Investing in New Construction homes: After our previous article on the How to Make Money Becoming an Airbnb Property Manager, the question -Is New Construction Your Next Real Estate Investing Niche? Keeps coming up. So I decided to address that issue here in this guide.
With so many different paths a real estate investor can take, it can be difficult to decide which path to take. However, with proper due diligence, it is possible that any exit strategy or type of property will work for your business.
Investing in New Construction homes
New Construction homes can be a great investment, especially for homeowners who want to avoid the cost of ongoing maintenance and repair of older homes. The main goal of real estate investors is to find a property that has a reasonable return on investment (ROI).
One easy way to see if an investment is paying off is to look at the cap rate (also known as the capitalization rate). The cap rate tells you how much money is coming from rents and how much is going out (also known as rental income minus expenses).
New investment properties in a booming area with high rental demand can generate excellent returns. Read on to learn more about the pros and cons of investing in new rental properties, and whether this strategy is right for you.
What Is New Construction?
When buying a new home with building income, you are buying a new home, usually direct from a contractor or property developer.
Buying a new property has unique advantages and disadvantages. As always, thorough due diligence is a very important step before making any investment decision. It’s a good idea to look at the developer’s previous projects and see how these properties have appreciated or maintained their value over time.
New construction real estate is a niche that plies a bit under the radar but it is perfect for investors who want to differentiate themselves. While many investors are constantly on the lookout for rundown and shabby properties to fix and flip, investors with the new construction niche are doing just the opposite – and typically generating solid returns.
Before jumping on the train, however, it’s important to note that the new building niche is a different beast, and has its own rules and quirks. Remember, you are buying the property directly from the person who built it, not the owner or any other investor. This means that doing your research upfront is crucial. Visit other developments that the builder has already completed and, if possible, get reviews from other buyers the builder has sold to in the past.
As with any real estate investment strategy, success depends on the short and long-term business goals of the individual investor. With today’s low-interest rates, however, investing in real estate with passive income is almost a given.
So will your rental be a new building or a rehab? Sort these pros and cons to help you 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!)
What To Know Before Investing In New Construction Homes/ Real Estate
Before venturing into a new construction real estate, any seasoned real estate agent will tell you that buying and selling new construction property for newbies is an equally exciting and intimidating experience. Here are five important tips for new construction real estate:
#1. New Construction Selling Process:
In Investing in New Construction homes, 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 rights of the buyer 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 in order to give the buyer the most information possible for their decision.
#2. Buyers Need Real Estate Agents:
A new building is intimidating, but with the right, experienced professional, you can get exactly what you’re looking for in a new build. Going blindly into a new building can expose buyers to various problems and risks that could have been avoided with the right information.
#3. Analyze The Builder’s Contract:
Builder contracts most likely contain words that are in the best interests of the buyer. It is recommended to read the contract as early as possible in order to properly meet the terms and deadlines. As the agent, it is your responsibility to clearly translate this information for the buyer in a straightforward manner.
#4. Financing New Construction:
Compared to resale transactions, financing a new or unfinished home should be handled a little more carefully. Interest rates cannot be pre-confirmed more than 90, which can cause problems for buyers later. For example, if the buyer barely qualifies to buy at the time of the contract, they may not be able to cope with the rise in mortgage rates after the property is completed. The more information you have, the better.
The Pros and Cons of Investing In New Construction
Dealing with new properties can take a little more time and patience for real estate agents. Like everything else, it contains a fair amount of information that you need to learn before you start investing. Let’s start with the pros and cons of new construction real estate.
Benefits of Buying New Construction Investment Property
Since real estate investments in new buildings are a bit more complex, this has a number of advantages. When it comes to new construction real estate, the nice thing is you avoid the endless costs associated with old homes, which is just one of the many benefits. Some others include:
#1 – Location
Anyone who knows real estate knows that location matters and that new builds are no exception. New construction homes are usually located in new or emerging markets. These new developments are usually integrated with or around A-quarters. Better neighbourhoods offer better schools, lower crime rates, access to well-kept parks, and closer proximity to amenities.
