4 Residential Real Estate Site Development Research Mistakes to Avoid

Real estate investors often face numerous challenges when selecting a site to build homes. And with recent increases in building costs that difficulty is expected to rise. Additionally, demand for single family housing is estimated to stabilize by 2024. With factors like these, it’s crucial for investors to make informed decisions when selecting a location as this can significantly affect their investment returns.

In this article, we’ll explore some of the most critical mistakes that residential real estate investors make with site development, along with practical solutions to avoid or fix these mistakes.

Mistake #1: Failing to Conduct a Thorough Market Analysis:

Steps to conduct a real estate market analysis.

Image Source: Real estate market analysis: What it is & How to do it | QuestionPro

One of the biggest residential real estate site development mistakes investors make is failing to conduct a thorough market analysis. The market analysis involves studying the area’s population demographics, economic growth rate, and potential demand for both residential and commercial property. As a real estate investor, investing in an area that is not in high demand could result in long periods of vacancy and decreased rental income.

A thorough market analysis is a critical step in the process of selecting a site to build property. It involves collecting and analyzing data on the area’s population demographics, economic growth rate, and potential demand for housing. Demographics such as age, income level, and employment status can provide insights into the types of housing that will be in demand in the area. For example, an area with a high proportion of young professionals may have a higher demand for smaller apartments or condominiums.

Solution:

Conduct a comprehensive market analysis.

Investors must conduct comprehensive market research to determine the feasibility of investing in a particular location. This includes studying the surrounding areas, identifying trends, and forecasting future demand.

One of the essential aspects of market research is studying the surrounding areas. This includes looking at nearby amenities such as schools, hospitals, shopping centers, and recreational facilities. The proximity of these amenities to the investment property can impact the demand for the property. For example, if the investment property is near a highly-rated school, it may attract families with school-age children, making it a more desirable location for investment.

Identify market trends.

Identifying trends is another critical aspect of market research. Investors must keep up-to-date with changes in the local market, such as shifts in population demographics, economic trends, and shifts in housing demand.

For instance, if a particular area is experiencing a population boom, it may be an excellent location for residential real estate site development, as the demand for housing will likely increase. Similarly, if a neighborhood is undergoing significant redevelopment, it may be an ideal location for investment as the area’s value may increase over time.

Measure local economic growth.

Economic growth rate is another essential factor to consider in a market analysis. The growth rate of the local economy can indicate the potential for job creation, which can lead to an increased demand for homes in the area. For instance, if a city is undergoing significant growth due to the arrival of new businesses or industries, it may be an ideal location for residential real estate investment.

Use data to forecast future demand.

Forecasting future demand is also essential in market research. Investors must consider factors that could impact demand in the future, such as new developments, changes in the local economy, and shifts in population demographics.

For example, if a particular area is undergoing significant growth due to the arrival of new businesses or industries, it may be an ideal location for investment, as the demand for housing is likely to increase in the future.

If done correctly, investors can make informed decisions about where to invest their money and avoid the mistake of investing in a location that is not suitable for residential real estate site development.

For more about how to research a real estate market, check out this video from Break Into CRE:

Mistake #2: Overestimating Potential Profits:

Another mistake real estate investors often make is overestimating the potential profits of a property. Investors may assume that they can sell or rent their properties at high prices, only to discover that the market demand is lower than expected. This mistake can lead to investors failing to earn expected returns, and they may also end up holding onto properties for extended periods.

Solution:

Be realistic and lean conservative in regard to potential profits.

Investors should be realistic about the potential profits of a property. They should calculate expected returns based on conservative estimates of rental or sales income and potential appreciation in property value. Investors should also pay attention to factors that could impact the property’s profitability, such as changes in population demographics, shifts in the local economy, and trends in housing demand. It is better to underestimate potential profits and be pleasantly surprised than to overestimate them and be disappointed.

One way to avoid overestimating potential profits is to work with a team of professionals who can provide expert advice on the local real estate market. Real estate agents, appraisers, and property managers can provide valuable insights into the local market and help investors make informed decisions about their investments.

Another strategy is to perform a thorough financial analysis of the investment. This analysis should include all expected costs, such as acquisition costs, renovation costs, and ongoing maintenance and management expenses. By accurately estimating these costs, investors can calculate the potential return on investment and avoid overestimating potential profits.

