Also called "New Construction," New Development is a high-reward and risk strategy that involves building and developing a multifamily complex from the ground up. The complexity of these projects arises from the uncertainty associated with materials, construction, market conditions, and permits.
Unlike other investment strategies, investors in new development deals typically won't experience cash flow throughout the project's duration. However, they may earn a great return on investment (ROI) when the property is sold at the end of its life cycle.
Types of New Development Syndications
Investors purchase a commercial real estate project for two purposes: either to rent the property to tenants or to sell the real estate property for profit. In light of this, we can divide new development into two broad categories:
1.Build to Rent
With the "build to rent" strategy, investors build the property and rent out its units to generate cash flow over a specific period. The syndicator is responsible for managing and operating the building until it is eventually sold in the future. The main risk here is the rent rate when the project hits the market. If projected rents do not materialize, cash flow may be lower than expected.
2.Build to Sell
Investors following the "build to sell" approach construct the property with the intention of selling it to another investor at a profit. The purchaser will then take over the building's management, rental, and operation. While this strategy presents a high ROI potential, there is a risk of market changes during construction, which could lead to a lower sale price than anticipated.
New Development | Benefits and Risks
Investing in commercial development is not all rainbows and sunshine. In this section, we will discuss the benefits and risks of new development syndication investing.
Benefits of Investing in New Development
High Return on Investment: Successful projects can yield substantial profits upon sale or rental income.
Long-term Wealth Building: Ideal for investors focused on wealth accumulation rather than immediate cash flow.
Potential for Consistent Cash Flow: Build-to-rent strategy offers ongoing rental income after completion.
Control Over Property Features: Investors can tailor the property to meet specific market demands.
Diversification of Investment Portfolio: New development offers an opportunity to diversify investment holdings.
Positive Market Conditions: Improving market conditions can lead to higher property values and increased profits
Risk of Investing in New Development
Complex and Uncertain Project: Building from the ground up involves various challenges and uncertainties.
No Cash Flow During Construction: Investors won't receive regular income until the property is completed, rented, or sold.
Market Changes: Fluctuations in the real estate market can affect the property's value during the construction phase.
Potential Cost Overruns: Increased raw material costs or unexpected expenses can impact project budgets.
Economic Downturns: Economic instability may affect the property's demand and potential rental income.
Permitting and Approval Delays: Delays in obtaining permits can prolong the project timeline and increase costs.
Bottom Line
Offering a high-risk, high-reward scenario, new developments are the perfect investment for anyone who wants to earn higher profits and diversify their real estate portfolio. Before investing in new development, you should carefully evaluate the team and their risk mitigation plans and their own financial objectives before delving into new development deals. Remember, every strategy has its own place in the investment landscape, and understanding these approaches will empower you to make well-informed decisions as a potential passive investor.