Opportunities in Single-Family New Construction
Be Picky and Find an Ideal Project in an Ideal Area
By Mitchell Zagrodnik
In the ever-changing real estate investment space, investors are always on the lookout for potential deals that can help them take advantage of the market and get them the best returns on their investments.
Throughout the first half of 2024, the market outlook has been persistently stagnant. Rates do not appear to be dropping anytime soon, home prices are rising, and low inventory continues to be a hurdle as demand is outpacing supply. When rates experienced that first big jump back in mid-2022, it was quite a jolt. Eighteen months later, the mindset has adjusted to acknowledge this current environment as the new norm.
There is optimism in the market for homebuyers and investors, as new home construction has been more robust than expected at the start of 2024. Housing starts and permits are also headed in the right direction. Overall housing starts are down, but if you look deeper, that is mainly due to multi-family starts being down significantly.
The single-family market, however, has been showing consistent signs of improvement. The most recent data from the Department of Housing and Urban Development shows that new single-family building permits have continued to climb for the 13th consecutive month. This shows that builders are actively addressing market need, with an emphasis on building affordable, entry level homes for prospective buyers.
Granted, this isn’t going to solve the supply issue overnight, but the takeaway is that single family new construction has been stepping up to help address this ongoing issue. The general consensus is that rates are not likely to drop until late 2024, and increased demand should raise prices on new builds that are starting in the next 3-6 months. Those new builds should then experience rapid appreciation in late 2024 and early 2025 by the time these finished builds hit market.
Planning and Experience are Key
The recent uptick in building permits over consecutive months showcases that builders are acknowledging the inventory issues for single family homes. This rise also shows an increase in entry-level starter homes, where there has been a significant need, as opposed to the recent trends of new construction projects being more geared towards the non-starter home market.
Builders are tackling the need for entry-level homes, with the ultimate goal being to add affordable housing for a target audience of first-time homebuyers and investors with lower capital. With a great game plan and experienced builders onboard, ground up construction projects can offer great returns for investors as well, while addressing the inventory issue we have been experiencing in recent years.
It is important to note that new construction builds can not only be difficult ventures for newer investors, but it will also be more difficult to get your loan approved. Most lenders in the investment space are going to require some form of experience when taking on these projects. Any previous rehab project or ground up experience is going to be a focal point when it comes to approval. The more experienced you are the more appealing the terms will be.
It can also speed up the process if the plans and permits are already in place by the time you speak to your lender about the project. It is crucial that the lender gets a clear understanding of the scope of the project, and that the builder has completed projects of a similar scale prior.
For single family homes, lenders are going to want to see these projects in established neighborhoods and be sure the newly built project will conform to that neighborhood. For example, if the median home value in the neighborhood is $350,000, but the finished product is expected to appraise for $600,0000, that is going to be a difficult deal to get approved. The value heavily exceeds the average for the area, making it less attractive to buyers and therefore riskier for lenders to want to fund.
Setting Expectations and Doing Research
Experienced fix-and-flip investors know that purchasing an existing property can come with surprises. Existing issues with properties will require repairs and potentially hidden issues like water and structural damage that might not be noticeable upon the purchase. With a brand-new build those issues should not come into play which can be a major selling point when the property is listed for sale. Whether the plan is to sell the property or hold onto it as a rental, the allure of being the first to live in a brand-new home is very attractive to prospective homebuyers. The builder gets a sense of accomplishment for executing their building plan and providing a new, stable home for the buyer as well as the financial benefits since new construction homes tend to sell for more. Especially if you have a great building plan that incorporates cost effective features into the property that can add significant value.
It is important to know that even though the reward is often worthy of the time put in, these projects are not to be taken lightly and it is imperative that you can financially afford to take on such an endeavor. As opposed to typical rehab projects on existing properties, upfront costs are higher due to permits, fees, materials and labor.
Just like with fix-and-flips and ready to rent properties, not every property is a good investment property. Be picky and find an ideal project in an ideal area that can pay huge dividends.
The recent single-family construction trends highlighted here are signs of optimism that the lack of inventory is being addressed and there are existing opportunities. If you are a builder and have a resume of flip projects, maybe it’s time to talk to your lender about new construction deals. If you are someone that has a portfolio of rental properties but have never taken on a rehab project, look to connect with contractors and experienced builders that are working on construction projects and let them know that you are interested in the property.
Relationships are key when it comes to real estate investing, so building a solid network of real estate professionals and builders can give you an edge when it comes to new construction in 2024.
