Today there are many ways to invest accumulated capital: from the simplest - buying precious metals and opening deposit accounts, to the most risky - playing on currency and stock exchanges. They all have their advantages and disadvantages, especially in the current crisis conditions. But investments in housing construction, contrary to time and fashion trends, have long been considered the most reliable investment for a fairly long period. Is it so? And what should potential construction investors pay attention to? The following material will provide answers to emerging questions.
There are many construction projects that require significant capital investments for their implementation. Among them are:
- housing;
- commercial real estate;
- hotel and entertainment complexes;
- cottage villages;
- industrial facilities.
Let us immediately note that all of the above objects, except housing, require more significant capital investments than may be available to the average potential investor reading this article. That is why we will talk about investments in housing construction in general terms.
Experts say that investments by small capital owners are usually placed in the housing construction sector. Such trends are observed due to the relatively low cost of such objects compared to objects in the commercial or industrial sector.
When starting a serious conversation about investing in construction, one cannot help but touch upon the disadvantages and advantages of this type of investment.
Construction reform
To protect shareholders and restore order in the construction market, Law No. 214-FZ came into force in Russia on July 1, 2020, according to which the bank lends to the developer and controls his expenses, and payments under the DDU are accumulated in escrow accounts.
Now how can an investor make money on new buildings? Developers can no longer raise money from citizens directly on their own. Mandatory banking support helps prevent the appearance of unfinished objects, and escrow accounts provide additional protection for equity holders if a problem does arise.
Content
Types of construction to invest in
There are several areas for investing in real estate. Some are suitable for beginners with small capital, while others will require more serious experience with a decent fortune.
Apartments in residential buildings
The purchase of residential real estate at the “pit” stage may be due to the following purposes:
- Sales of finished housing at a higher cost.
- Subsequent rental.
When choosing an object, you should pay attention to the following points:
- Infrastructure, i.e. Availability within walking distance of kindergartens, schools, public transport/metro stops, clinics, shops, etc.
- Prestige and safety of the area.
- Apartment layout. It is better to give preference to an option without passage rooms, narrow hallways and bathrooms, further from the elevator, with windows into the courtyard. It’s great if the apartment has a dressing room or storage room.
- The most in demand are studios, 1- and 2-room apartments.
For reference! The difference in the price of residential premises from foundation to delivery will be higher if a whole microdistrict or complex begins to be built.
Advantages of investing in apartments:
- Relatively low entry threshold.
- The payback period in case of resale is 1-2 years.
- Since July 1, 2020, a mechanism has been in place to protect such investments: the developer receives money only after the house is delivered.
Cottages
Perhaps the most profitable way to invest in real estate. Cottages are of particular interest among residents of megacities who want to combine the convenience of city limits with the comfort of country life.
When purchasing, you should consider the following nuances:
- If you purchase a building at the stage of pouring the foundation and subsequently invest in the improvement of the house and the surrounding area, you can sell the finished object with a very favorable price difference.
- It is important to pay attention to the status of the area, the development of infrastructure, the environmental situation, the degree of distance from large centers, the convenience of transportation, the availability of communications, etc.
What are the risks and difficulties:
- The threshold for entry into investing is much higher than buying an apartment. In addition, the installation of communications, repairs and other improvements to the cottage will require additional large financial investments.
- Selling country property is more problematic than selling urban housing in an apartment building.
- There are risks associated with the developer's dishonesty.
The payback period is approximately the same as for the option with a residential apartment.
Hotels
The construction of resort areas and hotel complexes is a fairly promising way of investing. The payback period for such objects ranges from 3-7 years. In large cities they are always in great demand.
However, it is important to consider:
- The recreation area is a rather specific and high-risk sector. The investor's ability to exit the project may be limited.
- Investments will require significant starting capital.
Industrial premises
Investments in the construction of production facilities are, as a rule, collective, since they rarely do without intermediaries. The entry threshold here is very high, and therefore it is easier to invest through mutual funds or direct investment funds.
This sector requires compliance with certain requirements, both from the investor and the developer:
- The investor must already have relevant experience and knowledge.
- It is important to determine in advance the goals of construction, ways to exit the project and other requirements.
- Before constructing a facility, you need a ready-made business plan taking into account all possible risks.
Payback period is 5-10 years. Objects focused on:
- the needs of the food and household chemical industries;
- premises for the production and sale of furniture;
- storage and sale of essential goods.
Commercial properties
This category includes:
- grocery stores, supermarkets, shopping centers;
- cafes, bars, restaurants;
- office rooms;
- educational, sports, entertainment centers;
- warehouses and so on.
