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New Construction vs. Existing Property Investing

By March 14th, 2024No Comments

“You can use an eraser on the drafting table or a sledgehammer on the construction site.”

— Frank Lloyd Wright

I’ve been notoriously skeptical of new construction projects.

I’m starting to change my tune on this for a few reasons.

Getting into new construction is very compelling right now, particularly in certain sectors.

We currently have $200 million in existing property and we’re about to get into some new construction.

Today, we’re going over why that is.

Both new construction and existing properties have their pros and cons.

You can educate yourself and choose which option is best for your portfolio.

I’ll also tell you about my two best assets in the space.

You’re gonna love them!

Let’s jump into it.


1. Existing Deal

We’ll start out by talking about the pros and cons of existing deals.

Most of the $200 million of multifamily assets we have is in existing property.

That means the property is in an existing location.

The Pros

The first pro of these deals is that you have an existing business.

When you have a property that already exists, you can try to make it better.

You also typically get faster returns.

This is especially true compared to new construction properties.

Returns can sometimes take up to three years – sometimes even longer!

Another pro is that existing properties have reduced risk.

One of the reasons for reduced risk is the existing business itself.

You usually have things set up like your tenets and management.

The property is often already cash flowing or at least neutral from day one.

The only caveat is if you invest in a distressed property.

The Cons

Let’s move onto the cons.

The first con is that you have limited appreciation when compared with new construction.

Returns can range from 10% up to 18%.

New construction starts around 20% and only increases from there.

There’s more upfront maintenance in existing properties.

A lot of work goes into turning classic units, sometimes a few years’ worth.

2. New Construction

It’s time to talk about new construction!

Like existing properties, there are many pros and cons.

Let’s start with the pros.

The Pros

The first pro of new construction is higher appreciation.

Like I mentioned, 20% to 30% is pretty common now.

That amount of appreciation is what you can look for in a project.

If you’re only going to get 10% in a new development deal, you might as well just buy an existing property.

The second pro is the tax benefits.

While there are also tax benefits for existing properties, they’ve changed a bit.

The benefits for new construction are great overall, especially for building certain types of projects in specific areas.

You can get things like credits that make the deal much more beneficial come tax season.

Another pro is that there is a shortage of units.

We see this particularly in areas such as multifamily.

In the United States, we are short 4 to 7 million housing units.

There’s an incredible demand for housing all over the country.

If you build a property in an area of demand, it will be gobbled up as soon as it comes to market.

At least that’s the hope!

In almost every market, we’re still seeing an incredible demand for multifamily despite the prices declining.

The Cons

You should also pay attention to the cons of construction.

Firstly, there is an extended timeline.

In the Los Angeles area, it can take up to three years before you can break ground.

That’s a long time!

We don’t build in California for that exact reason.

There are other areas that let you begin within 18 months of purchasing.

You can have everything all ready to go in that time, including permits and a certificate of occupancy.

The second con is the higher risk profile.

With an existing location, there’s already an established business.

When you’re doing a new construction, there is more uncertainty.

How long will it take to build?

Will the building get done in time?

What will the market look like when it’s actually built?

Those questions go into the next con of new construction, which is market unknowns.

You don’t know what the market will look like when the property is finished.

There isn’t a way to know what the tenant will be paying, what interest rates will be, or what the buyers will be doing.

For example: If you were building a property in 2008, that would have been a tougher time to sell because of the Great Recession.

3. My Favorite Deals

Now that we’ve gone over the pros and cons of both types of properties, I want to tell you about two of my best deals in new construction.

There are good deals that don’t need to be sold right away.

With these deals, investors should always be aware of debt and the process of said debt:

How long is the debt?

Is it fixed or variable?

When is it reset?

After you have all that in place, you can pick your investment area.

We paired two new construction deals that I’m really excited about.

The first one is senior housing.

If you look at the silver tsunami: Baby boomers are getting older.

Over the next 10 to 20 years, a large group of the population will reach advanced age.

I spent 10 years in medical device sales.

In that time, I worked with a lot of older people, sometimes in nursing home settings.

I saw the huge demand firsthand.

If you’re building property in that area, you’ll see a huge growth over the next 10 to 20 years.

The second deal is medical office building development.

This includes medical office buildings, urgent cares, hospitals — anything related to medical, really!

Medical spending is expected to go up as the population ages.

More hospital-type office settings will be needed.

You should, of course, still do a feasibility report both for senior housing as well as medical buildings.

I think both of these investments are incredible opportunities in the new construction space.

Now I want to hear from you!

Will you invest in new construction this year?

Let us know in the comments.

Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.

If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.

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Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.

Bronson Hill

Bronson used to work as a consultant for a medical device company but switched to investing in apartment buildings to make his money work for him. He started with a single rental property that made good money and, after some advice from a family member, moved into bigger real estate projects. Now, he's all about helping others get into this kind of investment to earn money without having to work all the time. When he's not dealing with investments, Bronson loves to travel, write songs, stay active, and help fight modern slavery through his work with Dressember. He believes in working smarter, not harder, and wants to share how that's possible with everyone.

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