Should You Invest in New Construction? Top Benefits and Challenges to Know
11 Jan 2022
5 min read
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In the field of real estate investing, one size doesn’t fit all. Some investors are solely focused on flip-and-fix properties, prioritizing lower-value homes and multi-family complexes they can renovate and sell/rent for a profit. Then, there are investors who want to start fresh, every time. As you think about your next move, does new construction sound appealing? Going this route allows you to enjoy strong returns without the costs and sweat equity associated with flipping, but it isn’t for everyone.
Today, we’re taking a closer look at this strategy and sharing what savvy investors need to know before pivoting in this direction.
What Makes New Construction Different?
While “new construction” is the umbrella term used to describe this niche, the properties can take many different forms, including residential, commercial, and mixed-use. Before investing in any type of unit, it’s important to know a few distinguishing features that set this approach apart.
One of the most unique aspects of new construction is the flexibility it provides. Investors who want to oversee the entire process can be involved from the beginning, working with contractors to fine-tune every aspect, from floor plans to finishes. Those who prefer a more traditional approach can wait and purchase the finished property from the developer once it’s completed.
With a new build, the builder becomes an integral third party in each transaction. If you decide to sell your property, you’ll need to have a detailed builder contract in place. In addition to construction information such as blueprints and room layouts, the contract should also include information on builder-provided financing options and buyer incentives.
Typically, the real estate agent will present this contract to the buyer, along with other relevant information on the transaction, such as how long their deposit will remain available if they decide to back out of the deal.
While property resales have their own set of financing rules, they operate a little differently when you’re building from ground up. The most notable difference is the timeline for mortgage rate locks. If a buyer qualifies to purchase a home that’s still under construction, they might not be able to afford it when it’s time to close, especially if interest rates have increased. That’s why most mortgage lenders cannot lock in rates more than 90 days before the closing date. If you’re planning to sell a new build, it’s smart to understand these regulations so you can prepare accordingly.
Benefits of Investing in New Construction
Thinking about buying brand-new properties before they’ve even had the chance to hit the market? Here are three reasons why this can be a smart move.
Before builders or developers select a spot, they normally perform extensive research on the surrounding areas. As such, most new homes are built near top-rated schools, well-kept public green spaces, and convenient amenities, such as dining and entertainment options.
As an investor, this means you can command a higher rate when you’re ready to sell or rent. You may even see your property appreciate faster, especially if more development occurs around it. Location always matters, whether you’re flipping a foreclosure or marketing a custom build.
When the home is brand new, there are naturally fewer maintenance and repair costs to contend with. Though some damage may occur throughout the building process, the issues are usually fixable, minimal in nature, and covered by the contractor (if their team was at fault).
In addition, many builders also offer warranties on new homes, which means that if a major issue, such as a plumbing emergency, does occur shortly after you close, you shouldn’t be required to pay for it out of pocket. The more money you can save initially, the greater your ROI will be down the road.
Does it seem like you’re always missing out on foreclosures or short sales? If you’re tired of the constant bidding wars, new-construction homes can be a breath of fresh air. They’re also more competitively priced than many investors realize. While you may pay more at the outset, you’re getting a ready-made, package deal that includes unused, modern appliances, custom touches, and a pre-vetted location -- all without the stress of the real estate rat race.
Challenges to Understand
As with any real estate investment strategy, it helps to know the roadblocks you may encounter with new construction. Let’s review the top three.
For most investors, the biggest challenge is price. While you’ll likely pay retail market value and most builders will hold firm to that number, keep in mind that you’re not paying for a renovation or repairs. You’re also saving time, which puts money back in your pocket.
Especially if you plan to earn long-term, passive income by turning the property into a rental, the sticker price shouldn’t be as shocking. To help offset the cost burden, consider working with a finance lender like Temple View Capital. Our ground up construction loans feature a quick application and approval process, as well as competitive rates, so you can get your project rolling quickly.
Many renters and homebuyers are looking for properties that have an established look and feel, with features like spacious backyards and mature landscaping. Brand-new spaces can lack this trait, especially if they’re located in developments that are still being built. This can make it more difficult to market your listing, but if you know the builder’s timeline and future plans, you can pass those insights on to interested parties.
Often, investors will purchase a new build while construction teams are still working on it. These negotiations are ideal for developers, as they supply the capital needed for further expansion. The only issue? It can leave you hanging in the balance if the timeline doesn’t go as planned.
From adverse weather events to unexpected illnesses and supply chain shortages, there are many factors that can affect the project’s duration. Before making an investment decision, make sure you have the space in your schedule and budget for unexpected setbacks.
Is New Construction Your Next Investing Niche?
New construction offers many benefits to investors who are willing to assume a degree of risk for a significant payout potential. The key to succeeding in this market is to clearly understand each project ahead of time, from closing-day contracts and legalities to interest rates, schedules, and final costs.
As you begin to look for land and meet with builders, we can help you finance the perfect property, tailoring our program to meet your project needs. Contact us today and we’ll reach out to you shortly to discuss the exciting next steps!