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The real estate market in the US is in need of homes now more than ever. A lack of inventory combined with pent up demand drives up home pricing even in the face of startingly high interest rates. In such a competitive market, new construction delivers highly desirable properties to homebuyers who are often willing to pay a premium for real estate. For investors, this can be a very lucrative opportunity so long as you’re willing to dedicate time to carefully plan your project. Have you been considering a new construction property for your next real estate investment? Continue reading as we cover some tips for identifying the most profitable opportunities.
Understand the Local Market
Whichever area you decide to invest in, you will want to take some time to learn about the local market. Namely, you will want to obtain accurate numbers regarding supply and demand, and how the job market is performing in that area. These factors tend to have a huge impact on property values and can give you an idea of whether they will increase or decrease. You may also want to look at recent sales in the area to see which direction prices are trending. Remember that you don’t necessarily have to limit yourself to markets near you either unless you really want to be hands-on in the management of your project.
Look for Emerging Neighborhoods
In any market, there will be certain areas that perform better than others for new construction investments. It can be beneficial to search for these lucrative areas in order to maximize your returns. For example, if an area is seeing a lot of infrastructure development, chances are it will be a prime location for a new home. If you can manage to secure a lot in a new subdivision, this can also be very profitable. As other homes are completed in the area and the neighborhood grows, your investment will also grow in value due to higher demand.
Perform Financial Analysis
The next step will be to conduct a thorough financial analysis of the project to determine potential value and ultimately your return on investment (ROI). You can start by obtaining accurate numbers for the lot purchase, building permits, and the cost of construction along with the final sale price. Estimates for the first two are relatively easy to obtain, and you can work with an experienced contractor to get realistic estimates for construction costs and resale value. Once you have accurate data, you can use it to calculate your return. If you plan to rent the home out afterwards, you’ll want to take a look at comparable properties to get an idea of monthly rent, and you can use this info to determine cash flow/cap rate.
Legal Considerations
There are a few legal considerations to take into account before you begin the construction stage. We’ve already mentioned permits, but it can’t be stressed enough how important it is to be compliant with your local jurisdiction and follow appropriate zoning laws. The last thing you want to do is have to change your entire project just because of this misstep, since it can completely kill your returns. You will also want to ensure you have selected a quality contractor who will build the property up to spec and follow the building code in your area. You may want to consider legal counsel, such as an attorney who specializes in real estate law, for further assistance with these matters.
Exit Strategies
The final decision you will need to make with your construction project is choosing an appropriate exit strategy. Depending on the investment and your personal goals, it may make more sense for you to rent out the property instead of immediately listing it for sale. This can be a great way to make up some of the project’s construction cost, since new homes are often very profitable rental investments that command a high price on the open market. Your strategy may also vary depending on broader market conditions, and local trends in the area. Be sure to consider each strategy in order to find the one that best aligns with your financial goals.
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. Connect with us today to discuss your next real estate investment.