With so many different avenues an investor can pursue in the real estate industry, it can be difficult to decide which path to follow. However, with the proper due diligence, making any exit strategy or property type work for your business is possible.
The opportunity to invest in new construction real estate often flies under the radar but is perfect for investors who want to stand out from the crowd. While many investors are constantly on the hunt for run-down, dilapidated properties to fix and flip, investors with the niche of new construction do just the opposite — and typically have solid returns.
What Is New Construction?
New construction refers to a newly built property, and can include residential, mixed-use, or commercial properties. Investors can either start by acquiring raw land and overseeing the construction process, or they can follow the more common route: buy new construction properties directly from a real estate developer. This strategy is known for its attractive profit margins and opportunities to break into up-and-coming markets.
However, before jumping on the bandwagon, it’s important to note that the new construction niche is a different beast and comes with its own set of rules and quirks. Remember, in many cases you’re buying the property directly from the person who created it — not the homeowner or another investor. This means, doing your research ahead of time is crucial. Visit other developments the builder has already completed and, if possible, obtain reviews from other buyers the builder has sold to in the past.
As with any real estate investing strategy, success will depend on the unique investor’s short and long-term business goals; but, with today’s low interest rates, investing in a passive income property is almost a no brainer.
So will your rental be a new construction property or a rehab? Sort through these pros and cons to help make that decision (and if you do decide to go the new construction route, be sure to read to the end for some helpful investing tips!)
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What To Know Before Investing In New Construction Real Estate
Before venturing into new construction, every experienced real estate agent will tell you that buying and selling new construction projects is an equally exciting and daunting experience for newcomers. Here are five essential tips to know about new construction real estate:
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New Construction Selling Process: There are extra steps you must take when selling this unique kind of property. Firstly is the builder contract. Real estate agents must outline the buyer’s rights, such as the deadline for the buyer to back out without forfeiting their deposit. Information such as inclusions, incentives to secure a deal, and financing options from the builder should be confirmed early. Every aspect from floor plans to blueprints must be covered to give the buyer the most information possible for their decision.
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Buyers Will Need Real Estate Agents: New construction is intimidating, but with the right experienced professional, you can get exactly what you are looking for in a new construction property. Going into new construction blindly can subject buyers to several problems and risks that could have been avoided with the right information.
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Analyze The Builder’s Contract: Builder’s contracts will more than likely have verbiage with the buyer’s best interest at heart. It is good practice to get ahold of the contract early to properly address any terms and deadlines. As an agent, it is your responsibility to clearly translate any of this information in a simple form to the buyer.
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Financing New Construction: Compared to resale transactions, financing for a new or unfinished home must be handled with a bit more care. Interest rates cannot be confirmed more than 90 in advance, posing problems for buyers later. For example, if the buyer barely qualifies for purchase at the time of the contract, they may not handle the increase of mortgage rates when the property is finished. Again, the more information you have, the better.
The Pros And Cons Of Investing In New Construction
Dealing with new construction real estate may require a bit more time and patience for real estate agents. Like anything else, it comes with its fair share of information to learn before you start making investments. Let’s begin by covering the benefits and disadvantages of new construction real estate.
Pros Of New Construction Real Estate
Given that new construction real estate investing is slightly more complex, several benefits come with it. When it comes to new construction, the beauty is — you escape the endless costs that tend to accompany older homes, which is just one of the many benefits. A few more include:
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Location: Unless you’ve been living under a rock, you know that real estate is all about, “location, location, location.” While it is completely possible to profit from a home that resides in a less-than-impressive neighborhood, chances are, you’ll find more success in an “A” -neighborhood. Good schools, well-kept roads, clean public parks, and low crime rates are priceless and usually, come with properties in nicer areas. Typically, new build houses are constructed in these types of neighborhoods (or up-and-coming neighborhoods), which usually means you’ll have better luck finding quality tenants.
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Increased Supply: Unlike foreclosure, short sale, REO, or wholesale listings, new construction properties are easy to find. Don’t get caught up in a short sale property bidding war and miss out on low-interest rates and nicer quality property. When you aren’t focused on chasing after a foreclosure deal that may ultimately fall through, you can zero in on finding a “packaged deal” property that is both well priced, in a great location, and comes with upgraded amenities.
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Initial Maintenance Costs: Newly constructed homes are not impervious to damage. However, they are much less likely to suffer damages like a leaky roof or broken pipe than older homes. It is also common for builders to offer warranties on their newly constructed homes, such as a short-term full structure warranty or a long-term exterior warranty. With fewer maintenance costs, new construction real estate is proven to relieve its owners financially in the first few years.
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Real Warranties and Upgraded Appliances: When you buy an older home, you’ll often spend a large chunk of time hunting down bids from a foundation specialist or calling your plumber incessantly. Avoid this headache with new construction properties. When a problem arises in a new construction home, it’s the builder’s problem – not yours – as new home warranties can last between one and 10 years (negotiate the length of time before you close). In addition to extended warranties, new construction homes are built with mint-condition appliances. This will save you or your property management company time and money by not having to deal with leaky faucets and clogged toilets.
