Why Aren’t More Investors Building Instead of Buying?

Ground up construction is more capital intensive. It's why buying existing buildings in any condition, particularly in what's percieved to be low barrier of entry price points are competitive.  Those purchases are often less risky, even if you over pay by a small amount.   On the other hand entry level new construction has a great deal of risk. Particularly in the smaller in fill projects you would expect an investor to jump into. The likihood of huge financial loss is certainly higher when you get into new construction.

Unless the investor plans to  self perfrom the construction (which few are qualified to do), the hired  GC must have two qualities: (1) Financial Means & (2) Wherwithal. It's extremely difficult to find both qualities in a GC looking to build a small in-fill project. Most who possess both qualities  recognize its more profitable to simply build for themselves meaning you often have to skip to larger GC's to get  both qualities and they have to be incentivized financially to take on smaller projects. Their overhead, staffing etc. is suited for larger and more complexed projects so those overhead costs are passed along. 

If the numbers work, thats great but construction defects on new construction can also be far more complicated and costly to resolve than in existing rehabs and its very difficult to hold the builder accountable unless they have a long standing track record and reputation (usually the means and wherewithal types). The timing of new development projects can also cause huge swings in material costs and changes in market conditions so its not a process anyone should jump into.

I personally relied on 3rd party GC's to build singles up to 10 unit buildings and it was a nightmarish experience. I basically had to become the GC's bank and began paying subs directly and there were a ton of errors along the way. It simply was impossible to make the numbers pencil using larger GC firms. Thats' why I made the decision to self perform construction last year. All of my projcts are sub 20 well within my comfort zone but should I get involved in a larger project than that I would feel more comfortable with an outside GC but that's ok because the project is large enough to support the overhead and pricing of the more established firm.

If you are an investor who wants to try their hand at new constriucton, I can't emphasize enough the importance of staffing. Get to know the GC well, understand their sub contractor relationships and research them.  Select a good architect. The cheapest architects often prepare the most basic set of plans the municipality allows. This often leads to confusion on the job site. Spending a little more makes the project run smoother with less risk of change orders. Lastly, make sure you are working with a bank who has  great construction administration processes. **** happens, that's just the reality of new construction and having a bank who can help you navigate those issues is incredibly valuable. Along the same lines, healthy contingency and interest reserves are important.