Pre-construction real estate investing has been a staple in the condominium and townhome markets for decades. The process is quite simple and is outlined below:
- A developer secures a piece of property, and creates plans, renderings, and additional collaterals representative of the proposed development.
- Working through licensed real estate brokers, the development is offered to the public on a pre-construction basis; that is, the buyer is offered an option to “reserve” a specific unit in the proposed development.
- Upon reaching a preset level of buyer reservations, the builder/developer is able to secure project financing and commence construction. At this juncture, the reservations are typically converted to sales contracts. Twenty-four (24) months later( again, typically-depending upon the magnitude of the venture, the development is complete and the real estate closing cycle takes place culminating in the buyer’s ownership and possession of the unit(s).
- Because the buyer made the cycle start by committing early on, the buyer stands to receive immediate appreciation once the building is complete and remaining units (if any), are placed on the market for sale at that time.
Common Sense Principals of Investing in Real Estate
Principal #1 The Rule of 72
The rule of “72” is a simple but very powerful financial principle. If you take the number 72, and divide it by a rate of return, the answer that you get is the number of years that it takes for your money to DOUBLE.
For example:
72 divided by a 6% rate of return=12 years (money doubles)
72 divided by a 12% rate of return=6 years (money doubles)
At the 15% rate of return using the rule of “72”, $300,000.00 becomes $600,000.00 in 4.8 years, and becomes $1,200,000.00 in 9.6 years!!
You might say…what if I only average a 10% rate of return? Well, would it be worth waiting 4.8 years longer to reach the $1.2 million? Think about it!
Principle #2-Leveraging
Let’s look at another financial principle known as leveraging. Let’s say you invested a 10% down payment to purchase the above-referenced example $300,000.00 investment. You have taken a $30,000 investment and leveraged your money 10 times!
Combine these two financial principles and invest in pre-construction real estate, and you’ll produce a winning combination of financial growth not seen in any other type of investing. Your rate of return is on the $300,000.00-not just the $30,000.00 that you initially invested.
Principal #3-Invest in Pre-Construction
Why buy pre-construction properties? Because developers offer discounts and incentives! After your initial down payment you may realize appreciation for 2-3 years with no additional out-of-pocket expense.
Developers offer incentive pricing during the pre-construction phase to raise capital to secure construction loan financing.
Prices are also discounted to provide incentives to buyers to purchase something that they cannot yet see.
After your initial investment, there are no further expenses until completion of the project. Sometimes, it makes sense to re-sell your investment to an end-user just prior to the time of closing by assignment of your contract at a significantly higher price than you originally paid. The profit could be used to purchase additional property in this same pre-construction way.
Smart buyers have learned that pre-construction purchases can be excellent investments when:
- Investing in resort properties near oceans, lakes, or mountains
- Demographics are favorable
- Investing in on the ground floor of the project
- Timing is right
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