Preconstruction investment is not widely known about by the average person. And yet many savvy investors have become wealthy through this method of investing in real estate. It's true you can achieve higher returns through preconstruction investment than through certain other investments. However, there is always risk and the potential for financial loss. Fortunately, careful investors have the ability to control most of their risk by choosing the best investments and making plans for "worst case" scenarios.

The principles of preconstruction investment are straightforward. The investor buys a property before it is built, at a discounted price which is less than the selling price of a finished unit. By the time construction is finished, say 12-24 months in the future, the property will have appreciated in value and the investor can pocket the difference between his price and what the unit is now worth on the market. At least, that's the intention.

In a booming real estate market, many properties will appreciate significantly over 1-2 years. However, what if the market takes a downturn? The unit may be worth less than what the investor paid for it, least temporarily. Or interest rates may increase, leading to a shortage of qualified buyers for the property. If the investor chooses to get involved in large developments that will take 3-8 years to complete, he is speculating on the state of the real estate market far into the future. It can be hard to predict how the market will change over a number of years, making this an uncertain investment.

Real estate developments in the preconstruction stage are little more than plans on paper and an artist's drawing of the project. The developer will try to portray the property in the most favorable light and downplay any negative aspects. Seeing plans for luxurious condos in attractive locations, a novice investor can become caught up in the excitement of buying. However, he may not have the knowledge to evaluate all the pertinent information to see if it really is a good investment for him. A more experienced investor knows not to jump headlong into any deal that comes along. Instead, the investor sets criteria for the type of investments most suitable for him and limits his investing to properties that meet those criteria. He has the knowledge and skills to measure both the pros and cons of a particular investment.

One of the attractions of preconstruction investment is that investors need to deposit only 5%-25% of the price when they sign a contract to buy. The low cost of entry may cause unwary investors to overextend themselves financially, without thinking through the pitfalls that can occur between signing the contract and closing on the unit. If for some reason the investor can't pay the balance of the price or can't get financing when the unit is finished, he will lose his entire deposit. A wise investor will avoid this disastrous outcome by planning a financial strategy that takes into account a slumping market, or high interest rates, or any other unfavorable investment condition.

As with any type of investment, preconstruction can be complex. If you are thinking about investing in preconstruction, you will want to spend time educating yourself before committing any cash to a project. Attending seminars, taking courses, reading books, talking to more experienced investors, and joining real estate clubs are all good ways to acquire the knowledge you need to be successful. When you understand how to select the right properties and plan for negative outcomes, it's far more likely that your investments will turn out to be highly profitable, rather than highly risky.

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