While fix and flip investing continues to provide lucrative returns ($73,500 gross profit on average), consumer demands and housing inventory instability have made new construction projects more attractive for investors.
The U.S. is now short 4.5 million homes, according to Zillow. With young homebuyers returning to the market, local and state governments are turning to investors to meet consumer demands for homes with new construction investment projects. The increased demand has many fix and flip investors considering transitioning from property rehabilitation to new build projects.
However, there is a learning curve when going from property rehabs to new build projects. Investors should take several considerations into account before making the choice to transition, including:
- Their overall business goals
- Local market condition (not every market is ideal for new construction projects)
- Their network and partners (contractors, agents, inspectors, etc.)
- Available resources
- Knowledge of construction and investing
- New build lender criteria
It’s important to consider the pros and cons of new build investing and understand what and who you need to ensure a smooth transition from property rehabs to new builds.
Pros of New Build Investing
From financial benefits to selling simplicity, new construction investments offer several advantages, including:
Higher Returns: On average, new builds garner between a 10% to 20% return on investment (ROI). For a $500,000 home, that’s $40,000 to $80,000 in take-home profit. The value of your home can significantly increase if it is built in a good neighborhood within a bustling market, with a high demand for homes.
Customization: Unlike already-constructed fix and flip houses, a new build project gives you full autonomy over the look and layout of your investment. You can design the property to stand out among the competition by including features that are in high demand in local markets and bring significant value to the property. This may include energy-efficient appliances, pools, landscaping, etc.
Eliminates the Risk of the Unknown: Buying property rehab homes leaves you vulnerable to unwanted, costly surprises, like flood and structural damage, mold, or infestations. In new construction investing, those risks are eliminated, helping you avoid fix and flip money pitfalls. This can provide added peace of mind.
Selling Simplicity: New properties will always be highly sought after and in high demand compared to older homes. The ability to build and offer a more energy-efficient home with lower monthly utility costs and the latest amenity trends will catch homebuyers’ eyes. Not to mention, new builds with modern efficiencies and features tend to appreciate faster than other homes.
Customization: Unlike already-constructed fix and flip houses, a new build project gives you full autonomy over the look and layout of your investment. You can design the property to stand out among the competition by including features that are in high demand in local markets and bring significant value to the property. This may include energy-efficient appliances, pools, landscaping, etc.
Eliminates the Risk of the Unknown: Buying property rehab homes leaves you vulnerable to unwanted, costly surprises, like flood and structural damage, mold, or infestations. In new construction investing, those risks are eliminated, helping you avoid fix and flip money pitfalls. This can provide added peace of mind.
Selling Simplicity: New properties will always be highly sought after and in high demand compared to older homes. The ability to build and offer a more energy-efficient home with lower monthly utility costs and the latest amenity trends will catch homebuyers’ eyes. Not to mention, new builds with modern efficiencies and features tend to appreciate faster than other homes.
Cons of New Build Investing
While new build investing has several market benefits, it comes with certain downsides, or at least potential obstacles to consider before taking on a project. These include:
Longer Investment Projects: While new constructions are often sold within 25 days on the market, the process of building and getting the property ready for sale can be significantly longer than rehabilitation real estate projects. While fix and flip projects can take between 3 to 6 months, the scope of a new build project takes an average of 8.6 months to complete.
More Upfront Costs: Property rehab loans through private lenders often come with little to no downpayment. However, new build projects are more expensive, meaning capital providers will require a higher upfront investment. Aside from land acquisition and material costs, you have to consider the costs of hiring a contractor, laborers, and permit fees.
Chances for Delays & Errors: While you avoid the risks of fix and flip property rehab unknowns, unforeseen delays and errors come with the territory in new constructions. Supply chain issues, poor work, permitting delays, and even weather can all halt or slow your ability to get a home to market.
More Upfront Costs: Property rehab loans through private lenders often come with little to no downpayment. However, new build projects are more expensive, meaning capital providers will require a higher upfront investment. Aside from land acquisition and material costs, you have to consider the costs of hiring a contractor, laborers, and permit fees.
