We have reached the time within the real estate cycle where new construction real estate investing is becoming popular again. New construction can be very lucrative for the capital growth investor, and investors looking to cash in on rapid appreciation love to invest in new construction.
This type of investing strategy makes sense for the capital growth investor when building is running strong. As new developments emerge, the builders have a strategy to start at lower entry level pricing and they strategically plan price jumps throughout the process of developments. They do this for a number of reasons.
First and foremost, the cost continues to rise and those costs are passed on to the buyers. Additionally, buyers want to know that the purchases are indeed a sound investment. As these prices rise, it comforts them in knowing they have indeed made sound investment as the builder suggested they would. Many builders start the development off with smaller (entry level) size homes and as the project unfolds they roll into larger and statelier homes.
These larger homes tend to bring up the value of the smaller homes. After all, everyone wants to own a home next to or near larger more valuable homes. These homes are cheaper to build and to buy. These smaller family homes tend to be the favored investments for the capital growth investor. They can get in early, buy, rent and then watch the appreciation unfold as builders complete the development and build out the larger homes.
This is the time to win in investing on these new home developments. Iit is important to understand some of the dos and the don’ts within this investment strategy.
NEW CONSTRUCTION REAL ESTATE INVESTING DO
Do your diligence. I know this one should go without saying, but believe me I have seen many a person just jump in and follow the thundering herd and buy because everyone else is buying.
Understand the location. New construction building does not in and of itself suggest the area is prime for investing. You still want to follow the principles of Capital growth investing.
Learn about the builder. How long they have been in business and what is their reputation for building a sound property and standing behind the quality.
Know the development. How many homes are going to be built in the development and over what time frame. What are the amenities that will be included in the development?
Learn about the HOA. Is there an HOA (Home owners Association)? These have become pretty popular amongst new developments. They tend to be good for maintaining property values as the HOA has rules and bylaws in place which help insure property owners are all maintaining their homes in a fashion that will keep the area looking good. An HOA will keep sustainable values within the neighborhood. These HOAs tend to have monthly, quarterly or annual fees, which of course need to be factored into your Pro-forma projections. Typically the higher the fee, the higher value to the homes and the more rules that are enforced.
Do buy a property’s that is at least a 3/2/2. The 3 bedroom, 2 bath and 2 car garage home is the most highly sought after home in the U.S. today. You can buy bigger, but the 3/2/2 will draw the most number of home buyers when it is time to resell, and you always want the exit strategy in mind when you buy.
NEW CONSTRUCTION REAL ESTATE INVESTING DON’Ts
Don’t buy in the latter 30% to 40% of the build out. As the development continues to build out, the prices are being raised. This is a lure that buyers love, but do not be caught in this lure as an investor. As you get beyond the 50% build out, the time left for price increases is starting to run out. As the final homes are built, the appreciation levels tend to slow. Opportunity may still be there, but you are running toward the end of a cycle and this is not where the purposeful investor wants to invest.
Don’t buy a house that cannot cash flow. Capital growth investors are buying for the appreciation in the home. The strategy should always be to watch the market and know when to sell. In the event a market shift should suddenly and un-expectantly occur, you always want to know you can continue with the investment by simply cash flowing the property. Failing at cash flow tends to only happen when the investors are not being purposeful and watching the market.
New construction real estate investing has made a lot of people a lot of money and you can do this too. Simply follow the proper dos and don’ts and make sure you are investing in the right location.
Want to talk over a potential investment or find out what we have on the market that we recommend? Give Larry a call today for a FREE 15 minute real estate investing consultation! +1 941-718-7761