Increased home building suggests investment opportunities for investors but is that enough? For a real estate investor it is imperative that you do your proper due diligence on best locations to secure your best investments. Whether you are a cash flow investor or more of a long term capital growth investor, a quick shortcut on the due diligence process is watching what the builders are doing.
Builders spend a lot of money and pay big fees to hire research firms to uncover the strong economic areas that can support and sustain new home building construction. A builder can spend millions of dollars up front creating the infrastructure, roads and legal work before even hoping to actually sell a property.
Architectural plans need to be generated, water runoff and drainage needs to be studied, local government approvals need to be acquired. Permits need to be pulled all before any hopes of making a dollar. You can rest assured that they have done their due diligence first.
When you see stories of builders building increase: it is time to sit up and take notice. This is the time you want to dig in and do your deeper due diligence. The builders building shortcuts a lot of your due diligence as you know by the fact they are home building that the stars are aligning for a lot of things such as.
• Demand is strong for housing
• Jobs exist to pay for the housing
• Population is increasing
• The path of progress is where they are building
• Financing is available
These aspects are imperative to be in place for you to capitalize on a strong and sustainable market.
This is a great and fast shortcut for your property investing diligence. Even more so for the capital growth investor as these are extremely strong indicators you want to have in place.
Builder’s presence is important: however it is not in and of itself enough diligence for the real estate investor. Many areas are great spots to build a home and the criteria a home builder looks for can be found in many areas. As I mentioned it is a great shortcut for your diligence, the important thing to understand is the real estate investor has more objectives over and above the sustainability of a growth area in order to have sustainable investments.
Builders presence is important for all investors consideration however not all areas where builders are present are deemed a good investments area.
As a real estate investor you also will want to look for things like:
• Undervalued markets: you want to target markets that are currently undervalued so you can be assured that after you purchase a property the values have a long growth potential ahead. Builders do not need this requirement met- affluent areas can have a great demand for housing but will not necessarily have maximum equity return potential
• Sweet spots: as an investor you want to purchase a property where the price point will be able to rent for fair market rent and be able to support the cost of the investment with maximum returns to you the investor. A builder may find a need and demand for housing in the $400K and up price point but these price points may not be the sweet spot that will give you a good return or even be a good investment.
• Be able to give you maximum cash flow: Investors typically want cash flow. You also want an area that can demand rents to cover expenses and give a decent return. Areas where expenses are low. For example many areas may be a great place to build a house but that area may be in a high cost insurance zone (such as by waterfront communities) where flood insurance is required and insurance or high tax costs restrict your cash flow.
You can see the requirement for a builder to build a home is paramount for a capital growth investor. If these criteria are not met you probably do not want to invest in the area, you do however need to have some additional criteria met to insure the area represents good investments area to accomplish your objectives and maximize your cash flow.