New construction investments can be very lucrative, especially in today’s low inventory real estate environment. However, ensuring you receive a good return through these investments isn’t always easy when you consider the growing cost of materials and labor that goes into completing them. It helps to have a strong understanding of the various aspects of the new construction process so you can minimize unnecessary expenses and maximize your return. There are some key strategies and techniques you can utilize, as well as some major pitfalls to look out for. Want to learn more? Here’s how to maximize your ROI on new construction investments.
Let’s start with identifying what ROI really means with a new construction investment. Typically, return on investment (ROI) is calculated by taking your total investment costs and subtracting them from the amount you receive from the investment. But before you dive into a construction project, you will need to decide what your exit strategy is, as this will determine what a healthy ROI looks like. For example, selling your property once it’s built is the most straightforward way to determine your ROI. But if you plan to rent your property out, you can expect to see a return from rental income, appreciation, and even upgrades you make to the home over time. Estimating these returns beforehand will help you determine if a project is worth following through on, and can save you from making a bad investment.
As the saying goes, you make your money on the purchase, not the sale. Due diligence is one of the most important factors in any real estate deal, and this holds true with new construction too. Start by researching and comparing the numbers on various markets, and take a look at key stats like population growth, home pricing, and the overall health of the area’s job market. The location of your property is also a key factor, so be on the lookout for high-demand areas that you’re confident will make for a good investment. Most homebuyers will be looking for quiet neighborhoods with access to good schools and amenities like shopping areas, entertainment, and transportation options.
Take some time to create a good budget for your project, including final sale price estimates to help determine your overall return and avoid overspending. You will also want to take care when selecting a builder. Consider their overall experience level, and ask for examples of their previous work to get an idea of what to expect. The quality of their work will have a direct impact on your final sale price.
Here are a few key strategies you can employ to help maximize your return on investment:
There are certain mistakes you will need to be careful to avoid once construction has started. Good planning can reduce the risk of unexpected costs, but good project management is also key. Lack of coordination can lead to delays which incur additional expenses, and the longer you take to complete the project the more you will be paying in holding costs like loan interest, utilities, insurance, and property taxes. You will also need to take care not to overbuild the property and just end up pricing out a portion of your buyers. Find comparable homes in the same area as your property to help you avoid this mistake.
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.