Investments in commercial real estate require a maximum of financial investments, which pay off in 5-8 years. You can also attract co-investors to purchase such an object.
What is an escrow account
An escrow account is one of the types of nominal accounts in which the shareholder’s money is stored and transferred to the developer upon the occurrence of certain events, i.e. the developer cannot dispose of them. In this case, the bank acts as a third party and guarantees that the developer will receive the money only if all conditions are met:
- The house has been put into operation;
- One premises was transferred according to the acceptance certificate;
- The ownership of any one premises is registered.
Now developers implement all new projects together with an escrow agent bank. The bank provides the developer with project financing for the construction of a house in the amount of 85-90% of the project cost, and the rest is the developer’s own participation.
Methods of investment in housing construction
Many potential investors who have firmly decided to add investment in construction to their investment portfolio are interested in schemes for such investment. Let's look at the most popular of them.
Share building
The first way you can invest money in the construction of an apartment is through shared construction. The essence of this method is to make investments by a group of investors. At the same time, they become “shareholders” and invest an amount on average 30–40% less than the cost of the finished housing. Such investments are sealed by a construction investment agreement, signed by both investors and the second party - the developer.
Please note that the possibility of buying out a share in shared construction exists at any stage, but the closer to the end, the more expensive the share. This is a pretty good investment method, but it comes with a number of risks. The most common of them include:
- deception of shareholders by developers - shares are sold several times;
- bankruptcy of the developer, which will inevitably lead to a halt in construction.
ZhNK
Housing and savings cooperatives began to appear about 10 years ago. Participation in them occurs on the basis of membership rights. An agreement is concluded between the cooperative and its member, on the basis of which the member undertakes to make share contributions.
The cooperative accumulates contributions from its members, and then invests them in the construction of residential premises, including apartment buildings. Such a cooperative can play the role of both a developer and a participant in shared construction. The risks are identical to shared construction.
Construction Financing Fund
Participation in construction finance funds is no less popular than the above investment methods. In essence, such a fund is an intermediary between the investor and the developer. First of all, he protects the rights of the investor by controlling the expenditure of funds, the construction process, legal support, etc. The FFS has the right to terminate relations with the developer in case of violation of the conditions.
Documentation of the investment is made by concluding an agreement between the FFS and the investor, which specifies all risks, conditions and force majeure. Participation in such a fund is possible only from the very first stage of construction. Experts note the high reliability of this method of investing.
How does a bank check a developer?
Before issuing project financing, the bank checks:
- Project: permits, examinations, financial model;
- Developer, gen. contractor;
- The developer's own participation is 10-15% of the project cost.
If the developer received financing from the bank and began construction, then he has successfully passed all checks and approvals. After this, the bank becomes the main investor of the project; it is most interested in the successful completion of the project. The bank controls the developer’s finances, the progress of construction and the implementation of the sales plan.
Responsibilities of the developer
As required by the new law, the developer is obliged to:
- Openly publish information on loans received, investments attracted and property sales on a monthly basis
- Disclose information on the real state of affairs at the construction site
The developer no longer has the opportunity to withdraw money from the project “outside” or spend too much. The developer is obliged to follow the financial plan agreed with the bank. The law protected shareholders. With the new rules in the developer market, there will no longer be “unfinished construction” when working with an escrow agent bank.
Previously, an investor could buy an apartment at the excavation stage at a low price and sell it at the end of construction and earn 20-35% on the price difference in 2 years. This is due to the fact that the developer sold apartments at a low price to finance construction.
After the developer switched to working on escrow accounts, the bank provided him with financing for the implementation of the project, therefore there is no point in the developer making discounts on apartments at the initial stage of construction. This means that you can no longer make money from buying and selling apartments according to the old scheme.
But despite the fact that the issue of financing the construction has been completely resolved, the developer still needs investments to replenish working capital, for example, to start new projects.
This created the conditions for attracting private investment in the developer’s projects.
Let's sum it up
Investment construction is an excellent and relatively safe way to make money. It contains a number of advantages:
- High profitability.
- Good liquidity of investment objects.
- An acceptable payback period for such a significant amount of investment.
- Reliability. The property remains the property of the investor. It can be sold, used as collateral, etc. In a stable market, even selling at a price below the market price will cover all losses.
- Not so much price volatility (compared to, for example, stocks).
- Large selection of objects in major cities.
- Multiple options for exiting the project.
Unfortunately, like any other method of investment, attracting investment in construction has its drawbacks:
- Risk of falling prices. Strong dependence of demand on the economic situation in the region and country. A protracted economic crisis can reduce the price of objects by 30–40%. Advice: follow the market conditions and choose the right time to invest.