For a breakdown of determining potential ROI for real estate development, check out the examples in the video below.

Mistake #3: Overlooking Market Infrastructure:

In 2014, The Urban Land Institute conducted a study of 250 public sector leaders and 200 private developers. The purpose of the study was to determine what role infrastructure played in attracting out of town real estate developers and investors to an area.

What they found was 90% of private leaders rated infrastructure as a top consideration for site development of new real estate.

Drivers of residential real estate site development investment 2014 graphic.

Image Source: Infrastructure-2014-Brief.pdf (uli.org)

Additionally, they found that 82% of respondents listed the public’s ability or willingness to invest in infrastructure improvements was also a leading consideration.

Residential Real Estate infrastructure improvement priorities in 2014 infographic.

Image Source: Infrastructure-2014-Brief.pdf (uli.org)

This shows that the lack of adequate infrastructure can decrease the property’s value, making it less attractive to potential renters or buyers.

Poor traffic infrastructure for instance can lead to decreased property value, increased commute times, and decreased demand for the property. On the other hand, good traffic infrastructure can increase property value and demand for the property.

Solution:

Calculate infrastructure as a major component for potential site development.

Investors should consider the accessibility of the property when choosing a location to build houses. Properties that are located near major highways, public transportation, and other transportation-related amenities are generally more desirable and have a higher value than those located in remote areas. Properties located in areas with high traffic volumes may also have increased exposure to potential renters or buyers.

Additionally, investors should consider the future development plans of the surrounding area. Investing in an area that has plans for infrastructure development, such as new highways or public transportation projects, can lead to increased property values and demand for the property.

Investors should also consider the potential impact of traffic congestion on the property’s value. Properties located in areas with significant traffic congestion may have decreased property values, as potential renters or buyers may be deterred by the long commute times and increased traffic.

Mistake #4: Underestimating Project Costs:

Another common mistake real estate investors make is underestimating project costs. This mistake can lead to budget overruns, delayed construction schedules, and reduced returns on investment.

Underestimating project costs is a common mistake that real estate investors make when investing in a property. This can result in budget overruns, delayed construction schedules, and reduced returns on investment. It is essential to conduct a thorough cost analysis of the property before making an investment decision.

To avoid underestimating project costs, investors must conduct a thorough analysis of all necessary repairs, maintenance, and construction costs. This includes obtaining detailed estimates from contractors, architects, and engineers to determine the actual cost of the project.

Additionally, investors should consider the cost of financing, taxes, and other fees associated with the project, as these costs can add up quickly and impact the overall profitability of the investment.

Solution:

Bring in outside, non-bias expertise.

One way to ensure accurate cost estimates is to work with a team of professionals, including architects, engineers, and contractors, who can provide expert advice on project costs. They can help identify potential issues and provide realistic estimates of the costs involved in the project.

GBA offers great project management and site development solutions for a variety of project sizes. Check out our locations page to find an office near you.

Implement a contingency fund.

Another strategy is to build a contingency fund into the project budget to account for unexpected expenses. This fund should be set aside specifically for unexpected costs that may arise during the construction process. Having a contingency fund can help investors avoid budget overruns and reduce the risk of reduced returns on investment.

It is also essential for investors to stay up-to-date on industry trends and changes that may impact project costs. For example, changes in material costs or labor costs can significantly impact the overall cost of a project. By staying informed about industry trends and changes, investors can adjust their cost estimates and budget accordingly.

For a breakdown of the importance of a contingency fund, here is a video from PM Course’s Mike Clayton:

In Conclusion:

When it comes to residential real estate site development there are several factors to consider. New investors need to make sure they are running a thorough market analysis on every potential location, especially when it comes to the infrastructure of those locations. Additionally, they need to be conservative leaning when it comes to profits and factor their potential ROI calculations into their initial investment costs.

To make this process easier, GBA professionals offer free consultations to developers looking for site development guidance. You can easily reach out to GBA through our contact page, or you can call us directly at 1-800-932-2468.

 

The information presented in this article does not constitute financial or investment advice. 3rd party and proprietary information discussed and linked to in this article is for informational use only.


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