Ground-up construction loans aren’t just for building your own dream house to live in. They can also be used to build a rental property that fits your business plan perfectly.
As a real estate investor, you’ll want to make sure that you’re making the best financial decisions. We cover this in our blog post about growing your rental property portfolio by treating it like a business, with strategies and financing in place.
One way to maximize your returns is to build your own investment properties. While the construction process does involve a lot of extra work, your successful projects could help you boost your rental income.
These are just five ways you can improve your real estate investments by building your own properties.
1) Build to meet demand
Make the real estate market work for you by identifying gaps, and building rental units to fill them. Consider market conditions: is there currently an oversupply of student housing, but a lack of family dwellings? Or are there lots of family homes, but high demand for small apartments due to rapid gentrification?
Do some research by spending time on local Facebook pages and subreddits targeted towards people searching for housing locally. You can also use your professional networks, such as real estate agents and other property investors, to find out which rental properties are moving fast — and which they are struggling to fill.
By doing your research you can make informed decisions about the type of property to build.
2) Design based on your business plan
Go back to the investment strategy that you wrote when you first decided to start renting out properties. In it, you should have defined the type of home and tenant you want to focus on — whether that’s families, single people, or those passing through for vacation.
By building your own property, you’re not limited by what’s currently available in your local real estate market. For example, if you’re struggling to find a multifamily property to purchase, you can build one.
You’ll have input into the architectural plans and will be able to optimize layouts for maximum rental returns. That could mean adding an extra bathroom, squeezing in another bedroom, or adding a large communal kitchen to attract a higher rent. Again, the features that boost rental income will depend on what’s currently available in your local property market: so do your research!
Of course, what you can do will be limited by local planning regulations and your budget. We go into this in more detail in our 5 mistakes to avoid in a ground-up construction project article.
3) Choose materials that need less maintenance
When you have control over the construction plan, you also have input into which materials are used to build your property. While it can be tempting to go for cheaper construction materials to reduce construction costs, it’s worth investing more at this point to maximize rental returns in the future.
By investing in higher quality, robust materials, you’ll reduce maintenance costs in the future. It might mean taking out a larger ground-up construction loan at the outset, but it will help to minimize outgoings related to repair and maintenance over the coming years. After all, it’s better to have a reliable monthly payment than a nasty surprise — and equally nasty bill.
One way to future-proof your build is to look at using more eco-friendly materials. As well as lowering the running costs of your property, choosing greener options could help you to qualify for building grants (great news when filing your tax returns). Check your state government’s website, or speak to a financial adviser, to find out what’s available.
If you’re interested in going this route, you’ll find more tips on building greener homes in our article about how to conduct a sustainable ground-up construction project.
4) Have a positive impact on the local community
Think about the big picture, and use your construction project to inject new life into a neglected area. During construction, you can support the local economy by hiring local labor and purchasing your building materials from local businesses.
Take time to develop detailed project plans that take the look and feel of the local area into consideration. Think about how you can improve and maintain the attractiveness of the area: for example by building in green spaces for biodiversity, or engaging local artists to create murals.
Designing for long-term growth will boost the area’s attractiveness and ensure your future rental returns. Building mixed-use or commercial property could attract small businesses, and help to create vibrant, walkable communities.
Focusing on flexible spaces that can switch between retail, office, and community purposes can add to the area’s vibrancy and attractiveness to tenants, while helping you pivot as and when the local real estate market changes.
By building properties that actively improve an area’s reputation, you can increase the likelihood of rents going up across the board. As an early investor, this could be lucrative. Do your research and work with local stakeholders to do an impact assessment on the local area.
5) Fewer hidden issues than with fix and flip
Another way to customize a property to meet your business plan is to go down the fix and flip route. While this can be lucrative (especially if you follow our advice on increasing the value of your fix and flip property), it does come with risks that ground-up construction eliminates.
Renovation costs can often run over. And, while the building process can be costly too, it’s easier to budget for those from the beginning. Old homes can often hide unexpected surprises like faulty wiring, mold infestations, and structural issues that can be triggered by renovation.
Some older properties may not meet modern standards, which means spending more time (and money) bringing them up to code. And, because the entire structure of a ground-up construction will be brand new, it’s less likely to need as many repairs or maintenance. Especially during its first few years.
Risks and challenges
While there are many benefits to customizing your own property to rent, building properties from the ground up comes with its own unique set of challenges. Here are a few you should look out for:
1. Overestimating rental income
Be careful not to overstretch yourself while applying for ground-up construction loans. Be as realistic as possible about how much you’ll be able to rent the property out for, and have some contingency plans in case you have a few months where the property is empty or if construction over-runs.
This is just one of the common financing mistakes to avoid.
2. Construction delays and cost overruns
Project timelines have a habit of stretching during large construction projects. Make sure your loan type and loan term is flexible enough to cover any fallow period. You should also ensure you have more than enough money to cover construction. Ideally, you want to have around 5-10% set aside to cover surprise costs. The amount you set aside will depend on your project’s size and risk profile.
3. Market fluctuations
Things can change quickly in the real estate market. Demand might drop suddenly, just as your construction project finishes. For example there might be an oversupply of rental properties in the area, making it hard to find tenants. Or, if you were planning to rent on Airbnb, new licensing regulations might be imposed and make it more difficult to make good money.
Economic downturns can also cause issues. Potential tenants may be looking for cheaper places to live, or moving back with their parents to save money.
This is why market research is so important before getting started. Before building, make sure the local economy isn’t reliant on one company. If they go bust, it’s likely demand for property will drop too. You should also check with local government to see if any bills related to property rental or planning are currently awaiting approval.
It’s important to be flexible enough to anticipate unexpected challenges. Look for ground-up construction loans with flexible terms so that you have a bit of breathing space.
4. Regulatory and zoning challenges
Local zoning laws might impose restrictions on the height, size or planned use of your building. This can limit the scope of your project, and could make it difficult to build the type of property you want to add to your portfolio.
There’s also environmental regulations to think about, with pollution controls and wetlands protection making building even more complicated.
Before starting on your project, engage with local authorities and planning experts. They’ll be able to help you stay on the right side of compliance when it comes to zoning, building codes and any obscure environmental considerations. Getting in early can also help you to get permits and approvals on track.
Considering ground-up construction to boost your rental income?
For experienced property investors with a track record of successful renovation projects, designing and building your own rental units could be a lucrative next step.
At Express Capital Financing, we understand the intricacies of construction loans and stand ready to guide you through each step, ensuring that your project not only begins on solid ground but also achieves its full potential. Don’t let financing stand between you and your next successful real estate venture. Get in touch with us today to discuss your ground-up construction loan needs today and join countless satisfied investors who’ve seen their blueprints transform into profitable investments.