Since new construction projects are often in good neighbourhoods (or soon to be in good neighbourhoods), it should be easier for landlords to find high-quality tenants.
#2 – People like Living in New Homes
As humans, we have an incredible ability to adapt to our surroundings. For example, a screeching ceiling fan may drive you crazy at first, but over time you won’t even notice it.
Since we can get used to our surroundings, we get bored quickly. Most of us love new and shiny things. Why do you think so many people choose to lease their vehicles? The thrill of driving a brand new car down the street every two or three years outweighs the cost for many people. When this “new car feeling” subsides, you can choose your next rental car and start the cycle again.
Newly built homes feel cleaner, often have open floor plans, and can provide better natural sunlight. Knowing that you are the first person to live in a room and make it your own is both welcoming and heart-warming. In fact, more than half of Americans prefer new homes to existing homes.
A big advantage of investing in new buildings is that people are always motivated by new things.
#3 – Appreciation & Instant Equity
New construction homes are a good strategy for investors looking for growth. Investing in new and emerging markets can increase the rate of appreciation of your property and build equity faster. Appreciation is never a guarantee. Therefore, conduct a competitive market analysis before buying. However, when you know the market is growing and rental demand is high, you can be sure that your property will appreciate in value.
I heard of a friend who recently bought a new investment property. In just three months, the value of his property has increased by $ 60,000! Talk about buying in a fast-growing market with an incredibly high demand for rental apartments!
#4 – Extended Warranties & New Appliances
Another benefit of new construction rental properties is that they come with new equipment and extended warranties for all major systems. Electricity, plumbing, heating, and air conditioning as well as important components must be covered by an extended guarantee (guarantee conditions vary). If something breaks or goes wrong, the factory warranty should cover it.
With new homes, investors don’t have to worry about as many surprise costs – at least not for several years.
#5 – Low or No Maintenance & Repairs
For the less-handy landlord, properties that require little or no maintenance can be an attractive proposition. Investors in new home properties avoid most or all of the maintenance and repair problems that often accompany older homes.
The need for major repairs, such as a leaky roof or problems with the installation would not even be an issue for new construction investors.
#6 – Ability to Customize To Cut Costs
New buildings should address what is popular today. Investors do not need to spend time or money on updates. Buying Pre-construction houses (houses that have not yet been built) allows you to customize the property inside and out. In this way, you can reduce costs by opting for sustainable basic functions and amenities over upgraded or luxurious alternatives.
Unless major renovations are planned on existing homes, you are getting exactly what you are getting. Older homes, of course, have unique features and aesthetics, depending on what was in vogue at the time of their construction. Even updating some outdated aesthetics is likely to be quite expensive.
Right now, most renters and buyers are looking for open floor plans, large spaces, and vaulted ceilings. One real estate trend we’re seeing with the COVID-19 pandemic is that the outdoors are becoming a “staple” too.
#7 – Smaller Deposits Upfront
New construction homes can usually be booked for very little money. Pre-construction houses can also be booked before they are fully built.
For example, let’s say a developer needs an initial deposit of $ 1,500 in real money to reserve a new $ 225,000 townhouse building. As a buyer, you don’t have to pay any additional money before the property’s closing date. This will keep money in your pocket longer and if market forecasts change and you have to log out of business it won’t hurt that financially.
#8 – Buy New Construction Now or Plan Ahead
Investing in New Construction homes gives you more control over your buying process and schedule. When buying a newly built property, the builder should be able to specify a fixed deadline in advance. The same applies to an investment property prior to construction.
This can be of great benefit to investors who want to buy now or plan their future investments in advance. You will also avoid potential bidding wars over properties for sale, especially if it is a competitive buyers’ market.
#9 – Work With the Builder’s Team to Expedite Buying Process
Developers and builders almost always have a team of professionals who they prefer to work with during the sales process. Consider using your builder’s mortgage and investment firms, appraisers, etc. Using your build team can help ensure a smooth and expedited buying process.
#10 – “Smart & Healthy” Technology
Compared to resale properties, Investing in New Construction homes offer much more advanced technology and energy efficiency. The materials used to build new homes are more durable and durable than ever.
