Is Building an Investment Property Ever Worth It?

Is Building an Investment Property Ever Worth It?

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Converting raw land or a blighted building into a brand-new real estate structure is rarely worth the cost, effort and headache necessary to pull it off. Constructing a new building requires time, effort and expertise. Often, even the best-managed projects end up delayed and over budget. It’s also worth pointing out, it’s always more environmentally friendly to update and retrofit an existing home rather than building ground-up construction.

Table of Contents - Is Building an Investment Property Ever Worth It?

Why then, do some investors and homeowners insist on building their residence or multi-family structures? Because when done correctly by a talented, skilled development professional, real estate development is a lucrative endeavour. It requires extensive expertise and connections with local contractors and trades to be a profitable one, though.

Think long-term

Most real estate appreciates over time. The costs associated with building a new structure means it will take a longer time for your asset to appreciate to profitability. In burgeoning areas, raw land prices are often low, and investors might be tempted to purchase and develop a plot of land.

For the vast majority of real estate investors, building an investment property from the ground-up shouldn’t even be a consideration. If you believe there’s an irresistible opportunity or if you possess the knowledge and experience necessary to develop a piece of land, a custom-built property might be a valuable addition to your portfolio.

Benefits of building new real estate

While it’s often costlier, less efficient and riskier than investing in pre-built real estate, there are benefits associated with building ground-up properties. Here are just some of the ways you can benefit from building ground-up properties as part of your real estate investment business:

Customize to your needs

There is something to be said for the ability to create a building that meets your specific needs as a real estate investor. Building new ground-up properties allows you to create a custom asset that responds to exactly what you want. You can carefully curate a product for a very niche need in your sub-market.

Build-in energy efficiency

You can control utility costs with relative ease when you build a brand-new building. Over the past several years, building technology has advanced rapidly, meaning it’s now possible to build homes and multifamily buildings that are much more energy-efficient than older properties, even with some amount of retrofitting.

Design for the site

When you build new, you have the opportunity to create a structure tailored to the site you’re developing. This could be an opportunity for your creativity to shine. If you know how to maximize the site you’re developing, you could build a property that ultimately ends up achieving profitability.

Construction warranties

Many general contractors offer construction warranties. If anything is wrong with the structural integrity of your asset, the contractor will foot the bill. In practice, however, it’s often challenging to convince contractors to honour these warranties, so be wary about them.

Reasons to avoid new construction

In the vast majority of cases, you’ll be far better off if you leave ground-up construction to real estate developers and instead focus your efforts on acquiring properties that already exist. Here are just some of the many reasons most real estate investors should avoid new construction projects:

Higher costs

In virtually all cases, it’s more expensive to build a property from the ground-up rather than purchasing a pre-built asset. If someone’s quoting you a lower rate, you should approach the contract with skepticism. Building a structure isn’t easy work – it’s expensive, and rightfully so.

Environmentally damaging

There are a lot of raw materials used in the construction of a new home, and quite a bit of heavy machinery is necessary. It’s damaging, environmentally-disruptive work that often yields sub-par results. Rather than building a new home, you should instead look at ways to retrofit an existing asset. There are plenty of vacant properties on the market that can turn around with a little love and care.

Longer time to profitability

Building a new asset takes a long time. Chances are, it will take at least a few months longer than you anticipate, as well. This means you’ll have to wait quite a while for your property to reach profitability. During this time-frame, your liquidity is tied up in your construction project. This limits your ability to pursue other investments.

Potential poor outcomes

At the end of the day, investors need to do everything possible to minimize the amount of risk they expose themselves to. Building a new ground-up property is among the riskier types of real estate transactions you can pursue. Rather than building a new asset, look for fixer-upper opportunities representing less risk.

Executing new construction

If you do ultimately decide to pursue a new construction project, there are a few ways to minimize the risk of your undertaking.

One of the best ways to ensure the success of a ground-up construction project is to hire a turnkey development service. These developers perform all the tasks associated with pulling together a team of contractors, architects, engineers and more and charge you on a single, cohesive invoice. While it’s undoubtedly expensive to work with a turnkey developer, this is usually the best way to minimize the potential hiccups associated with ground-up construction.

Always talk to your local real estate investment community about their experience with ground-up construction in your area. You might find useful recommendations regarding development services or contractors or suggestions on the best ways to navigate permitting and city zoning laws.

Ground-up construction is rarely the quickest path to profitability for real estate investors. But in some circumstances, it can be a fun, worthwhile way to diversify an existing investment portfolio with an asset bearing your unmistakable stamp. Make sure you’re taking steps to protect yourself and aware of the extended timeline of return on investment for new developments. But if you’ve got long-term plans that require a custom solution, you could hardly do better than a custom-built investment property.

The Pros and Cons Of Building An Investment Property


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Scott Dillingham

Scott Dillingham

I have been investing and lending to real estate investors for nearly 10 years now. After thousands of successful deals between flips, rent to owns, student properties and commercial assets I have developed a deep knowledge of real estate investments and have a passion of sharing this information with the world! If your looking for a lender who specializes in rental property financing you're going to want to connect with me at team@lendcity.ca.