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Why Invest in New Project/Construction?

Why Invest in New Project/Construction?

When considering whether to invest in new construction in Hawaii, it’s important to understand Hawaii is a trusted world-known brand.  Because of that, condominium prices on Oahu have appreciated at an average annual rate of 4.72% over the last 38 years.  That appreciation along with several other contributing factors make new construction an attractive investment opportunity.   Let’s dive into the details!

Leveraged Appreciation

The main benefit of investing in a new project is leveraged appreciation at no cost.  For example, the developer required 20% down payment for a $1,000,000 condo is $200,000.  That $200,000 investment allows you to control and enjoy the appreciation of a $1,000,000 asset. 

During the 2-3 year construction period, that $1,000,000 condo is appreciating at the same rate as the market.  As I mentioned, the average annual appreciation for Oahu condos has been 4.72%

So it’s not your $200,000 investment that is growing at the market rate, but that $1,000,000 condo.  While the condo is appreciating in value during the construction period there are no carrying costs such as mortgage payment, insurance, and property taxes.  There are also no concerns about keeping the condo rented or dealing with potential tenant issues during the construction period. 

Why Invest in New Project/Construction?

The example below shows the difference in return between a $200,000 investment in a 5% CD versus a $200,000 investment in a $1,000,000 condominium appreciating at the 38-year average annual appreciation of 4.72%.  The 5% CD earns a cash on cash return of 21.55% while the condo investment earns a 101.29% cash on cash return over a four year period.

The return calculation doesn’t include any rental income from the condo in the fourth year after the initial 3-year construction period.

Why Invest in New Project/Construction?

Inventory: Choices for Every Budget & Need

One of the standout features of investing in new construction is the varied inventory to accommodate the needs of various investors.  Whether you’re a new investor looking for an entry level price point or a seasoned investor needing a higher price point for a 1031 exchange, there’s usually an option that fits.  New investors can purchase a lower floor 1-bedroom unit to start their investment journey.  A high floor 3-bedroom unit is a great option for the seasoned investor who may be looking for that last exchange into a property they will eventually move into.

New construction inventory also provides options for those investors who are planning for the future.  Whether through 1031 exchange or just direct purchase, an investor can accomplish estate planning goals with new construction. 

A great example of this is a client who sold a single-family investment property and bought each adult child a 1-bedroom condo.  This helped to avoid any family squabbles over selling and splitting the investment property. Each adult child received a 1-bedroom condo that was pretty much the same as the others.  They could then decide on their own if they wanted to live in their condo, rent it, or sell it.  Purchasing during the pre-construction phase while there’s a good amount of inventory can provide the solution to many different estate planning needs. 

1031 Exchange With Ease

I mentioned the 1031 exchange a little earlier.  One of the biggest challenges with executing the exchange is finding the replacement property once the relinquished property has sold. This is especially true in a chronically inventory challenged market like Oahu.  Having 45 days to identify the replacement property and 180 days to close seems like a good amount of time. However, I have seen many clients stressed out as we’re reaching day 40 and they are still competing with other buyers for replacement properties.  This can lead to overpaying for a property to avoid the tax consequences.

When exchanging into new construction, the replacement property is already identified and in contract.  With most developers, you will have a solid estimated closing date.  With that estimated closing date, you can back plan and easily sell the relinquished property within the required 180-day timeline.  Exchanging into new construction really reduces stress related to the process. 

Portfolio Upgrade

Investing in new construction is a great way to upgrade an existing portfolio of properties for better returns.  Rentals in new buildings generally earn higher rents than existing older inventory.  Many of the expenses in new construction properties such as maintenance fees, insurance, and even property taxes in some instances can be significantly lower than older properties in a portfolio. 

Properties in older buildings are almost always at risk of an assessment for capital projects like fire suppression sprinklers, plumbing upgrades, or more recently, changes in the insurance industry leading to significantly higher premiums.  These large assessments can completely neutralize years of returns.    

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