Advances in technology have improved the efficiency of windows, insulation, and heating and air conditioning systems. These advances are creating a healthier living environment and have made energy-efficient homes an industry standard. And because new buildings are energy-efficient, your tenants save utility costs every month.
Drawbacks of Buying New Construction Investment Property
While the benefits of Investing in New Construction homes may sound very attractive, it’s important to consider the other end of the spectrum before deciding whether this niche is right for you. On the other hand, don’t let the downsides put you off – every investment strategy has ups and downs. Whenever you want to try a new construction, you know that there are always ways to overcome these obstacles.
#1 – Longer Commute / Location
New and emerging markets usually only appear outside of existing city districts. Many large American cities are already densely populated, and developers can only build outside of it. Therefore, newly built districts are often further away from cities and city centres. A longer walk and closer proximity to practical amenities can be very disadvantageous for investors and tenants.
#2 – New Construction Homes are More Expensive
If you’re buying something new, be it a car, lawn mower, or table saw, it will cost you more than buying a used one. Because new homes are built with new materials, when you buy a new home you pay the entire market value of the retail. For an investor, buying a product at market value is not an ideal starting point to invest. Hence, this could deter many from buying new homes.
Remember, the trade-off with money is time. A new property costs more than a resale. However, a resale property often requires more ongoing maintenance and repairs, which can pull money out of an investor’s pocket. Real estate investors prefer different strategies. So it is up to you to decide what is right for you.
#3 – Give Up the Charm
It is impossible to restore the appearance of older parts of the city. If you’ve ever walked the sidewalks along the streets under mature trees, you know the feeling of nostalgia I am talking about.
New buildings are mostly in newer areas and not in older, established parts of the city. These new districts and houses lack the charm that many people are looking for.
#4 – New Homes Can Be Generic
New houses in planned communities often look the same. It can be difficult to tell one street from the next. They are pretty much the same “cookie cutter” houses, painted in slightly different colours. Tenants looking for more character and charm will not find new buildings appealing.
#5 – Lack of History
Newly built homes have no past expenses, so it is more difficult for investors to pinpoint the numbers to see if the investment is paying off. Some unknowns such as property taxes that come with new construction can be seen as a downside.
#6 – Sometimes a Waiting Game
The supply and demand for housing vary from market to market. Finding and buying newly constructed investment property can sometimes take a while, especially when demand is high and supply is low. What if there weren’t any new construction houses for sale right now? Investors may have to wait several months before they can actually close the completed property. That being said here are tips to investing in new construction homes.
Quick Tips for Investing In New Construction Homes / Real Estate
When you’re ready to invest in new buildings, keep the following tips in mind:
- Work with an agent who is familiar with new construction and ideally has a relationship with the contractor.
- Be creative in negotiating. Builders may not be willing to cut their prices, but they may be willing to cover the closing costs or upgrade the equipment at no additional cost.
- Before you decide on a loan, look around and be careful. The builder’s lender may not always be the best option for you and your business.
- 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.
- According to a report performed by SeekingAlpha, on average, one in five home closing gets cancelled. This means investors should buy immediate inventory because builders want to sell as quickly as possible once a project is complete.
- Don’t assume that a home will be okay just because it’s brand new. Always do a thorough inspection like you would any investment property.
- Since most home builder rewards are based on monthly and quarterly goals, buying a new home in the last few days of the month can help investors close a deal.
- If you buy a home that is not fully finished, you are given a guarantee. Include specific dates and requirements to ensure your property is on time and of the highest quality.
- Consider working with the builder’s people. Often times, builders have relationships with investment firms, mortgage brokers, appraisers, etc. Using people from the manufacturer’s network can potentially benefit you from discounts.
Do you see new construction properties as your investment niche? This can be a challenge for newbies, but with the right information provided by seasoned professionals, it can be a worthwhile endeavour in your real estate career. Research will be your greatest asset and your success will help you stand out from other investors.
Given the massive shortage of affordable housing in the United States, investing in new buildings is a unique opportunity. Finding new buildings in a growing market that doesn’t have a lot of new buildings means you can offer something that other homeowners can’t: a new home.