Is New Construction Your Next Real Estate Investing Niche?
- What is new construction?
- New construction pros and cons
- Tips for buying new construction homes
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, it is possible to make any exit strategy or property type work for your business.
What Is New Construction?
New construction is a niche that flies somewhat 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.
Before jumping on the bandwagon however, 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, you’re buying the property directly from the person who created it — not the homeowner or from another investor. This means, doing your research ahead of time will be 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!)
The Pro’s And Con’s Of Investing In New Construction
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. Here are a few more:
1. 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 builds are constructed in these types of neighborhoods (or up and coming neighborhoods), which usually means you’ll have better luck finding quality tenants.
2. Increased supply Unlike foreclosure, short sale, reo, or wholesale listings, new construction properties are easy to find. Don’t get caught up on a short sale property bidding war and miss out on low interest rates and a 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.
3. 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 builders 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.
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 con’s 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 off obstacles.
1. Higher priced While there are many incentives that 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 is 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 investors most valuable asset. You might be paying more, but you’re paying for a hassle free process.
2. Buyer taste There will be plenty of buyers out there who are looking for exactly what new builds can offer, but some will be turned off the qualities. New developments are often not completed at once. The builder will sell as he or she finishes 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 who are looking for a well-established community feel. In addition, 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.
3. The unknown Unlike older homes, new builds 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 he or she has completed in the past and run “comparables” on those. Minding your due diligence is another way to limit the uncertainty.
Real estate is still the best investment you can make today, millionaires say—here’s why
1. ‘Owning made me rich.’
"Buying real estate has made me rich — mostly through necessity, not by design. I bought my first itty-bitty studio after scraping together a few bucks because I needed to live somewhere anyway.
A few years later, the studio doubled in value, giving me enough cash to plunk down 50% on a one-bedroom apartment. That soon rolled into a two-bedroom, then a three-bedroom, and finally landed me in my 10-room penthouse.
Buying that tiny studio was the most important decision I made because it got me in the game."
2. ‘Residential properties can generate income year-round.’
"Investing in real estate is a great idea if you are in it for the long haul, not a quick return.
Your best bet is investing in residential properties that produce rental income year-round. Just make sure you understand all of the associated legal fees and are prepared for unexpected costs."
3. ‘The right investment will continue to appreciate.’
"Real estate is real, and it’s always a good idea to put your money in real assets. But let me be clear: That doesn’t mean that all real estate is a good idea.
I only buy certain types of properties, generally multifamily ones in upscale locations that provide consistent cash flow and great potential for future appreciation.
I stay away from low-income areas and single-family homes. But even those assets are probably a better place to store your money than letting cash depreciate while sitting in the bank!"
4. ‘Buying is smarter than renting.’
"Most millionaires I know made more money from owning real estate than any other investment. Real estate consistently increases in value over time and outperforms other investments.
Plus, it isn’t as vulnerable to short-term fluctuations as the stock market. You get a tangible, usable asset, whether you’re renting out an apartment or commercial building for income or buying a home. And there can also be tax benefits for investment properties.
It’s always a good time to buy real estate. In fact, the real wealth is made by buying when everyone else is selling and vice versa. While many are talking about a recession, the market is strong, with increasing prices and transactions.
Renting a one-bedroom apartment can cost $5,000 a month in certain neighborhoods today, yet you can buy a $1 million house with just $4,000 a month in mortgage payments. And the rate is fixed for 30 years — the best kind of rent control.
So why would you rent? Besides, if you rent your property to someone else, you can cover your mortgage or better."
5. ‘You get six-figure tax breaks.’
"Real estate has incredible tax benefits. In certain situations, you don’t have to pay taxes on your gains from investment properties. You can also get a $250,000 tax break as an individual and $500,000 as a married couple.
The wealthiest people collect property the way they used to collect cars. Interest rates are low, prices have fallen, and you don’t have to tie up a lot of cash in the investment.
At the same time, more people are choosing to rent instead of own. You can have a lucrative rental property using other peoples’ money to cover the mortgage, taxes, and upkeep. With sites like Vrbo and Airbnb, you can also find short-term renters to subsidize your overhead.
While I suggest diversifying your investments, there is no better place to park your money than brick-and-mortar investments you can live in and enjoy. When you invest in your surroundings, you invest in yourself!"
6. ‘It doesn’t tie up a lot of cash.’
"Real estate is a bankable asset, so you can always leverage it. It also doesn’t tie up a lot of cash. You can put down as little as 10% and use banks’ money to grow your investment. With such low interest rates, that’s like free money.
Unlike the stock market, where many factors are out of your control, your investment can’t disappear overnight. You can also build your wealth with excellent return rates and tax advantages.
The only people who lose money in real estate are those who bought at the height of the market and sold at the wrong time or took too much equity out of their home, leaving no profit margin when they sold it. It often takes time to see big appreciations, but if you hold on to your investment, you will.
7. ‘Real estate offers unlimited options.’
"Real estate is always a great investment because you have more options than with other types of investments.
If you invest in stocks, bonds, or a private offering, your success is completely dependent on factors outside of your control. At most, your options are to hold or sell. With real estate, you have unlimited options.
You can buy a house with the intent of flipping it, then rent it if the market turns south. If you buy a rental that appreciates in value significantly, you can sell it. Real estate can be refinanced, rehabbed, and rezoned. You can develop it, lease it, subdivide it, or add parcels to it.
These are just a few of your options. This flexibility is one of the reasons it has created more millionaires than any other asset class."
8. ‘People will always need a place to live.’
"There’s an opportunity for greater and more consistent returns with real estate than with other investments. When a property is built, it’s because a group of people see a population large enough to justify it.
"The sheer number of new properties each year is a testament to the growing real estate market. Supply follows demand, and demand is continuing to rise. Populations almost never decrease, which is why the need for housing increases year over year.
The market for multifamily apartments in particular is growing. As apartments become more attractive, people are less likely to buy houses. With multifamily apartments, you continue to generate increasing income over time.
Once the property stabilizes, you can collect returns for your investors until you decide to sell. There’s also demand year-round wherever you go."
9. ‘You can invest in land that produces income.’
"Many businesses come and go, but there’s one thing we’ll always need: land.
There’s an inherent demand for real estate, whether the land produces a product like coffee or is home to an apartment or retail space; so it will always be a good investment. No matter what kind of business you run, you need land.
Investing in real estate allows you to protect yourself and your wealth. While the real estate market has gone up and down, it has never declined over time. Compare that to when Wall Street collapsed or currencies that aren’t backed by anything tangible.
Over time, you will always get value from real estate that produces income — like a coffee farm, for example. Even better if you choose property with inherent value, such as a location in Times Square."