new construction vs getting run down property and rehabbing

[Robert Cioffi]

hello,  trying to break into my 1st property.  inventory scarce and expensive in NJ where I live.  looking at some new construction in developments surrounding Philly.  just don't have experience or time to rehab even if I find a property I am interested in trying to buy and rehab.   Does anyone have experience in buying new from developers and then renting out long term.  cash flow limited but upkeep will be minimal.  and attractive to higher demographic of renters.

any feedback?

[Stuart Udis]

There are certainly pros and cons to acquiring new construction or even recently rehabbed rental properties. Here are a few things to keep in mind when you review opportunities:

1. In Philadelphia there is a 10 year tax abatement. The legislation changed at the end of 2021. It's important to know which abatement applies (there are properties that were permitted a few years ago but are now being built that receive the old legislation version which is more favorable).

2. Don't assume because the building is new construction, there will be less maintenance. There are a lot of poorly constructed buildings and in most cases the Builder Warranties are as valuable as the paper they are written on. It's important to vet the builder just as much as the building. 

3. If the building is being delivered leased, it's important to understand whether concessions were offered to secure the first leases. It's a competitive lease-up market with so much new housing that's coming on line and landlords and leasing companies have gotten creative on how to offer concessions in ways to shield lender's knowledge as means to maximize refinance proceeds. Its not unreasonable to expect a prospective buyer to be unaware as well.

4. This is particularly the case in Philadelphia, but there are many poorly designed buildings that have been coming on line. This is a consequence of higher land and construction costs forcing many builders/developers to maximize the unit count. By way of example there may be a parcel that would have been better served as a well designed 2 unit building but was constructed as 3 units with small or below ground bedrooms and living spaces. Design matters and poorly designed units will not fare well over time. Many opt to build the maximum number of units and craft their pro-formas with a best case scenario in mind which may not be realistic or sustainable. A well designed building may display a lower NOI, but if looked at over a 10 year window may outperform the denser building because the building experiences less vacancy and turnover.

5. As an extension on points #3-5, it is sometimes more advantageous to acquire a building that's a few years old as an inspection of 2-3 year old building will be more insightful than a building that's just been built with  little to no wear and tear and without the ability to display settlement issues. Furthermore, you will be able to better gauge how well the building has performed from an occupancy standpoint.

Hope this helps