Buying Rentals in Subdivisions...

Buying & Selling Real Estate
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Buying Rentals in Subdivisions...

Jason Merchey
Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes

I'm a little worried about getting a buy and hold in a subdivision. Here in Charletston, SC, subdivisions are fairly common, as I imagine they are in most areas. I am a home inspector, and will soon have an infrared camera to help me get to about 95% sure I know what a house will hold for me in the future.
Two things I am less confident about are: 1) the construction quality (is it a "cracker box", did the foreman let the guys cut corners to make a deadline or save a buck or simply because he was too busy) and 2) if the home in question turns out to inspect well, how how well the neighborhood is going to fare over time if it's less than 5 or 10 years old? I imagine that I can pretty much get a vibe about an older, established subdivision, but if I wanted to buy new or recently-built, let's face it, many of the big builders don't put out a great product and sometimes don't stand behind their work.
I imagine that one way to get intel is to ask my Realtor. There is a 33% chance she would know. Second would be to query neighborhood folks about their own house, and the word around the campfire (I avoided a house last year because the woman I met in her front yard had a story or two about mold and contractors not being all that satisfactory in response to it (I know, negatives rise to the top more easily than positives do, but still, I became worried and began to fret about big builders).

Part of me wants to work harder for a living and do 1-3 fix and flips a year, the other wants to get into a buy and hold so as to use leverage. If I got with the rental property, what thoughts do you have about how to determine if a neighborhood is going to rise or sink over time, and how to safeguard my investment?

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David Krulac
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
12y

@Jason Merchey

You have a big advantage to almost all buyers by being a professional home inspector. Your professional expertise will be very valuable to your personal investment portfolio.

I do both buy & hold as well as flips. People have said to me that if you buy and hold, that limits the number of properties that you CAN buy.

I say the buy and hold limits the number of properties that you HAVE to buy.

By your calculations you need 50 flips over 25 years. If you keep properties instead of flipping them you will not only keep the rents for the next 25 years, but you will also keep all of the future appreciation. Eventually in a buy and hold scheme, you will pay off the mortgage debts and the positive cash flow will magnify your returns.

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  • Jason Merchey
    OP
    Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes
    12y

    Indeed, when I calculated the idea of preparing for retirement in 25 years by doing flip after flip, I would have to do two, successful flips a year for 25 years. That's more work and probably less money than getting a few good rentals. So I would really like to focus in on how to not get stuck in a "neighborhood" (read: subdivision) that sinks due to builder defects or poor neighborhood maintenance. Any advice or referrals to various written sources will be helpful...

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  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    12y

    @Jason Merchey

    You have a big advantage to almost all buyers by being a professional home inspector. Your professional expertise will be very valuable to your personal investment portfolio.

    I do both buy & hold as well as flips. People have said to me that if you buy and hold, that limits the number of properties that you CAN buy.

    I say the buy and hold limits the number of properties that you HAVE to buy.

    By your calculations you need 50 flips over 25 years. If you keep properties instead of flipping them you will not only keep the rents for the next 25 years, but you will also keep all of the future appreciation. Eventually in a buy and hold scheme, you will pay off the mortgage debts and the positive cash flow will magnify your returns.

    1Reply
  • Jason Merchey
    OP
    Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes
    12y

    I get what you're saying. However, I think that it's apples and oranges for me because I can either put 25% down on 4 houses using $200,000, or, I can use the $200k to get one flip going. Eventually, I will have $230,000, and I can do 1.2 flips with that, and so on. I suppose I could think about using a loan for the flipping, but that puts a lot of cooks in the kitchen. So in my head, it's kind of like "4 rental properties in four local subdivisions, or one flip maybe two or three times a year." Primarily I am concerned about if I choose to buy and hold, how do I predict an upward growth trajectory in regard to the construction quality and thus the "word around the campfire" about the subdivision. I guess I would just kind of ask, would ya'll invest in a home in a 5 year old subdivision built by one builder - a big national type builder - and if so how do you feel comfortable about the quality of construction? Clearly big builders squeeze their labor and their materials providers to preserve the bottom line, I think more than small-time contractors do. And to some degree, I think, in subdivisions, a few bad apples can spoil the whole bunch with the Realtor community and the neighbors and so on.