- Risk of fraud: shell companies, construction as a distraction and selling “air”, selling the same share several times. Tip: check the legality of the developer in the official register of construction companies. Attention. Fraudsters often work together with a legal structure that covers them. Advice: Get your lawyer involved.
- Bankruptcy of the developer due to unprofessional management, lack of financing, misuse of funds. Advice: choose a developer who is reliable in all respects.
- The construction deadlines may be missed. This leads to direct and indirect losses. The property may lose its competitive advantages (if another house is built nearby, the return on investment will drop by tens of percent). Advice: provide for penalties in the contract for violation of deadlines.
- During the construction process, the technical parameters and quality of the object (for example, layout) may be violated, up to the refusal of the state commission to put the house into operation. Advice: carefully study the construction investment plan and, if possible, monitor the progress of work.
- During the construction process, costs and cost per square meter increase significantly. Advice: carefully study the contract for the methodology for calculating the final price.
- Risk of loss of an object (natural disasters, military actions, industrial accidents, fires). Advice: be sure to be insured.
Follow these rules and your investment in capital construction will be safe.
Investel Platform
Investel - investments in new buildings from 100,000 rubles for 6 months with an average fixed rate of 13% per annum, only in projects of verified developers working under escrow. Investments are reliable because The bank exercises full control over the activities of the developer and manages risks.
No special knowledge is required to invest; documents are signed directly with the developer and delivered by courier. The ease of action is comparable to placing money in a bank deposit.
Investel makes real estate investments accessible, reliable and profitable, so that everyone can create passive income for themselves or save up for a big purchase. Investel helps to conclude a deal directly with the developer.
Advantages of investing in developer projects through Investel
- Guaranteed income, fixed rate of 13% per annum*.
This is approximately 2 times higher than the deposit (compared to the proposals of a number of banks for placing deposits as of the beginning of winter 2019).* If you invest as an individual, then before returning the investment and interest, the bank will withhold personal income tax, i.e. the real return for you will be 12% per annum. - Investment protection.
The bank controls the developer's payments and carries out risk management measures based on the conditions in the loan documentation. - Securing investments.
If you invest an amount equivalent to the price of the apartment, then the security is the apartment itself according to the DDU. If the investment amount is less than the amount of the apartment, then the security is an agreement with the developer that the return of investment and interest will be made by the bank when opening escrow accounts after the delivery of the house. - Ease of operation.
To invest in a developer’s project, you need to sign documents that will be delivered by courier and expect a return on your investment with interest within the appointed period. - Early exit.
You can resell investments to other investors on the secondary market through Investel. Or submit an application to the developer for early exit, with the profitability determined by the refinancing rate.
Advantages and disadvantages of investing in housing construction
Experts consider the first and most rational advantage of building housing, at least before purchasing it, to be a significant difference in price.
Thus, the cost of already built housing will be significantly higher, since it depends not only on the cost of work and materials, but also on other factors, such as infrastructure, age of the building, condition of engineering systems, location, etc. Thus, investments in construction will be much less than buying a ready-made apartment. And since the volume of investment is smaller, the return rate is higher, which gives reason to talk about a more acceptable profit. But it is worth remembering about the risks that an investor can expect, as well as the timing of liquidity, since construction investments do not pay off quickly. In addition, professional investors also highlight a number of advantages that contribute to the fact that investment and construction activities bear fruit. Among them it is noted:
- High return on investment.
- Guaranteed return on investment, subject to the absence of force majeure.
- Reliability of capital placement.
- A large number of offers for diversification within one financial instrument.
As a rule, a high percentage of profitability of most such projects is ensured even if it is necessary to sell an already constructed facility at a price below the market average - and then the return on invested capital is practically guaranteed. The reliability of this instrument will always be the first point in justifying investments in construction projects, the risks of which are much lower than playing on the stock exchange or transferring to trust management.
Despite all of the above, many investors note quite obvious disadvantages that accompany attracting investment in construction. The first of these will be dependence on the human factor. Of course, the result of construction directly depends on the quality of the construction. At the same time, builders make mistakes at every step, which can become a critical factor for the liquidity of an investment project.
An equally common problem, investors note an increase in construction time, which directly affects the increase in risks. Thus, delays in construction work inevitably lead to an increase in the importance of the human factor, and the possibility of accidents, accidents, delays and related problems increases. It is estimated that a week of delay quite realistically reduces the income from investment in housing construction by 0.01%.
In addition to all this, there is high competition among developers, which directly reduces the future market value of the finished investment project. And while other problems can be somehow dealt with, real and legal tools for influencing competitors simply do not exist.
