As of June 2024, Zillow estimates the U.S. housing market inventory is now short 4.5 million homes. With this supply and demand imbalance, the prospect of new construction to meet the demand for new homes can be appealing to real estate investors.
Is it Better to Build New Construction or Renovate Existing Homes?
When buying a new construction home vs. an existing property, investors will uncover both the pros and cons of each venture.
The pros and cons of new construction homes include:
Pros
- Opportunity for a more modern floor plan
- More authority in the design of the home
- Lower maintenance costs
- Warranties on new appliances
- Less costly utility/energy bills
- Home will likely be “greener” and “smarter” than many existing properties on the market
- New construction home’s appreciation tends to rise faster
Cons
- Upfront costs can be more expensive
- Harder to estimate overall costs and timelines
- Traditionally include longer holding times
When the pros outweigh the cons, investing in new construction homes can be a great opportunity for investors to supplement homebuyers’ demands for homes while turning a profit in a less-than-favorable housing market.
Combating Institutional Real Estate Investors
While many factors have influenced the housing inventory shortage, institutional real estate investors–or larger enterprise investment companies–continue to be a key component of the issue. A recent Redfin report found that institutional investors accounted for nearly 19% of all the U.S. homes sold during the first quarter of 2024–a number that continues to rise year-over-year.
These companies buy up sizable amounts of properties, typically tens of hundreds at a time, creating a portfolio of rental properties. This lowers an already depleted housing market.
With the right financing, real estate investors can combat these institutions and facilitate the demand for new homes with new construction projects.
Tips to Conquer Your First New Build
However, investing in new construction homes is not the same as fix and flip endeavors, and requires investors to learn and navigate a few new things that they may have never dealt with before.
Here are a few tips that will help you conquer your first new build:
Thorough Market Research
In business, any successful venture begins with thorough research to help guide informed decisions. For real estate investors, evaluating industry dynamics to uncover investment opportunities should be routine for any project. Collecting key data points on things like a location’s job and population growth, housing affordability, and unemployment rates is a great first step.
When scouting an area for new construction projects, investors must take a more granular look at the location. Identifying emerging neighborhoods with the right features is essential to building success.
Investors should look for:
- Quiet and safe neighborhoods
- Access to amenities and entertainment
- Convenient transportation or access to public transportation
- Great school districts
These factors will help you determine some of the top places to invest in real estate.
It’s important to note that while building new homes in older neighborhoods with proven amenities provides peace of mind to potential buyers, securing a lot to build a new housing development could be more profitable. As more homes are built and occupied and the neighborhood develops, your property value is likely to increase.
Find a Builder with Experience
Not all builders are created equal and choosing the right builder is one of the most important aspects of investing in construction projects. Quality of work, timeliness, and great communication are all critical to building efficiently and effectively.
When shopping for the right builder ask for examples of their past work. Builders with a background in building spec homes for profit are ideal. Spec homes, or speculative homes, are homes that builders construct on the speculation that they will sell easily for a significant profit.
Invest in Green Features
More than ever, consumers want a home that aligns with their values and efforts to reduce their carbon footprint. In fact, a 2024 global survey commissioned by WWF found that 66% of consumers–75% of millennial respondents–consider sustainability when making a purchase.
Investors looking to entice today’s consumers should look to add eco-friendly appliances, such as:
- Solar panels
- Tankless water heaters
- Energy-efficient doors and windows
- Energy Star-rated appliances
- Smart thermostats
Taking a green approach to designing a new build will further fuel consumer demands for new homes and get your investment sold and off the market quicker.
Marketing & Sales Strategy
A new construction home won’t sell itself and it certainly won’t garner the highest return on investment on its own. Identifying target markets–or the type of consumer you want to sell to–and identifying ways to reach that audience will go a long way in turning a profit quickly.
For example, if you’re building a single-family home for a young family, advertise the extra bedrooms, living room space, as well as local schools and daycares in the area.
Secure Flexible Financing
Working with flexible and reliable financing will facilitate the first step, and give you peace of mind while moving through the new build process. While traditional lenders, like banks and credit unions, offer construction loans, these loans come with a lot of governmental oversight, making approval difficult and time-consuming.
Private lenders, on the other hand, offer faster and more accessible financing options in the form of business purpose loans. With Construction Loans specifically designed to finance new construction projects and less bureaucracy, private lenders provide:
- Flexible financing options
- Fast approval times
- No prepayment penalties
- Eligibility for investors with poor credit or no downpayment
With less oversight and the speed and flexibility to get the funding necessary for a new construction project, construction loans through private lenders are the ideal option for real estate investors. Furthermore, you’ll be on track to help meet market demands for homes.
Finance of America Commercial: Filling the Demand for New Homes with Business Construction Financing
Finance of America Commercial (FACo) offers the most reliable and flexible short-term construction loan options on the market. With flexible terms and prepayment options, we can tailor our programs to meet the unique needs of your new construction project.
Our financing options are designed for developers and investors alike that include land acquisition and multiple draws available at the borrower’s discretion. It’s no wonder Finance of America Commercial is a top new construction capital partner!
Ready to help homebuyers find their forever home while turning a significant profit? CLICK HERE to schedule a FREE consultation with a FACo expert today!
