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

[Kaiser J.]

I know the area well and live a couple miles from there, plus work in finance, so I'm generally one of the "typical" residents that you described. Fully agree that people in the area are going to prefer a SFH with yard.

Out of curiosity, is it the Wendover Green development that you are referring to?  If so, this is the definition of the riskiest thing to buy at the outset of a weaker market.  Nobody in this area is going to want a 4 story townhome located smack in the middle of a busy intersection, not even as a rental, and cookie cutter properties are the first to weaken in a downturn.  These are old neighborhoods with character - stuff like this tends to stick out a bit, for better or worse.  Not saying they might not be able to sell all of them, just that in a downturn they may experience more challenges than others will.

At $425k these are a fraction of the price of a house in Myers Park or Eastover, but precisely zero of those residents would consider living in this townhome. Your more budget conscious shoppers will know that they can go a mile down the road and get a SFH in Sherwood Forest for +/- $500k. Also, be careful about the school zones. A bit to the West and you'll be in Selwyn-AG-MPHS, which is fairly sought after. In the Wendover/Sedgewood location you may find that you are zoned for schools that are less desirable after some changes that occurred a couple years ago.

If your budget is in the 400s I think you should also look in the areas just West of Park Road, such as Madison Park or Ashbrook. You can pick up a SFH in that price range and many were zoned into MPHS a couple years ago. Madison Park in particular is roughly 2 miles from neighborhoods that are 3-5x the price, but some parts of the neighborhood (be careful about that) are now zoned into the same school district. I think you would easily find quality renters for a house in that area.