Chances for Delays & Errors: While you avoid the risks of fix and flip property rehab unknowns, unforeseen delays and errors come with the territory in new constructions. Supply chain issues, poor work, permitting delays, and even weather can all halt or slow your ability to get a home to market.
Ensuring a Smooth Transition from Property Rehabs to New Constructions
If you decide that moving to new build investing is the right path for you after weighing the pros and cons, it is critical to know what and who you need to succeed:
A Strong Business Plan: As an experienced fix and flip investor, you already know the importance of a strong business plan. New construction investing is no different. Ensure you do your due diligence and devote ample time to determining:
A Strong Business Plan: As an experienced fix and flip investor, you already know the importance of a strong business plan. New construction investing is no different. Ensure you do your due diligence and devote ample time to determining:
- Profitable markets
- Budgets
- Project costs
- Timelines and goal dates
- Exit strategies
Be sure to include contingency budgets and timelines for unexpected costs and delays.
A Solid Network of Professionals: Property rehab investors understand the importance of building a team of essential players for fix and flip projects. With new constructions, a team of qualified, skilled, and trustworthy industry professionals is even more important to investment success.
Nothing can derail a new build project faster than poor-quality work from laborers. Additionally, nothing can bankrupt you quicker than unethical and untrustworthy general contractors, tradesmen, and other industry professionals. Before transitioning into the new build market, ensure you have a team of trusted and highly skilled professionals by your side.
A Flexible Capital Partner: Unlike fix and flip loans, construction loans through private lenders often require previous real estate experience. This typically comes in the form of 1 to 2 completed ground-up projects or comparable, reputable experience with a capital partner.
It’s important to establish credibility with a lender to ensure you qualify for a new construction loan, whether through past property rehab loans or other business financing endeavors. In some cases, lenders will also look favorably on investor contractors–or investors with general contractors (GC) licensing.
Whether you secure a GC license or organically establish a credible business relationship, acquiring a reliable and flexible lender, financing will be paramount to new build success, alongside a solid network of professionals and a strong business plan.
A Solid Network of Professionals: Property rehab investors understand the importance of building a team of essential players for fix and flip projects. With new constructions, a team of qualified, skilled, and trustworthy industry professionals is even more important to investment success.
Nothing can derail a new build project faster than poor-quality work from laborers. Additionally, nothing can bankrupt you quicker than unethical and untrustworthy general contractors, tradesmen, and other industry professionals. Before transitioning into the new build market, ensure you have a team of trusted and highly skilled professionals by your side.
A Flexible Capital Partner: Unlike fix and flip loans, construction loans through private lenders often require previous real estate experience. This typically comes in the form of 1 to 2 completed ground-up projects or comparable, reputable experience with a capital partner.
It’s important to establish credibility with a lender to ensure you qualify for a new construction loan, whether through past property rehab loans or other business financing endeavors. In some cases, lenders will also look favorably on investor contractors–or investors with general contractors (GC) licensing.
Whether you secure a GC license or organically establish a credible business relationship, acquiring a reliable and flexible lender, financing will be paramount to new build success, alongside a solid network of professionals and a strong business plan.
FACo: Helping Investors Find Success in the New Build Market
Finance of America Commercial (FACo) offers the most reliable and flexible short-term loan options on the market. As a premier lender within both the fix and flip and ground-up construction industries, we pride ourselves on providing experienced investors with the flexibility, reliability, and capital necessary to buy, build, renovate, and sell with success.
FACo’s short-term New Construction Loans provide investors with:
If you’re ready to transition from property rehabs to new build investments, let FACo help! Schedule a FREE consultation today by CLICKING HERE.
FACo’s short-term New Construction Loans provide investors with:
- Up to 100% construction costs
- Quick and easy construction draw requests with Snap Draws DIY
- 1-4 non-owner occupied unit residential, townhome, and condo eligibility
If you’re ready to transition from property rehabs to new build investments, let FACo help! Schedule a FREE consultation today by CLICKING HERE.