New construction is a great strategy for generating returns through real estate investing, but it tends to get overlooked by most investors. Although they do require more knowledge than investing in an existing property, new construction projects offer the potential for great returns, especially when they’re done correctly. The key lies in taking the time to perform due diligence and analyzing each deal before diving in. Understanding which markets are profitable, and then choosing good locations to build within them, can lead to sizeable returns. Thorough planning and budgeting also helps to ensure the investment is a success.
Have you been considering a new construction project for your next real estate venture? Here’s how to evaluate an investment to help you identify a profitable opportunity.
Before you start scouting locations for a potential investment, you should have a good understanding of the level of demand in your chosen market. Take a look at key statistics like population growth, job market stability, and the direction home prices are trending to get a better idea of property demand. Be sure to utilize trusted resources like ATTOM Data and reidealmaster.com to get accurate data on these key stats. Then, you can compare the data to other real estate markets. If the numbers don’t add up, it may be worth choosing a different area to invest in.
You will also want to make a competitive analysis of the market to help you see if there are still opportunities available for investing. Look into any existing or upcoming construction projects to gauge competition and determine if they may impact demand for your property.
Once you’re confident that the market you’ve chosen will make for a good investment, you can begin the search for the right location. Ideally, you will want to choose a lot that’s located in a quiet area with access to a variety of amenities (think good schools, shopping centers, transportation options, etc.). This way, you can be confident that there will be good demand for your property once it’s built. You should also take a look at any future developments happening nearby, as they can improve demand for your property once they are completed.
Next, you will want to spend some time tallying up all the costs associated with the project. This includes land acquisition costs, permitting, labor and materials costs, and marketing expenses. Along with that, you should take a look at comparable properties in the same area as your project so you can get a good idea of your final sale price. From there, it will be easy to determine your net profit, and you can use that number to determine if the investment is still worth pursuing.
There are a few options you have for financing your investment, ranging from traditional bank loans to private loans offered by entities in the real estate space. It will be worth your while to seek out a few of these options, that way you can compare loan terms and find the financing programs that works best for your investment.
A crucial step before you get started with construction is being aware of some of the legal aspects involved with it. First, be sure you understand zoning laws for the area you’ve planned to build in so you can be confident the property is in compliance. You will also need to make sure you have all necessary permits in place, and approval from the local jurisdiction to start construction. When hiring contractors, take the time to check they are qualified with the appropriate licenses to do work, and covered by insurance to prevent any legal liabilities from falling on your shoulders.
We also want to bring special attention to environmental concerns, which can impact your ability to complete a project. It is worth the effort of getting an environmental site inspection (ESA) to confirm that there will be no major environmental impact of the project, allowing you to move forward without the risk of total stoppage.
There are some inherent risks involved in a construction project which can impact your investment timeline and overall profitability. In terms of timeline, understand that delays happen, and although you can work closely with your builder to mitigate them, it is worth having breathing room in your estimates to accommodate these delays.
Understanding how your builder typically operates will also help you get a better estimate of your return on investment. Look into their track record and financial stability to ensure your project gets completed, and read reviews so you can have an idea of the quality of their work for the price you are paying.
Having an exit strategy in mind will help you better estimate your project’s return, since you can compare your property to existing ones in the same category. For example, if you’re planning to sell the property immediately after construction, you can take a look at other new properties in the same area/market as yours. It may also be worth looking at existing homes with a similar number of features. If you’re planning to hold on to the property for rental income, you should research rental pricing for new homes in your chosen market. Knowing these numbers will help you get a better estimate of your project’s return, and allow you to make a better informed decision.
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.