New construction investments can be incredibly profitable, especially in today’s low-inventory market environment. However, there are some common pitfalls investors run into throughout the process of completing a construction project. Understanding these common mistakes, and how to avoid them, is crucial for finding success with these investments. Dedicating time for due diligence also allows investors to make better decisions and maximize their returns with this asset class. Interested in learning more? Here are the top 5 mistakes investors make with new construction, and how you can avoid them with your next project.
The easiest mistake to make in new construction is underestimating total project costs. It’s easy to miss some of the more hidden expenses that come with these investments, such as site preparation, permitting, and unexpected delays that increase holding costs. Before you dive into a construction project, you should do some research and create a detailed budget that lists out all of the costs you can expect to pay. It also helps to have a contingency fund (the rule of thumb is 10% of your budget) to help cover these unforeseen expenses. Working with an experienced lender that understands these costs can also help you prepare appropriately for them.
If there’s one thing that holds true across all types of real estate investments, it’s that location is a crucial factor for success. With new construction, this can be a fatal error that can only be solved by lowering your final sale price, diminishing your returns. That’s why it’s important that you dedicate time to market research, and compare the numbers for multiple potential locations before making a purchase decision. Some key indicators of a good location are a market experiencing population growth, an area with future development plans, and a neighborhood close to local amenities. Be sure to collaborate with a builder that has local market expertise to help you properly assess a site’s potential.
Many investors neglect to vet the main partner they’ll be working with throughout the construction process. Relying on inexperienced or unreliable contractors often leads to poor quality work, or delays that can incur additional costs. Be sure to look into each potential candidate you’re considering working with, including checking reviews, verifying licenses, and taking a look at examples of their previous work. If you’re still struggling to find a reputable builder, consider asking for references from friends and family, or the lending partner you’ve chosen to work with.
Another common mistake investors make is forgetting to check zoning laws for the lot they are building in, and also not obtaining the proper permits before starting construction. Zoning restrictions can vary from neighborhood to neighborhood within the same jurisdiction, so it’s important that your property falls under the appropriate category or you risk violating these restrictions. Not obtaining the proper permits can also be a crucial mistake, as it can lead to delays or even fines that threaten the profitability of your investment. You should aim to work with professionals who fully understand the importance of these regulations, including your architect, developer, and project manager if you have one. It’s also important that any contractors you hire to work on your property are fully licensed and insured, or you will risk liability should something go wrong on the site.
Investors often have an idealistic view of their projects, expecting great returns without fully understanding all the difficulties that come with achieving them. This leads to investors overleveraging themselves and taking on too much debt without considering the impact this will have on their monthly expenses. New construction loans typically have elevated interest rates, which can limit the amount of liquid capital an investor has to complete the project. It’s important to fully consider these expenses before making a purchase or seeking out financing. Additionally, investors can work with private lenders who offer flexible repayment options, such as interest-only loans where the principal amount is only due at the end of the loan term.
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.