Build to Rent ???

Question

I’ve been looking to invest out of state and have looked at several different turnkey programs along with traditional deals, however I stumbled upon an program called Build to Rent. I took a liking to the program due to it location, Houston Texas, specifically Conroe Tx. I am a strong believer in market fundamentals and it hard to argue against Texas right now.

The program offers 3 and 4 bedrooms homes, with the 3 bedroom homes starting at 125k. They claim that they rent out the properties out for $1,300 a month. I’ve talked to Ron Black the guy running the program and he sounded very knowledgeable but also come off as a little salesy. He invited me out to see the homes, but before I consider a trip to Taxes, I wanted a second opinion, sounds too good, too simple, especially the rents, nonetheless he insist they regularly gets the advertised rents.

Supposedly the advantages to buying new.

-Higher rent than pre-owned homes

-Tenants normally stay longer

- Improves tenant satisfaction and reduces turnover

-Builder’s warranty

-Less maintenance and repair expense

Here is a the link

Link

I could not attach the spreadsheet he sent me but here are the expenses.

Taxes     190

Insurance    40

HOA       20

Management   80

Misc       20

Total      $350

Just looking for some opinions and thoughts here. I understand returns elsewhere offer higher returns but does this seem sound investment?

Sara Liskey · Answer

@Richard Michael- I have experience in buying new construction in the Houston market.  While it's true that it's like "buying a new car", it happens to be my favorite property.  I bought in 2007 in a great area.  Over time, I've raised the rent and the value has gone up. I've also refinanced to lower the interest rate.  I haven't had one day vacancy since the first tenant was placed (knock on wood).  The best part is that because it was new, I've had very little maintenance.  Less than $1500 in almost 7 years ownership. At the end of the day, on any property, the numbers should make sense from day one and buy in good areas.  Real estate investing is a marathon, not a sprint.  Slow and steady wins the race.

Katherine O. · Answer

I bought a brand new SFH in San Antonio, TX from the developer.  I was a newbie, and I made several mistakes.  I bought in a really nice community with a bunch of coworkers (we all bought either one or two SFH for ourselves).  This is what I discovered.  They advertised that the rent would be $1200, but I bought in 2006 and in an area with a lot investors.  The rent I actually got was $1050.  The tenant always paid on time and stayed for about 5 years.  They moved out because I raised the rent to $1200 (gradually).  But, with the new tenant, I now get $1450/mo.

My house has 4 br/2b, and these are my actual expenses:

Taxes: $3500/yr

Insurance: $960/yr

HOA:  $300/yr

PM: 1070/yr

Maint/Repair: $1300/yr

Total: 7130

I was only able to recently refinance from 7% to 4.8%, and that was the first time my property had positive cash flow.

These are the things I would consider:

1) The developer cannot really predict the rent.  It could go up or down, and you want to make sure you are able to pay the difference in the down periods.

2) I was very surprised by the taxes.  They are much higher than California.

3) I was also surprised by the maintenance and repairs.  I didn't really spend $1300 each year.  Instead, when my first tenant moved out, I spent about $6000 to get the place ready.  They had small kids and the walls were trashed, carpet trashed, backyard trashed, etc.

4) ***MOST IMPORTANT***  Get your own property inspector!  Get someone who is not connected to the developer.  This saved me a few thousand dollars.  When I closed, the developer had his own inspector go through and check my property.  He said everything was fine.  My PM recommended an independent inspection.  He discovered a host of problems mostly related to the fact that the developer was putting the houses up so fast that they sometimes pulled the crew off the house before finishing the work.  Since I was under warranty, I didn't pay, but it was important to know that stuff before putting in the new tenant.

I think you are OK to go into deals like this, but be aware that the rent won't always be what is predicted and the expenses will be higher.  If you can still get positive cash flow (or makeup the difference) with these parameters you should be OK.

Ellis San Jose · Answer

My take on new construction from a builder, is that you are paying a premium at worst or market value at best for the property. I would much rather buy from a motivated seller willing to sell below market value.  You would be surprised how many "pretty houses" you can buy, that are fairly new & in great shape.

Second, are there any constraints on building in Conroe, TX? The reason you should be concerned is because 5 or 10 years from now if Ron Black or someone like him is still selling new construction homes that are so much better than your 5 or 10 yr old home, how is that going to affect your resale value? (supply vs demand).  This happened not too long ago in Texas when a hoard of California investors bought new homes from a builder creating a sea of rental property.  Then the builder lowered prices on newer homes in the next phase and offered sweetheart financing to owners occupants. The CA investors saw not only rents drop, vacancies soar & values plummet all at once.  Last time I checked, Conroe has plenty of cheap land to build competing units in the future.

Just my 2 cents.  It always comes down to your decision.

Mike H. · Answer

@Linda Lin

Have I hired anybody else to do this? No.

But I have thought about providing the service a couple of times because of how much I saw these turnkey places were charging for homes. They are all the same too. You are getting absolutely no equity in these deals that it just doesn't make sense to do.

I thought about what a typical investor would think is fair in order for them to find the deal and then manage the rehab. PM work is probably a separate issue as you may just want to find a PM company and go that route.

But if you were to pay an investor 5 or 6k to do the work for you, you're going to come out way better on your equity capture than buying it from these turnkey places. And not only are they overcharging for the purchase price, but their rents are actually a bit above market. And that would really concern me too.

If I get a chance, I'll post some of the numbers from some of these turnkey places and show just how ridiculous they are.

Ellis San Jose · Answer

@Richard Michael

Paying a premium for a new home doesn't make sense to me.  Kind of reminds me of buying a new car. It sure looks nice & feels good, but rarely makes economic sense.

I have managed many properties out of state, which is why I discourage newbies from buying out of state.  Unless you are able to buy more than a handful of houses you will have many odds against you.

Richard Michael · Answer

@David Krulac I like the analogy of the used car.

As I think of it, finding out what phase of construction the community is in, is also an important factor. Developers typically build communities in phases. With each phase the prices go up, this create bigger margins for the builder but equally important forces application to the market while keeping homeowners satisfied.

David Krulac · Answer

@Richard Michael

Existing houses are cheaper than new builts.  You pay a premium for new construction and the costs to build with new permits and new regulations are increasing all the time.  for example we've had to do endangered species studies and archielogical studies in order to build.  The rent to price/value ratio, or in other words your profit is higher with existing housing.

And just like new cars becoming used as soon as you drive it off the lot, a brand new house is no longer brand new after a year with a tenant, even a careful tenant.  To see that just look at newer built foreclosures.  Recently saw a foreclosure built in 2011, that has been foreclosed and empty for at least a year.  It was no in pristine condition despite being occupied by a the owner for a year or so.

All that being said, I built a house for a tenant to their specs, after showing them my existing inventory as well as the MLS inventory and could not find exactly what they wanted.  I required a min 3 year lease and they are still there 13 years later.  Its not a new house anymore and I had to replace the entire heating and central air system already, but that's another story.

Ramon Jenkins · Answer

@Gunnar Teltow I feel you totally

I reside in one of the highest property taxes

communities in Wisconsin.

Not to mention, their rebuilding the local highschool.

Rough estimate an additional $1000 dollars

per year for each local tax payer.

Gunnar Teltow · Answer

Jenkins, I live in Austin and I think that's right. It's because there's no state income tax in Texas so real estate taxes are a big part of the local budgets. A $350k house would have about $8k in taxes annually, depending on the county.

Ramon Jenkins · Answer

@Katherine O. Thank you for providing your experiences

I'm really amaze

-> Texas property taxes is higher than California ?

Build to Rent ???

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