and all associated expenses are paid. Still, there are significant rewards that await the investors who are willing to learn the new construction strategy. By choosing to build in underserved areas with high demand for housing, investors stand to make great returns. Have you been considering new construction for your next real estate project? Continue reading for our comprehensive guide on the financial aspects of a new construction investment.

Building process of a home from engineer planning, bank money borrowing, to presentation by a real estate agent

Understanding the Landscape of New Construction Investing

New construction is a daunting task for investors that don’t have experience with it, as these projects tend to come with a few more financial considerations. Besides the standard acquisition, labor, and material costs, you can expect to pay for licensing and permits, as well as fees to connect the home to the town’s utilities. That’s why financial planning is so important for a new construction investment. Be sure that you’re obtaining accurate numbers and considering all expenses when determining the budget for a project. This will allow you to obtain better estimates for a project’s ROI, and help you make the best financial decisions.

Thoroughly planning your project is also beneficial in reducing unnecessary costs. For example, ordering items in bulk is a simple way to reduce material costs. And by staying on top of progress throughout construction, you can ensure the project is completed in a timely fashion and reduce holding costs. As the saying goes, time is money. The sooner you can finish construction the sooner you can begin the process of selling the property and actually see the returns you are working for.

Financing Options for New Construction Investments

You have a few options when it comes to securing financing for a new construction project. Working with a traditional lender like a bank or credit union is always an option, and these loans offer attractive interest rates, but know that they also come with stringent requirements and a lengthy application process.

Alternatively, you can work with a private lender for real estate investments. They will be able to provide you with quick financing as well as resources like budget planning tools and real estate contacts, but these loans also tend to come with higher interest rates. Depending on your exit strategy, you may also be looking for a convertible loan such as construction-to-permanent. You should take time to compare the various options available, and choose the one that best fits your investment scenario.

Managing Costs and Budgets

The way that you handle costs and budgeting for your project will have a massive impact on its final success. As mentioned, working to create an accurate budget is important for ensuring your project doesn’t experience cost overruns. It may be beneficial to leave a buffer in your budget estimates (the rule of thumb is 10%) to cover any unexpected costs, helping ensure that your investment remains profitable. Staying in regular contact with your developer throughout construction will also be important. This way you can stay on top of progress and also quickly deal with any delays that would otherwise extend the length of your project.

Mitigating Financial Risk

We want to provide some tips on how to mitigate some of the more common financial risks associated with a new construction investment:

  • Market Fluctuations: Nobody can predict where the greater market is heading, but it’s possible to get a good understanding of a particular market by taking the time to research it and look at all its key stats. Comparing these numbers to those of other markets will allow you to choose a location that is more resilient to potential downturns. You should also understand that real estate has a seasonal nature, with less demand in the winter months, and more in the summer.
  • Regulatory Issues: Failing to comply with local regulations can end up costing you big with a new construction project. The last thing you want is to be forced to tear down or redesign parts of a brand new property. Even if a situation like this doesn’t end up costing you much, it can still cause a significant delay that will affect your project’s timeline. Be sure that you are complying with building codes for the area you are building in, and also that you have all proper permits in place before work begins.
  • Contractor Disputes: You are bound to run into issues with contractors and developers if you aren’t running a good screening process when selecting them. You should aim to hire trusted professionals with a proven track record of delivering quality work in a timely manner. Try and ask for a portfolio of past work to get an idea of their level of expertise. Any professional worth their salt will be able to provide you with some examples. And if you are struggling to find professionals you can trust, consider asking friends and family for references.

As with any investment, the key to financial success often lies in due diligence. Your project is sure to be more successful if you take the time carefully plan your investment, comparing all options and doing your research before making any major decisions. This also puts you in an advantageous position if any sort of issue does appear. Since you have less to worry about in the other aspects of your investment, you will be better equipped to handle these problems. You might even have a contingency plan in place already.

RCN Capital

The easiest way to save on a new construction investment is to work with a trusted lender that can get you the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors & developers across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. If you are an investor looking to acquire financing for a construction project, RCN Capital has competitive loan options available.