New Home as an Investment?

Question

I get that this is a forum for investors, and I get that investing is almost synonymous with buying something for under market value. 
However, I am batting .000 in my recent property-acquisition and holding or flipping model, and I kept seeing a new subdivision about 1/2 mile from where I live. I went by and had an hour-long discussion with a decent realtor there. 
My question is, Would you all drum me out of BP if I were to "invest" in a new home?  My goals are cash flow and appreciation, and I think that this home is probably 50/50 in how that would go. Appreciation is a bit of a speculation, I get that, but it seems more likely than not. Also, with labor and materials going up and with folks kinda preferring new homes for $80-100 a square foot, it might appreciate better than average actually. My area, Charleston, is improving decently. 
So yah, is that an investment that I should be ashamed of, or is buying a new 2,000' 4-bed two story open floor plan vinyl sided house with granite and stainless appliances on 1/3 acre fenced for $105 a foot that would rent for $1,750 from DR Horton around the corner from me a possibly good thing?

Mike H. · Answer

The other issue with that plan is your price point on the rent. When you start hitting the 1700 to 1800 mark in rent, you're really starting to limit your renter pool.  And without a big renter pool, you tend to have longer vacancies.

If you are going to build new construction, you probably don't want to go as big.  Instead of 2,000 sq ft, what kind of rent could you get if you built a 3/2 at 1,300 sq ft?

At 2,000 sq ft, it looked like the price was about 210k.
At 1,300, could you get that down to $90/sq ft with lesser finish and be all in around 120k?  And maybe get rents in the 1100 range instead of 1750?

Typically, 3bdrm homes at 1,300 sq ft don't rent for too much more of a discount than a 4/2 at 2000 sq ft than that. And since your 3bdrm would be brand new construction, you could probably get a premium in rent compared to the other 3/2 1,300 sq ft homes.

Just a thought on the building new.

I think it has some potential to at least get yourself in the game. But I would definitely see if I could ratchet down the numbers a bit to make the rent to price point look a little better for you.

Again, not sure its the best route either. But if you are going to consider it, I'm just thinking that might be one way to go about it and still get yourself a little better returns.

2 of those units would cost you 240k and you'd be getting 2200 rent and with a much better renter pool as you'd be a lot closer to that 1,000 mark.

Peter Davis · Answer

"I get that this is a forum for investors, and I get that investing is almost synonymous with buying something for under market value. "

I don't think that's true at all.  Yes, it's true that you can maximise your gains by buying under market value.  But, an investment is simply something that will make you money.  It doesn't make it not an investment if you pay above market value, what matters is that you make money on it.

Jason Merchey · Answer

THe best builders just don't build in my state. I forget where I saw the rankings for national builders, but I think it was JD Power or Eliant or some such name.

Ben Hughes · Answer

KB's are build super cheap.  I wouldn't want to live in one.  Almost bought one for my first house and so glad I did not.

Andrew O. · Answer

Having worked in quality control/customer liaison for a number of the big builders, avoiding Horton seems prudent.

Jason Merchey · Answer

Thanks everyone. 
I actually literally decided against this particular house since it's built by DR Horton, and there is just too much negative feedback about quality online. I might would do better to go with Centex, Ryland, or KB/Mungo than Horton. Still looking...

Rich Weese · Answer

Hi Jason,
    I know you can find a lot of threads here on bigger pockets and discuss this, and many of them are mine! I have been a proponent of new real estate for quite a while as investments. I'm sure you can research and find a lot of my thoughts.
     I think you're correct on your 50-50 reasoning. Obviously, cash flow is normally better on older properties but they come with some inherent disadvantages in my opinion. The maintenance is definitely higher, financing becomes more difficult, and the areas are normally older and in many instances not very well maintained. I'm not familiar with your area but cash flow can change quite rapidly.
      I am involved in a subdivision in South Texas where originally I was building four bedroom two bath homes and receiving $975 rent. These same homes, now four years old are pulling over $1200 in rent and the newer ones of the same floorplan are receiving $1400 in rent. I'm very happy with the increase in cash flow, as well as the higher tax write off due to more depreciation, and theprice per sq ft price of the rentals.
       I have built single level, and also two level but nothing less than 1500 ft.². I have found no problem in renting both types and the return is approximately the same on each investment.
      I own both older and newer rentals but I assure you the increase in rent is much higher on the newer properties. Good luck on your decision. Rich

Jason Merchey · Answer

Good feedback gentlemen. I looked this up, kinda interesting:
http://www.bloomberg.com/news/2013-05-14/private-equity-taps-builders-as-foreclosures-vanish.html

James H. · Answer

I don't think buying at market value is such a terrible thing as long as the cash flow is good. Much better to get in with equity right out of the gate, though. Typically, you don't find good cash flow with at market purchases, but it can happen. I don't think I would do what you are proposing. New neighborhoods are too unknown. They will not nessarily develop into good neighborhoods - especially the ones aimed at entry level buyers.

David Beard · Answer

Jason Merchey - Jason, collect your things and clear out!

Sorry, couldn't resist, you were begging for it, weren't you?

Looks like a 10% gross rent yield, maybe 6% net since you're on the higher end of the tenant spectrum and maintenance should be low for many years to come on new construction.

If you finance it at 4% w/ 75% LTV, then your total ROI is roughly 12% w/ the principal reduction, w/ tax benefits ROI will jump a few more points, plus potential appreciation (what would comparable new homes have sold for in 2006?).  As they say, better than a poke in the eye.

The $105/sf included the lot, right?  Are you sure you can rent in that subdivision?  Are there solid rent comps in the area?

New Home as an Investment?

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