Real estate investors seek to maximize their return on capital. Meanwhile, real estate developers must raise capital at all stages of the property development process. One of the ways they do this is by offering favorable pricing to those willing to invest in a property before construction begins. The developer gets the benefit of some cash with which to begin the construction, as well as an easier time attracting bank financing.
When a developer begins to seek investment capital for a planned real estate development, he will write a prospectus. This is a document that explains the construction plans, the capital requirements and expected outlays, and lays out the anticipated risks. Corporations that have been in business for longer than a year will generally also have an annual report on record, which will contain valuable information about the business.
Advantages of Preconstruction Investing
In theory, you can buy into property development projects at a steep discount by purchasing during the preconstruction phase. Because you will eventually sell, or generate income at the same level as those who got in later, the preconstruction investor's return on investment, or ROI, is greater. However, construction does not always go as planned. There is no guarantee that a preconstruction investment won't fall in value while you are waiting.
Disadvantages of Preconstruction Investing
Preconstruction projects can be riskier: If the developer runs out of cash and can't raise money to finance the completion of construction, investors can get left holding the bag for some time. You also tie up capital for the construction period without the opportunity to live in the property or rent it out to generate income.
Where to Get More Information
Generally, the best information on preconstruction investment opportunities will come from the companies themselves, from agents representing real estate investment opportunities in the area, and from your own due diligence, looking at the values of similar properties nearby.
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