Lender explains why investors are building properties from the ground up and how brokers can secure more of these deals
The country continues to face a dire housing shortage and competition for both existing and newly built homes is getting intense. So intense, in fact, that many investors would rather bypass that purchase process altogether, buy a plot of land, and build a new property of their own on it. It’s a strategy that carries a number of benefits beyond traditional fix-and-flip or single-family rental investing, including much greater control of the project end-to-end and a greater degree of flexibility. The land, and the ability to build on it, is an endless source of potential that many investors want to exploit in this market.
Despite higher building costs due to lumber and commodity prices, the idea of building an investment property from the ground up makes a lot of sense to some investors. The real question is how can they finance these deals, cover the costs of construction to either flip for sale or refinance into a single-family rental property?
Justin Parker (pictured), CFO at RCN Capital, explained exactly why these investors see the business case in building their own properties and how brokers can help them access the best financing tools available.
“There’s such a high level of demand and low supply that’s led to increasing house price appreciation, and when you have that much demand it creates an incredible amount of opportunity to start building homes to meet it,” Parker said. “We’ve historically seen a lot of fix-and-flip production, but the margins have gotten continuously tighter and tighter where the opportunities to find that distressed flippable asset aren’t there anymore. When we look at the next great investment opportunity, there’s long-term rent and hold options and there’s also a massive opportunity in these ground-up construction ‘infill’ projects.”
The range of options available to an investor seem endless. They can build properties to rent, constructing 1-4 unit multifamily properties or even larger, refinancing them into a long-term hold to generate rental income while they ride the wave of house price appreciation. Or they could build that new property and sell it on fast.
Parker explained that these new construction projects often come with fewer unknowns than a fix and flip. You never know, when flipping an older home, if you’re going to take down a cabinet and find black mold. You never know for certain just how high costs will run. New construction, on the other hand, allows the investor greater freedom and control over their project.
Parker acknowledged that our current sky-high lumber prices may add to the costs of new construction, but he believes the pace of house price appreciation has matched the pace of cost increases and many investors can easily incorporate those costs into the rental or sale prices of their home. If the investor is adhering to a successful business plan, those costs shouldn’t derail a deal.
It helps that there’s a lot of capital flowing into this space already. Parker and the RCN leadership are bullish about these infill construction deals and, having had so much success with both fix and flip and hybrid fix and rent loans, they have the capital and knowledge to finance an investor’s project and support them in this deal. In terms of build-to-rent, RCN can finance 1-4 unit multifamily properties, as well as 5+ units and multi-purpose projects. They take a common-sense approach, guiding investors and brokers through many of the regulatory hurdles that can come up with projects like this. They offer feedback throughout the life of the loan for the borrower and offer continuous education and support to brokers looking to secure more of these deals.
As brokers look to expand their pipelines and work more on the commercial side, Parker believes these smaller ‘infill’ built-to-rent deals open up a world of opportunity.
“One of the things we take to heart at RCN is continued broker education,” Parker said. “We provide so much information to our brokers that, for them, it’s as simple as plugging in some numbers and knowing immediately what we can do for the borrower…We take the time with our brokers to show them that there’s opportunity in a metro area they work in for new construction financing projects. We can encourage them to take advantage of an opportunity while supporting them as they step into something a little different from what they might be used to. We want to give our brokers the tools necessary to generate more business, grow their portfolio, and help their customers grow their businesses as well.”