Mitigating Risk in New Construction Investments

With the US housing marketing experiencing an unprecedented housing shortage, now might be one of the best times to make an investment in new construction. Construction investments can be very profitable since the value of a home often exceeds the cost of the materials and labor used to build it. Plus, choosing to build in an underserved market can lead to even higher returns on your investment. While new construction can be lucrative, it’s also somewhat risky since you won’t be seeing a return until the very end of the process, after the home has been sold and all other expenses are paid. If you want to make sure you will receive a good return on your new construction project, here are a few ways you can reduce the risk level of your investment.

Do Your Due Diligence

First and foremost, you will need to conduct due diligence before any of the construction work begins. Start by researching the market you’d like to build in to see if new construction is financially viable. If your market is experiencing high job or population growth, then it’s likely to be a good fit. You will also want to make sure you’ve chosen a good area to build in; ideally, a safe neighborhood with access to amenities which will increase demand for the property. Finally, be sure to vet your developer by looking into their reputation and track record, and asking for examples of previous projects.

Conduct Comprehensive Financial Analysis

One more thing you should do before you go to purchase a plot of land is conduct a detailed financial analysis of the investment. You need to be sure that the deal has enough of a profit margin built into it that it’s worth your time and money. You can start by obtaining accurate numbers for the construction and holding costs, as well as a precise estimate of the final sale price once construction is completed. It can also be a good idea to overestimate your budget by about 10% to cover any sudden expenses or cost overruns. Even if you don’t end up using the budget, it will only add more to the profitability of your deal.

Carefully Review Contracts and Legal Documentation

You’re going to be dealing with a good amount of paperwork and contracts throughout the construction process, so it’s important to take care and protect yourself by carefully reviewing all documents. First, you will need to make sure all necessary permits are in place for the property in accordance with your local and state regulations. You should also take time to review the contract you’ll be signing with your developer, to ensure that the pricing and timeline for the project are reasonable (along with making sure they are properly licensed and insured). You might also want to consider working with a real estate attorney to help you go through all the necessary documents.

Stay On Top of the Construction Timeline and Potential Delays

Once construction has begun on the home, you’ll need to stay on top of things to ensure the process goes smoothly. Time is money, and especially with a construction project where you’ll be paying more in holding costs the longer it takes to finish. You can reduce your risk in this step by working closely with your developer to handle any issues as soon as they crop up. Communication will be key here, so make an effort to check in with them regularly so you can stay involved in the construction process.

Stay Up to Date on Local Market Conditions

After construction is completed on the property, it will be time to market it and enact your exit strategy. In order to get the most out of your investment you’ll want to stay informed on current market trends, such as the level of supply and demand in your particular market. You will also want to keep an eye on the price of comparable homes so that you can price your home accordingly. Keep in mind that you may need to adapt your exit strategy based on evolving market conditions. For example, if your chosen market has become oversaturated with homes that end up spending many days on the market, you may want to consider transitioning the home into a rental property. Being informed and acting quickly will be key to helping you make a return with your new construction investment.

RCN Capital

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 property, RCN Capital has competitive loan options available. Connect with us today to discuss your next real estate investment.

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