Investment in single-family home construction represents one of the most attractive opportunities within the residential real estate sector, especially in tourist, suburban, or high scenic value areas. This type of development combines the potential for land appreciation with the growing demand for single-family homes, especially following lifestyle changes resulting from the pandemic and the rise of remote work.
In this article, the personalHOME team, experts in managing the construction process of this type of housing, explains the key points of these investments, their financial analysis, and the risks they entail.
Key factors when investing in single-family home construction.
Location
Location is the main determinant of a home’s value. Coastal, mountainous, or areas near tourist cities tend to have higher demand. Villas located between 20-40 kilometers from major cities maintain an optimal balance between residential tranquility and job accessibility.
Proximity to schools, health centers, and commercial areas directly impacts demand and, therefore, sale price. Access to highways, public transportation, and the quality of roads significantly determine the project’s attractiveness.
Market demand
Local market analysis allows us to determine whether there is sufficient demand to justify the investment. This includes studying the competition, the ideal client profile (tourists, high-net-worth families, foreign investors), and market trends (for example, the rise of eco-tourism or smart homes).
Urban planning regulations
When analyzing any construction investment, legislation must be taken into account. At personalHOME, we constantly monitor any modifications to urban planning regulations at national, regional, and local levels. Parameters related to land type, building restrictions, maximum height, buildability, and license requirements can vary significantly between municipalities, directly affecting the project’s viability and profitability.
Financial analysis of the investment
Construction costs for villas are typically distributed as follows:
Land acquisition: should represent between 25-35% of the total project cost, depending on location and land characteristics. In very exclusive locations, it can reach up to 50%, and it is discouraged for land cost to exceed construction cost if an optimal ROI is intended in the future.
Construction costs: It is very difficult to specify construction costs at a time like the present with such a volatile economy, especially considering the diversity of materials and finishes, and the current labor shortage, which has a direct influence. The built square meter price is unlikely to be below 1,000 euros.
Development costs: urbanization, infrastructure, permits, and licenses can represent 10-15% of the total budget.
Financial and marketing expenses: marketing, sales commissions, and financial costs add up to approximately 8-10% of the project.
In addition to the factors to consider, in the analysis of what truly interests investors, we must focus on profitability and, for that, multiple aspects must be considered:
IRR (Internal Rate of Return): well-located single-family home projects can generate IRRs of 18-25% in stable markets.
Gross margin: in this type of investment, a gross margin of 25-35% over the total development cost is expected.
Payback period: this also depends on many factors but is usually between 24 and 36 months from the start of construction to full sale.
Risks and considerations when investing
Among the risks that must be considered when investing, we can highlight market risks such as price volatility, mentioned earlier, regulatory changes, and competition.
Not to mention other dangers related to the process, such as cost overruns in construction, delays in obtaining necessary permits, or weather conditions.
For all these reasons, experience, technical knowledge, and market insight are essential to undertake any type of real estate investment, no matter how small. At personalHOME, we offer you our know-how to successfully carry out this type of operation.
