Unlocking Profit Potential with New Construction Investments

The real estate market is going through a period of significant change. Many markets are still undersupplied, and investors have started to take notice, branching out into new construction to meet the needs of buyers. At the same time, interest rate cuts have made these projects more financially viable to many investors. There has also been something of a boom for new construction in emerging markets across the US. Being able to identify one of these markets and a profitable location to invest in can lead to significant returns, and this is where you can step in as a lending partner. Brokers and private lenders who offer new construction financing have been able to take advantage of market conditions to expand their lending operations, and massively grow their deal pipelines.

Are you considering branching out into new construction with your lending business? Read on to learn how you can provide your clients with the knowledge and resources they need to make the most of this rewarding asset class.

Why New Construction is Attractive to Investors

New construction is an effective investment strategy for a number of key reasons. For one, many buyers prefer homes with modern features such as newer styling and better energy efficiency. These monthly savings also help offset the higher price that often comes with a new home. New properties also typically come with modern amenities that are not as easy to implement in older homes, including smart thermostats, smart lighting, and smart locks which improve efficiency and home security. Additionally, for investors who prefer a build-to-rent strategy, tenants are more likely to stay in newer homes for longer, increasing the ROI for these properties.

Profit Potential for Brokers

The upsides of new construction financing are apparent for brokers and lending partners as well. New home projects often require more financing than standard property acquisition loans, which means higher commissions for these investments. Clients who succeed with new builds also tend to return for either long-term financing, or other new construction projects, which presents a great opportunity for repeat business. Last but not least, getting exposure to the construction industry means connecting with builders and developers who regularly work on new builds. At best, this means you gain an excellent repeat client, and at worst, they are an industry professional you can refer your existing clients to.

Financing Strategies for New Construction

There are two main types of construction loans, one for purchasing a lot and the other for the actual construction of a property, commonly called ground up construction financing. Many lenders only offer one type of these loans, so it’s important to work with multiple lending partners to be able to cover both types of transactions. Ground up construction loans also come in two varieties: construction-to-permanent and construction only. Construction-to-permanent loans offer the benefit of converting to a long-term financing structure while only requiring one closing, which can help investors save on financing costs. Be sure to talk to your client about their investment strategy to better understand which type of financing to recommend for their use case.

Risks and How to Mitigate Them

New construction investments can be somewhat risky, especially because delays incur more holding costs, and that means investors won’t see their returns until further down the line. In order to avoid delays, you should recommend that your client partners with a reputable builder that has a proven track record, and implements contingencies for both the budget and project timeline. The rule of thumb is to keep an extra 10% of the original budget available to deal with problems that tend to crop up.

Market fluctuations are another thing to consider, but this risk can be mitigated by taking time to conduct proper market research and location scouting. Finally, there are regulatory and permitting issues. It’s crucial that all necessary permits are in place before breaking ground, since delays can completely stall projects. Investors should consider working with a local expert who understands these regulations to ensure proper compliance.

Action Steps for Brokers

Let’s talk about some steps brokers can take to position themselves for success in the new construction space. First, take time to understand the markets you are planning to lend in; this includes demographics, overall trends, and identifying locations that are prime for construction investments. Next, establish relationships with developers and contractors that you can trust. Not only are they a great source of business, but you can also recommend these professionals to your investor clients. Finally, you should take time to educate your clients on the ins and outs of construction investing. Discuss financing options, how to appropriately calculate ROI, and the things they need to keep an eye out to ensure a successful investment.

RCN Capital

Just as important as the programs you offer is the wholesale lender you choose to partner with. If you want to help your clients maximize the returns on their next investment, choose a lender that can provide you with the best leverages and rates. RCN Capital works with real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors and lending partners. If you are looking to offer new construction programs to your clients, RCN Capital has competitive loan options and an award-winning broker referral program available to partners.