Understanding the Risks and Rewards of New Construction Investments

Although new construction investments can be very lucrative, this strategy often does not get as much attention as other types of real estate investment strategies. A new property can fetch a great return as the cost of labor and materials used in a building home is often far less than its final sale value. But investors tend to shy away from these projects because they require a significant investment of both time and resources, as well as some basic construction knowledge. Having a firm understanding of the risks and rewards associated with this type of investment will be very beneficial in maximizing your returns. Continue reading as we cover everything you need to know about new construction investing.

The Appeal of New Construction Investments

New properties have a certain kind of appeal to them that cannot be matched by existing properties. There is something to be said about being the first person to live in a home, and using all its furniture and appliances for the first time. New homes also feature modern amenities and often come with smart features, both of which can become major selling points in a listing. All these qualities combine to make a property that is in high demand on the open market which can lead to a great return on investment.

Identifying the Rewards

So, why would an investor choose a new construction project over an existing property? Well for starters, we mentioned how new construction tends to have a very good return on investment, often exceeding that of fix and flip projects. Plus, new homes cost much less to maintain as they are built with brand new materials and energy-efficient lighting & appliances. New properties can have a lot of appeal for certain buyers, and they will likely be willing to pay top dollar to acquire one. That means less trouble finding tenants to lease to, and an easier time selling your property when it comes time to do so.

The Risks of New Construction Investments

There are three main areas of risk associated with New Construction projects that we want to address: Market Risks, Construction Risks, and Regulatory Risks.

• Market Risks: With any real estate deal, the market you invest in is a key factor, and it has a massive impact on the profitability of a new construction project. A good location means you can fetch a higher sale price with little to no effort. Be sure to dedicate time to selecting a good market and a high-demand neighborhood to maximize your ROI.
• Construction Risks: There are also some risks you’ll need to stay on top of throughout the construction process. There can often be construction delays and budget issues that end up complicating your project. The best way to manage construction risk is by creating a detailed plan for the project with completion goals, and checking in with your developer regularly to work around any delays. For your budget, it may be wise to leave a 10% buffer on your initial estimates to ensure you make a profit.
• Regulatory Risks: New construction projects involve getting in touch with local governments to comply with zoning, as well as following building code throughout construction. Failing to follow these regulations can be incredibly damaging to your investment, and will require you to either make costly last minute renovations or abandon your project entirely.

Mitigating Risk Through Due Diligence

As with any investment, the key to mitigating risk is with careful due diligence before making any purchase decisions. Taking time to plan your project helps ensure that it gets completed on time, under budget, and for a profit. Here are a few tips for managing risk in a new construction investment:

• Conduct thorough market research: On both the local neighborhood of a lot as well as the greater market as a whole. Not every location is created equal, and some may be more profitable than others.
• Assess project feasibility: Ideally by hiring a property developer to give you a realistic estimate of costs and final sale value.
• Evaluate contractors: Be sure you have vetted your developer and any contractors you hire during the construction process. If you don’t have examples of their previous work to go off, consider reaching out to friends for references.
• Make a contingency plan: If your original exit strategy doesn’t play out, you may have to consider a different route. For example, switching to a rental strategy allows you to make up holding costs and some of your initial investment while also giving you time to prepare for an eventual sale.

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.