New Construction, good or bad?

Question

Hi, I've heard before that for investors usually the idea is to run from new constructions. Can anyone explain why that would be? I'm interested in new duplexes being built in my area that start out base 100k+ less than any other nearby. Would this not work well for a house hack? Obviously there's a lot more to consider numbers wise, but I see it as lower upkeep costs and lower capex. So why do I hear bad things about buying new construction?

Aaron K. · Answer

@Jordan Cortese yeah that is why it is so cheap you need to supply your own land.  That doesn't mean it is a bad deal but you need to factor that in as well as permits and hookups to utilities.

Jordan Cortese · Answer

@Aaron K.

https://www.zillow.com/community/adair-homes-tempe/2083307654_zpid/

Although now looking again I think what you said about having your own land is the case. My mistake

Aaron K. · Answer

@Jordan Cortese do you have a link for us to look at?

Jordan Cortese · Answer

@Aaron K.

Okay, from what I can gather in the ad it is a whole neighborhood build. So I'm not certain if the land is already owned and is just being built on, or if that means that the cost of land would then be divided up by lot and tacked on with the house and all the taxes of both.

Jordan Cortese · Answer

@Jay Hinrichs

So it can be a good rental, assuming that I factor in all the right numbers and they fan out? Is that only when the whole thing is rented? Rather than 1/2 live in?

Aaron K. · Answer

@Jordan Cortese more just look carefully at the property taxes and other expenses that you will owe like HOA, sometimes they are harder to find on new construction.  Since I don't know what exactly you are looking at I can't say for sure if you are looking at ads where you need to supply your own land or not, but if it is that much cheaper than everything else it seems like a distinct possibility.

Jordan Cortese · Answer

@Aaron K.

Okay. I had never heard of mello roos before. So when analyzing the property I should also consider in those bonds as well as the land?

Jay Hinrichs · Answer

as for buying new construction for rentals if they work out on paper I certainly like those better than old tired beat up houses.

I bought 13 new ones in Mississippi primarily for the go zone tax bene's but they were bullit proof.. brick houses I had them put in scored concrete floors.. had the builder include blinds and fencing and mail box in the purchase price EASY to rent since they were in nice new areas.. I have my last one to sell.. but I was able to sell all 12 of them to Owner occ buyers for a premium.. If you buy lower end rentals in what are rental areas you kind of bracket yourself into your only exit is another investor.. so they are going to be reading BP and know how to run cash flow and are only going to pay you for a given cash flow.. so there is that side of it.. values of those only really go up as rents go up.

Jay Hinrichs · Answer

See above for my explanation of how and why they are used and how they work

Jay Hinrichs · Answer

in the same line as  roe wade how you would think of Simon and Garfunkle :)   it was two senators who passed the legislation.

IN CA the developments are so massive that the capital for the infrastructure .. the banks were un willing to lend say 50mil to build out a project and do a large amount of off sites.

So this bond issue.. how it works is this

the developer pays to get the issue put to the county supervisors or whatever you call them in your area.. they vote if they want to allow the county to manage the bonds as they have to be incorporated into your tax bill etc..  normally to set this up U have to have a Very big appraisal of the project  you need to hire Bond council and you retain an investment banking firm that will buy the bonds then resell to their clients.. Mello roos are not double tax free or tax free munis so the rate on the bonds is higher in my day it was 9 to 12% return for those that bought the bonds..  So once the bond issue has been approved.. THEN you can approach the bank for your infrastructure loan.. so in my case at Lake Wildwood in Nevada county we needed 10 million for the first phase and keep in mind this was late 80s when 10 million actually bought you something not just one house in Palo Alto LOL.. So the bank would fund the loan the project gets built and as soon as the county or city approves what you built and takes ownership and maintenance of it the bonds that have been sold those dollars go to retire the bank loan.. all in all that process cost us about 2 years in time and about 750k up front.. If the bond issue had been voted down my boss would have lost his money.. I was lead on the team and secured the bonds and I was the broker for the project.   Now many of these in CA did not work out well and there were a lot of defaults so for a while they were hard to get through.  Anyway that's Mello Roos bonds my dad used to use 1915 act bonds for his smaller developments 500k to 2 million back in the day.. those are harder to get approved since the county has to guarantee them and they have some tax free advantages I believe as well