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  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    12y

    @Jason Merchey

    With SFH buy & hold you can diversify your holding to different subdivisions, different builders, different towns, different price ranges, etc.

    I troubles me to buy in a subdivision that is not done, where there are vacant lots. sometimes what happens is that a builder folds and another builder comes in and builds a cheaper product, less square footage at a cheaper entry price, that erodes the value of the older higher priced homes. I've seen a couple of cases where a big national came in, took down the remaining lots and built cheaper houses.

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  • Brandon TurnerPro Member
    Investor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes
    12y

    Hey @Jason Merchey -

    This may sound odd ... but I wouldn't worry about it. Yes, think about it for about 10 minutes, and then move forward. There is no guarantees in this business, but over time, as long as you buy smart, things tend to work out well. I don't mean to sound flippant about it, but I honestly think if you just do the normal due diligence, I think you'll do just fine. You can wonder all day long if it's going to go downhill someday because of bad construction quality, but at the end of the day... it's better than not buying anything!

    Thoughts?

    My biggest encouragement would be not to overthink it too much. Even as a buy and hold investor, chances are you'll sell sometime anyways and upgrade to something bigger. So just do your best and pull the trigger!

    Podcast Guest on Show #92
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  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    12y

    @Brandon Turner & @Jason Merchey

    I would add that sometimes you sell or better yet Section 1031 Exchange property not only for a bigger property, but sometimes for a better property, a closer property, or even a newer property.

    I did a 1031 where I exchanged two building built in 1890 for two building built in 1994 & 1996. The acquired building were over 100 years newer and had more modern/desirable features like central air conditioning, integral garages, and fireplaces.

    Another time I 1031ed property in a distant town for property much closer at hand and easier to manage, it also commanded higher rents.

    1Reply
  • Jason Merchey
    OP
    Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes
    12y

    I hear you guys. I think I can get to 80% sure. SInce I can get to 95% with the condition of the actual house, it's a tad unsettling. But I'll try to take Dr. Turner's advice and not overthink it ;) I was also thinking of maybe aiming for this one part of town that is older and has undergone 15 years of revival, and thus, it's clear what trajectory it's on. There are no subdivisions there, and few were built in this millennium. More like a neighborhood in San Francisco - a bit unique, a bit established, and not in a subdivision per se. Folks should bite on a good house or a well-rehabbed house in that part of town.

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  • Pat L.
    Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
    12y

    I am constantly amazed (around here) how many poorly built 2x4 cookie cutter homes are still able to sell for premium prices as long as it's in 'pleasant-ville'. The buyers mindset is close quartered suburban living to co-mingle their kids & hang out (& compete) with the neighbors. Our problem is inflated assessed values driving property taxes beyond reality.

    There are still foreclosure flip bargains to be had but 'subdivision' buy & holds are not viable here with the overheads we face.

    We have vacant sub-division lots & I was looking at a $24,000 in-fill lot surrounded by $275-$325,000 homes but again the final tax assessment would be the killer. The last one we built for $168,000 was assessed by the part-time matronly 'appointed' assessor for $225,000. Taxes are 100% of assessed value & run >$8400 & that hurts.

    The older part of town you mentioned that is beginning to revitalize would definitely be my choice. We have high end factory lofts renting for $1500-$2500 in the older down town area.

    Good luck..

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  • Jason Merchey
    OP
    Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes
    12y

    Gotcha.
    I think I made some headway yesterday by cutting ties with an agent that I was in the beginning stages of working with. She just didn't seem to be trying very hard. Agents are kind of like mail order brides; neither really knows what they're in for until they're already married. So she and I got a figurative divorce. I met a broker in what seems like a great brokerage, so I am going to get my license and do it my damned self. There are two brokers who have been around the block a few times and dozens and dozens of other agents to coordinate with. There is an attorney who comes in once a week, a mortgage broker on site, and so on. So my point is that I think I can really get clear about the "reputation" of a builder and a neighborhood in a most likely stronger way than if I were just searching online and such. Often Realtors are repositories for great information, but you have to know one or many of them to get the intel. Obviously, it has a chance of being biased. I'm fairly excited, and so now my biggest concern is just that we have few foreclosures, a lot of cash buyers, and a strong seller's market - even if I can *determine* what a neighborhood is probably like and where it's probably going, getting my bid accepted is going to be a challenge. And I am under a bit of pressure to act prior to mortgage rates rising to 6% and to generate a few hundred bucks in cash flow. So I feel a little urgency along with my excitement about finding a good brokerage/broker to shepherd me along, allow mls access, get 100 new colleagues, and facilitate me collecting some commissions.

