Investing in new construction properties can be a worthwhile real estate investment option. As a growing area, new constructions allow investors to find property at lower cost bases before appreciation occurs. However, these investments require research on development plans and market demand. When selected properly, new construction investments can generate strong rental income and capital gains over time.
Market research is critical when targeting new construction real estate
Thorough market research is essential when considering new construction real estate investments. Investors should analyze population and job growth trends to gauge development needs. Reviewing city planning documents can also provide insights into future growth areas. By understanding where demand is likely to increase, investors can identify submarkets and projects that are more likely to appreciate over time.
New construction investments carry higher risk but allow lower entry pricing
While new construction investments carry greater risk than existing properties, they also allow investors to acquire assets at lower cost bases. As the initial investor, you can benefit from significant price appreciation as the area becomes established. However, ensure the developer has reliable construction projections and the capacity to complete the project on schedule.
Tenant demand and achievable rents should be evaluated when investing in new constructions
A key part of evaluating a new construction investment is researching the achievable rental rates in that submarket. Review listed rents for comparable properties to determine what tenants are willing to pay. While a new construction may garner a rental premium initially, ensure rates are sustainable long-term. Also assess whether tenant demand exists to support the unit mix and absorption pace projected by the developer.
Newer properties require less maintenance spending than existing buildings
One advantage of new construction is the limited maintenance requirements in the early years. With brand new building systems and components, investors can minimize near term capex needs. However, ensure reserves are sufficient to fund future replacements of mechanical equipment and amenity refreshments. Overall, new constructions allow investors to maximize their cash flow during the peak appreciation years.
Development incentives and programs may improve new construction investment returns
Many cities and states offer incentives to spur development of new housing inventory. These programs include reduced tax rates, subsidized infrastructure spending, and discounted utility costs. Investors should research available incentives when evaluating markets and submarkets. By understanding the development incentives, you can more accurately forecast investment returns and make better capital allocation decisions.
New construction real estate investments offer investors the ability to acquire properties at lower cost bases before significant price appreciation occurs. However, these projects carry greater risk around construction delays and absorption pace assumptions. Proper due diligence around market fundamentals, achievable rents, developer credibility, and development incentives is key to maximizing returns.