The prospect of new construction investing makes more and more sense in today’s real estate environment. The national housing shortage means that properties are in higher demand than ever, and building a new home in the right place can be very lucrative. In order to make the most of your investment, it will be necessary to develop a sound strategy and take time to research the best areas to invest in. You will also have to work to develop strong partnerships to help you complete the project on time and still remain profitable. In this piece, we cover some strategies for making a good return with new construction investments.
Understanding New Construction Real Estate
New construction real estate can be somewhat different than investing in existing properties. These properties will require specialized financing, and you will be working closely with a developer or builder throughout the entire process. Investing in new construction can be very profitable since the value of a property when it is completed is often higher than the cost of labor and materials used to build it. Since new homes will often be built in developments with many other new properties, this means there’s also the prospect of a growing community that will develop as the neighborhood becomes more settled and continues to expand.
Market Research and Analysis
Choosing the right place to build is perhaps the most important choice you’ll make with a construction investment. It’s vital to conduct market research so that you can find an emerging market that will lead to a good return. Consider rapidly growing cities, or other areas experiencing high job growth. Some great examples include Austin, Tampa, Nashville, and Charlotte. As for the location, you will ideally be looking for a place close to amenities such as shopping, restaurants, or entertainment. You may also be able to benefit from a growing area that will see more developments happening in the near future.
Financing a New Construction Investment
It’s important to note the qualifying for financing on a new construction may be difficult, and traditional lenders may not offer this type financing for them at all. Lenders will likely require that you have real estate experience, whether that comes in the form of completed construction projects or heavy renovation projects such as fix and flips. It’s also important to recognize the different types of construction loans: construction-only and construction-to-permanent. Construction-to-permanent loans have the added benefit of being easily converted into 30 year mortgages after project completion, making them ideal for rental property investments. Be sure to look around and compare rates and terms to find the financing that best fits the needs of your project.
There are a few ways you can reduce the risk level of your project, but it helps to understand some of the common risks associated with construction investments so you can know how to navigate them. The most common of these will be construction delays, whether it be from supply chain issues or contractors you’ve hired. The best way to reduce this risk is by taking the time to select professionals that are trustworthy and deliver good work, and by working closely with your developer to find workarounds that reduce delays. The other main risk you have to keep in mind is a changing market, which may affect the profitability of your investment. You can reduce this risk by performing your due diligence and selecting a real estate market that is likely to continue growing in terms of home values.
Building Strong Partnerships
Building a team of trusted and experienced professionals can bring you many benefits and increase your likelihood of success with a construction project. The developer you choose to work with is one of the biggest decisions you will make, so be sure to vet them carefully and ask for past references to get a sense of the quality of their work. You will also be working closely with a real estate agent both during the buying and selling processes. An experienced agent will be able to match you with the right buyers and ensure you receive a good offer for your property. Finally, you should consider working with a tax professional to help maximize your deductions through write-offs and depreciation.
Developing an exit strategy is important because it’s where you will actually see your investment’s returns. Not having a good strategy can lead to difficulty realizing these returns and even diminish them. There are a number of exit strategies you can choose with new construction properties; most investors choose to either sell right away, or hold on to the property for long-term income. Others will hire property management teams, effectively turning their investments into passive income. Some investors will take their returns and immediately invest in the construction of another property, allowing them to build out developments over time and create even greater returns with appreciation.
Certain markets may be better suited to long-term hold strategies or quick build-and-sell investments. Whichever strategy you choose, it’s important to do your research and have a clearly defined plan so that you can execute it properly when the time comes. This will help ensure you see maximum returns and can also help give you direction throughout the investment process.
If you want to save on a new construction investment, 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.