Model Home Leaseback in Charlotte, NC

[Adam Sciupac]

I have an opportunity to purchase a model townhome from a builder in one of the better neighborhoods in Charlotte, NC. The builder would then lease back the model home to use as their office/model for the duration of the build. The lease contract stipulates that the builder occupies and pays for 12 months, after which they renew on a month to month basis until the building/sales are complete. The numbers make sense, it works. My worry though, like many others, is that we don't know how the real estate market will react to the current crisis.

On the one hand, I would have a guaranteed tenant locked in at above market rates for the next year. Assuming the build continues, the model home will incrementally appreciate until the development is complete (traditionally 2-3 years). At which point I either sell it, move in and rent the other rooms out, or find a tenant. It seems like I can protect myself over the foreseeable downturn.

On the other hand, after the year lease is over the builder walks away from the development because the economy isn't doing well and I am stuck with a townhouse at a market value lower than what I paid. Current comparable rental rates in the area are between $2,000-$3,000, but who knows what it will be in a depressed economy. The area traditionally attracts buyers and is mostly SFHs. So I question what I will be able to rent it for a year from now, and whether that will create cash flow or simply cover my expenses.

The biggest dilemma I am facing is that, assuming I can get a loan, this one investment (my first one) would tie up my credit and I will not be able to invest in possible deals that pop up through a downturn over the next months/years.

Any thoughts, insights, and experience from investors who have done something similar would be awesome!

Thanks