Top Ten Reasons to Invest In Pre-Construction Real Estate
As we approach the start of a new era in the construction industry, the challenges for the sales of pre-construction homes have become more evident for the developers. The developers are also facing tighter lending policies which combined with cautious investors and home buyers results in more anxiety for the developers planning to start new construction projects. Traditionally most lenders require around 50% pre-construction sales of a project as a contingency for a construction loan. To reach this threshold, the developers have to go through expenses of marketing, creating models and staffing to get ready for sales of the pre-construction homes. Additionally, they have to discount the prices in order to entice the investors and potential home buyers to purchasing preconstruction homes. The amount of the discount offered is to offsets the marketing expenses and cost of the idle capital invested in the acquisition of the land, permits and other operating overheads.
Offering discounts is a win, win situation to the developer as well as the home buyers and investors. The strategy helps the developer to reach the 50% pre-sale plateau faster while rewarding the pre-construction investors and home buyers from the discount. Besides the profit from the discount, there are many other factors that will make the purchase of pre-construction real estate a very attractive proposition for many investors:
1. Lower Prices- Although the discounts are driven from the builder’s bottom line and are an important part of the pre-construction investments, but in reality these margins are a minimal cost for the developers when compared to the cost of idle capital and marketing and sale of the pre-construction units. The home buyers and investors, on the other hand, will appreciate the built-in equity when they purchase preconstruction homes. They recognize that while any appreciation in a typical real estate investment would require a large upfront investment or payment of a mortgage for a long period of time, but in pre-construction investments they could enjoy profits with only a down-payment and in a shorter time period.
2. Lower to None Maintenance- Purchasing a new unit will require less maintenance for the first ten years of ownership than existing older homes.
3. “OPM” Other People’s Money or “Leverage”- The small amount of initial investment in a pre-construction property affords the purchaser to acquire a property of much higher value. Consider these two simple examples below on purchasing a 100,000 property:
a. Assume that an all cash purchase of a property for $100,000 brings 15% appreciations in 5 years. This will yield a $15,000 Return On Investment (ROI).
b. In the second example, we leverage the same $100,000 investment as down payment to purchase a property requiring 10% down. This will allow us to purchase a property valued at $1000,000. If we expect the same 15% ROI as the previous example, then the ROI will amount to 1000,000 x 15% = $150,000. This simple example demonstrates the power of leveraging that instead of $15,000 we could make $150,000 return o the same amount of investment.
4. Amenities- Today’s developments are designed as resort style and equipped with the state of the art fitness centers, swimming pools, and walk/bike paths in place of the shuffleboards and card tables in the clubhouses.
5. Timely Entry- This is the best time to enter the pre-construction market as we are still in the early stage of an appreciating market. The typical real estate cycles of the past decades have been 7-8 years. During this period, the home values climb up till it hits the top and reverse its course till hits the rock bottom line. Remember to always get into investing in the pre-construction market during the early and midterm stages and never during the late cycle.
6. Safety- The new construction techniques and enforcement of the more stringent local codes have resulted in better construction, which is safer during the hurricanes. This makes the newly constructed homes safer than the older units. Since the1993 Hurricane Andrew; tougher Miami-Dade Building Codes have become a guideline to many other counties and municipalities as well. The result has been a sturdier construction of new homes in Florida.
7. Energy Efficiency- T he efficiency in the construction industry has evolved into more sustainable developments that save you money day in and day out for many years to come. From construction techniques, better insulations to Star Rated Appliances with higher efficiency rates the recently constructed homes are viable when it comes to total efficiency.
8. Technology- Never before has the access to latest technologies been as important as the past two decades with the internet becoming a way of life and work. The modern constructions have adapted to this phenomena by pre-wiring the homes for the internet, alarm systems, and other must-have modern technologies.
9. Builder’s Warranty- Normally builders offer a warranty on all new home purchases, which is a piece of mind for home buyers who have gone through the dreaded purchasing a home and moving expenses.
10. Built-in Equity- From the first day of purchasing a preconstruction home an immediate equity is in place with a minimal investment and before the purchase has been completed.