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Energy Efficiency: New home builds generally include energy-efficient aspects of the home that will homeowners money in the long run. If you buy one of these homes, you will find more control over which energy-efficient aspects you prefer in your home. These can include solar paneling, low use or water-efficient appliances, or upgraded insulation and HVAC systems. Not only will these homes generate a lower monthly electric, gas, and water bill, but they will also reduce their owners’ carbon footprint and help to reduce their impact on the environment.
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Appreciation: Appreciation is one of the most attractive benefits of real estate investing. With new construction properties, this benefit can be even more exciting. The value of the land can change tremendously as you build new property and as the surrounding area develops further. You could see appreciation in a matter of months with the right property (and the right location). Pay attention to the market and look for areas to tap into new growth.
Cons Of New Construction Real Estate
While the benefits of investing in new construction can seem very attractive, it’s important to review the other end of the spectrum before deciding if this is the niche for you. On the other hand, don’t let the cons scare you off — there are ups and downs to every investing strategy. If you want to take a stab at new construction, know that there are always ways to thwart obstacles.
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Higher Priced: While many incentives come with buying newly built homes, the fact of the matter is, they are usually more expensive. If you’re a new investor or an investor on a budget, new construction may not be an ideal match. Because the property and neighborhood are brand new, you’ll be basically be paying retail market value. The number might be hard to stomach at first, but if you’re investing in the property long-term (i.e., passive income properties), the increased prices are not that big of a deal. Look at it this way: you are trading off money for time, and we all know that time is an investor’s most valuable asset. You might be paying more, but you’re paying for a hassle-free process.
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Buyer Taste: There will be plenty of buyers out there who are looking for exactly what new build houses can offer, but the qualities will turn some off. New developments are often not completed at once. The builder will sell as they finish each property. This means a buyer will often be living in a neighborhood that is under construction and/or has no neighbors. It can be hard to sell to new families and first-time homebuyers looking for a well-established community feel. New construction properties are often built on smaller lots and can lack the charm older homes possess. This, again, can make it more difficult to entice buyers who’ve imagined big backyards and unique styles.
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The Unknown: Unlike older homes, new build houses don’t have a history investors can rely on. When a home is brand new, you can’t be certain what the property taxes will be, nor will you be able to run a cash flow analysis with confidence. In your first year, property taxes will only be based on the land itself, making the cost relatively low. But you won’t know the cost for the following year until the completed property has been appraised. Diminish these unknowns by having an open line of communication between you and the builder. Ask about properties they have completed in the past and run “comparables” on those. Minding your due diligence is another way to limit uncertainty.
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Tough to Negotiate: Typically, a home’s price is determined by its previous owner and its market value. For these reasons, there is typically room for negotiation with a previously owned home. However, new build homes prices are not determined in the same way. The price of a new build home is set by the builder who constructs them. Builders typically will not negotiate, so a new build home’s price is what a home buyer will pay.
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Construction Timing: It is not uncommon for investors to secure a new construction deal while the development process is ongoing, after all developers need a way to fund the project. This arrangement can occasionally leave investors in a tough spot if construction does not go to plan. Remember that weather, sickness, supply chains, and more can all impact construction timelines. Account for these possibilities as you consider potential deals and avoid making costly mistakes.
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10 Tips For Investing In New Construction
If you’re ready to invest in new construction properties, keep the following tips in mind:
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Work with an agent familiar with new construction and who ideally has a relationship with the builder.
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Be creative when you negotiate. Builders may not be willing to drop their prices, but they may be willing to cover closing costs or upgrade amenities at no additional fee.
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Shop around and mind your due diligence before choosing a loan. The builder’s lender may not always be the best option for you and your business.
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According to a report performed by SeekingAlpha, on average, one in five home closings get cancelled. This means investors should buy immediate inventory because builders want to sell as quickly as possible once a project is complete.
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Research future plans for the community. If no initial blueprint has been made for the surrounding area, you may be buying in a neighborhood that has no room for growth.
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Don’t assume a home will be without issues just because it is brand new. Still perform a thorough inspection as you would with any investment property.
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Because most bonuses for builders are based on monthly and quarterly goals, buying new build houses during the last few days of the month can help investors score a deal.
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If you’re buying a home that has yet to be fully complete, get a guarantee. Include specific dates and requirements to ensure your property is done on time and of quality.
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Consider working with the builder’s people. Oftentimes, builders have relationships with title companies, mortgage brokers, appraisers, etc. Using people in the builder’s network may allow you to reap discounts.
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Plan out a budget ahead of time, leaving some wiggle room for changes along the way. The cost of customizations, landscaping, and additional features can add up fast if you don’t pay attention.
Summary
Are you considering new construction real estate as your investing niche? It can be a challenge for newcomers, but it can be a rewarding venture in your real estate career with the right information from experienced professionals. Research will be your greatest asset, and your success will help you stand out compared to other investors. Ask your questions about getting started in the comments below:
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