New Construction investments can be very profitable in the current market climate where demand for housing far exceeds supply in most places. The main thing that makes new construction such a great investment strategy is that the cost of building a home is often far less than its final sale value. When you’re able to build a quality, modern home in a high-demand market it can lead to sizeable investment returns. One of the questions investors often have with this strategy is whether to rent their property out or sell it immediately after construction is completed. Continue reading as we compare these two exit strategies, so that you can choose the one that best fits your investing goals.
The Renting Strategy
First, let’s explore these two different strategies in depth, starting with renting your property out on a monthly basis.
- Benefits of renting: the main advantage of renting new construction properties is that the units tend to fetch a high monthly rate since they are brand new. This strategy makes more sense with multifamily properties since their cap rate and cash flow is often significantly better with a new property. It is also better suited to investors focusing on long-term wealth building.
- Considerations for renting: If you’re going to be renting your property out, this means you also need to be prepared to handle the responsibilities of being a landlord. Along with maintaining the property this means filling vacancies, handling tenant requests, and also staying within the landlord-tenant laws in your jurisdiction. You should also see how rents compare in your chosen market compared to other areas to determine if it makes good financial sense.
The Selling Strategy
Now let’s take a look at how the selling strategy can be beneficial in comparison:
- Benefits of selling: selling your property right away is great because you get immediate access to your returns. If you want to use the returns from your project to fund other investments, this will be the strategy for you.
- Considerations for selling: The downside of selling your property right away is that you may be leaving some returns on the table. You will be subject to capital gains taxes, and if market conditions change, it can completely ruin your project’s ROI. You also won’t get the chance to see any property appreciation gains, or any rental income.
Analyzing Market Factors
Market conditions will play a big part in determining which strategy is more viable for your investment. Rapidly expanding markets will have high demand for housing which can lead to better returns. If an area is experiencing job growth, this can be another indicator of good returns. You will need to conduct due diligence in order to understand market values and rental pricing in an area before making any purchase decisions. Then you can accurately compare the returns of renting or selling and find the best fit for you.
Cash Flow and Equity Growth
If a real estate investment generates consistent income for you every month, it can be considered a cash flowing property. New properties tend to cash flow very well since their market rent is higher than most existing properties. You may want to prioritize cash flow with your investment portfolio if you are looking to build long-term wealth. When you combine this factor with the potential for price appreciation, it can lead to significant returns over time.
Tax Advantages of the Selling Strategy
If you choose to sell a new property once construction is completed, your returns are typically subject to a high tax rate through capital gains. However, it’s possible to reinvest your returns in another project to avoid paying such a high rate on these returns. Many investors will use this strategy to develop multiple properties in a housing complex or subdivision, gradually increasing their return with each project.
Making the Decision
Be sure to consider all the pros and cons of each exit strategy before making any final decisions with your investment. The more time you can dedicate to conducting due diligence, the better informed you will be when it comes to making your decision. You will also need to consider how the strategy aligns with your financial goals, along with your ability to execute your chosen strategy given market conditions.
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 todayto discuss your next real estate investment.