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When people seek a hassle-free, ready-to-move-in solution, they turn to new construction. The allure of pristine siding, spotless floors, and that unmistakable 'new house' scent is undeniable. Many are drawn to new construction not just for its contemporary aesthetics and conveniences, but also for the promise of being the first owner.
Make no mistake—renter households are the same. They like things to feel fresh and new (and who can blame them?). There’s ample reason to hop on the build-to-rent (BTR) movement, where new construction is made with rental communities in mind.
Further Reading: Why the Build-to-Rent Model is Here to Stay
It's crucial not to underestimate the potential risks associated with new construction properties. As always, these risks necessitate thorough due diligence before making any investment.
Mitigating 10 New Construction Investment Risks
#1 – Premium Pricing
Risk: Because of the "brand-new" factor, new construction homes are often priced at a premium compared to similar older properties in the area. This can mean lower initial returns on investment.
Mitigation: Ensure the rent-to-price ratio meets your criteria and compare pricing to existing homes in the market. New isn’t always the best option.
#2 – Uncertain Market Dynamics
Risk: New developments can create an oversupply in the area, potentially slowing rent growth or making it difficult to find residents. New areas may not be “settled” like established neighborhoods.
Mitigation: Do your research, including rental demand and future development plans that could impact supply. A flurry of new construction can suddenly (and speculatively) boost supply when demand isn’t there to sustain it.
#3 – Delays in Construction
Risk: Construction projects can face delays due to supply chain issues, labor shortages, or weather, which can postpone rental income. These hiccups can cause timeline woes and sometimes result in last-minute swaps for cheaper materials if the premium stuff isn’t readily available.
Mitigation: Negotiate clear timelines with penalties for delays and build a financial cushion to handle vacancies. But the best thing you can do? Buy the property after it’s built and move-in ready. In highly competitive markets, this may be easier said than done…but it’s definitely safer!
#4 – HOA Fees and Rules
Risk: It's important to note that new construction homes often come with homeowners’ associations (HOAs), which can impose fees that impact your cash flow. Moreover, some HOA by-laws may impose restrictions on rentals. It's essential to carefully review these rules before making a purchase.
Mitigation: Review HOA covenants, conditions, and restrictions carefully before buying. The earlier you can get your hands on these documents, the better. HOAs do have some benefits, but you must weigh whether the cost and restrictions tip the scales.
#5 – Unknown Long-Term Performance
Risk: Limited historical data on new construction exist, so you can't gauge how it will appreciate or hold value in the long term. These are new communities coming up due to recent trends or speculation. Thus, it’s harder to know what the future holds.
Mitigation: Assess the developer's track record and examine comparable areas to predict potential performance. Be prudent, and don’t put all your eggs in a newly constructed basket. Thoroughly investigate the market's health by looking at the job market, population growth, rental demand trends, and similar metrics.
#6 – Developer or Builder Financial Issues
Risk: If the developer runs out of funds or declares bankruptcy, the project may not be completed, leaving you with a partially built or unsellable property. Talk about a nightmare.
Mitigation: Research the developer’s reputation, financial health, and history with prior projects. And again – wait until the home is constructed. There’s almost never a compelling reason to buy the slab when you can easily buy it when the project is complete.
#7 – Limited Bargaining Power
Risk: Developers often have set pricing and may not negotiate much, particularly during high-demand periods. There’s not much wiggle room on the asking price, and you might even end up paying more.
Mitigation: Consider buying during slower sales cycles or haggling for incentives like closing cost credits or upgrades.
#8 – Location and Infrastructure Concerns
Risk: New construction is often in developing areas where schools, transportation, or amenities might still be under construction. This can discourage residents from moving in, if only for the nearby construction noise.
Mitigation: Evaluate the area’s growth potential and proximity to key amenities people look for, such as shopping, schools, recreation, and places of employment.
#9 – Higher Property Taxes
Risk: Newer homes often have higher property taxes because assessments are based on the most recent sale price or construction value – which may be inflated.
Mitigation: Verify property tax rates and include them in your cash flow analysis. Anticipate their fluctuation with the market.
#10 – Craftsmanship Questions
Risk: There’s something of a joke about the quality of new construction. And listen – not all new construction comes with shoddy workmanship. But some do. And for investors, poor craftsmanship is a big risk. You might not see the effects in the short term, but it will catch up with the property.
Mitigation: Have a professional inspector review the property before closing to ensure you understand the scope and terms of the warranty. Be aware of some of the common signs of shortcuts, such as gaps in flooring, misaligned doors, moisture, faulty outlets, and water stains near windows.
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