    1Reply
  • Bob May
    Involved In Real Estate · Lake City, SC · Member since 2013 · 15 posts · 1 vote
    12y

    Not meaning to quash your thought on getting licensed, but I think you would be better off just taking action and aligning yourself with a good realtor resource for MLS access and their insights. I am a Realtor in upper SC and have seen many instances of people getting licensed and thinking its going to be instant success for themselves. It's a tough business and it comes with high cost of entry.

    Buy and hold decisions are made primarily with passive income in mind and overall ROI of the monthly rental income. While asset appreciation is a factor, it is a minor one in my decision making and I treat it purely as "gravy". I will echo some of the previous posters and suggest you are thinking way too much.... Just take some action.

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  • Lynn McGeein
    Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
    12y

    Our realtor would take us to see one or two homes in different subdivisions when we first started working with him that looked like great values, but he would call them "goat farms" and show us, for instance, where the slab was seriously cracked up or half the siding had blown off in the last minor storm. He'd been around long enough to know the areas and builders and knew which ones were better to avoid, but he also realized we had to see it for ourselves to understand and not feel bad when it looked like someone else got a house in those neighborhoods for what looked like a value.

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  • Jason Merchey
    OP
    Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes
    12y

    Bob, wow I view rental property differently. I think it is pretty much only worth doing if you can a) pay cash and get a decent ROI, or b) invest such that you're pretty sure there will be appreciation at least as strong as inflation - and hopefully twice inflation. That use of leverage is really the only solid reason to invest in rentals and deal with landlording and so on versus the stock market. It isn't guaranteed, but I would consider it more than gravy.
    In regard to your advice about the Realtor, well, I'm hoping that the mls access I would have, the elbow grease I would put in, the knowledge of real estate I would develop, the colleagues I would meet, the broker I would get able to easily get the advice of, and the percent or two in gain vs. paying a Realtor will make my decision a smart one. Since I would be reactivating my license, I believe I can use my old book, pay $100 for the test, $3-400 for mls fees, a few hundred if that for a couple catch-up continuing ed. classes, and I'll be off to the races.

    Lynn, yes I agree, there are many homes that aren't very appealing. I recently heard of a new development in a fairly popular part of town that are LEED certified homes, and the subdivision is built by 7 builders, not one or two. That is the kind of diversity I am looking for re: builder defects that could negatively affect property values going forward. Also, despite new home prices and the premium that the energy efficiency will confer on my tenant will make this a particularly rentable home. No rehabbing necessary. It should be a 30 year hold, so the fact that I'm paying more for the efficiency should wash out in a decade, and I don't think there is a big difference in pricing between used and new in this market. As far as not being able to get below market value, well that's true, but as I expect appreciation to occur, in a year or three I will have made up for the net-loss up front, and over time hopfully the newer materials, mechanicals, and transparency of the house (e..g, no furniture to get in the way of inspections) will pay dividends in the bottom line. The more I think on my market, the more I either need to get a beater that can be bought for 30% below market (read: difficult to find) or a new, updated home that will rent well for years to come. The "ten year old and decent condition house for market value" is kind of a no-man's land I think. Heck, around here, 10 years old should be interpreted to mean "the HVAC has a little more but not much more time," and "get ready to buy a new water heater." Maybe some appliances as well. The roof and siding are probably fine, but 10 years used is on the cusp of a higher level of upkeep. That would erode the cash flow that Bob talked about every year that something like that occurred - at least with my $300-$400 in cash flow projections. OK I digress. Basically, I like this new, LEED home concept and I certainly want to buy to have a decent chance of appreciation. I need 7%-8% compounded interest equivalency over 30 years in order to pull money away from my stock investing and feel good about it.

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  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    12y

    @Jason Merchey

    Or another alternative would be for you to buy a vacant lot and build a house to your specs for a rental. I've done that and it has worked out well. You then would have control over construction standards and the quality of the home built, and it would be excatly what you want.

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  • Jason Merchey
    OP
    Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes
    12y

    I have definitely thought of that! It wouldn't necessarily be a loser ROI-wise?

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