Purchasing a New Build for Rental?

Question

I’m probably going to show my inexperience here, but does it ever make sense to purchase a new build in a master planned community for an investment? I’m in a very competitive market (Denver area) and have the funds to purchase a second rental property when the right one comes along. However, properties are getting snapped up, quick. (Could share lots of stories to illustrate this.) We really like our area and it is very desirable for young families moving out of the city. A national builder is developing a huge area with various types of homes. I’m curious if it ever makes sense to buy a builder home in a new development. I’m sure there’s a term for what these are called, but I am very new and still learning all of the lingo.

I considered buying one in a nearby area a few years ago for my first home, but quickly learned there are a lot of additional costs for things that would already come with an existing home, such as air conditioner, blinds, etc. It turned me off and I bought an existing home instead. I’m guessing these homes are not ideal to add to a portfolio due to the build time, potential delays, and all of the additional costs, but curious to hear from others.

Bridget Brazelton · Answer

Hey @Ann Wing, I think it's smart to not rule anything out, ESPECIALLY because of how hot our market is here in Denver. Someone who comes to mind that has used new builds to build their investment portfolio is @Todd Baldwin in Seattle (also a hot market). Check out BiggerPockets Podcast 392 if you're interested in hearing his story. It all comes down to a numbers game. All things being equal, a new build is fantastic because a) there's no deferred maintenance, and b) you'll have new fixtures and modern layouts that will garner top rents. But, that needs to be balanced against the premium you're paying to get into a new build, so without specifics it's hard to say whether it makes sense. In master planned communities also be sure to check into the HOA, if there is one, to ensure your rental strategy is allowed there.

Matt M. · Answer

Try to buy one of the first new builds in a new development. Avoid communities that are already almost built out.

James Carlson · Answer

@Ann Wing

Any good answer in real estate should start with "it depends." So, is buying new construction in Denver as an investment property a good idea or not ... well, it depends.

Largely, it depends on the numbers. I just got a buyer under contract on a new build SFH in Arvada that he plans to operate as a short-term rental on Airbnb. The numbers make a lot of sense to him. New builds stand out on Airbnb, and this is close to light rail. But again, look at your mortgage, look at your expenses, look at your estimated rents. Does it meet your goal, whatever that is?

The biggest benefit to new builds in Denver (or Arvada or Littleton or Colorado Springs or ... wherever) is that ... they're new! I know this site holds up as the gold standard buying a home in which you can "force appreciation" or do some "sweat equity." Don't get me wrong, those strategies work, but they're not for everyone. They're also a lot of work and time and stress. How much do you want to devote to this? Sometimes an easy win is the way to go.

In your normal running of numbers, you would include "repairs" and "capX" expenses. I usually estimate 5% of rents for each of those to sock away for that rainy day. But theoretically, you can reduce both of those because you won't have those repair expenses for a long time.

Like @Matt M. said, try to buy early in a development. Prices are always lower. My buyer who nabbed the new build in Arvada, prices were about $20k higher from the first to the last sale. And phase 2 of those builds will start an additional $25k higher.

Good luck!

Michael Glist · Answer

I think going new build is a good option. The extras that cost a lot to get from the builder I would suggest pricing out yourself and seeing if it's worth it to pay for them yourself in cash or to be able to finance them into the loan.

The nice thing about new builds is the appreciation. Also depending on your goal with the property I know investors that will buy new builds, rent them out and then sell them to their tenants a few years down the road which is great for you since you get cash flow for some time and then can cash out on the appreciation down the road. I would just make sure it s a good development in terms of people wanting to buy there. If the houses are selling fast it's good if the builder is having to discount homes and incentivize agents more than normal to bring in buyers you may want to go elsewhere.

I hope this makes sense and helps.

Jeremy Gaal · Answer

@Ann Wing, I am closing on a new build townhouse in a week. I am nervous about it because it is different then the BRRRR method and such but our markets in Colorado is rough right now.

Tina Tsysh · Answer

I agree with what @Bridget Brazelton and @Ben Rhodin that as long as the numbers make sense, why not buy a new build? Especially if the new master-planned community is in a good school district, the tenants that you get there will most likely stay there for a while if they have kids. This should be your target demographic for tenants if there are good schools nearby. In addition, with Denver being such a hot market, many people that are moving there want to be in a new home. Denver has also seen a very healthy increase in wages, meaning that people can afford paying higher rents for new construction.

At the end of the day, you are trading low maintenance for the premium you are paying for the property. As long as the numbers work, do it!

At the end of the day, you are trading low maintenance for the premium you are paying for the property. As long as the numbers work, do it!

Ben Rhodin · Answer

Hey @Ann Wing

Like @Bridget Brazelton mentioned, I wouldn't rule it out because it's a new build, there are plenty of pros to buying newer construction. Mainly that you know it's up to current code standards and is new age construction. So you won't have to worry about updating electric, sewer, plumbing, or anything of that nature.

Hopefully, as long as it's properly built, there won't be much in the way of maintenance or Cap-Ex for the first 5-10 years. Then along with that buying new construction you can feel pretty assured that the area is in demand since someone put forth the money and time to develop a whole new community. I would make sure that there is a strong rental market in the specific area, and that your specific strategy will be allowed/work.

Really, as long as the numbers make sense, then the deal makes sense. Doesn't matter if it's new construction or a house from the 50s. Just different things to take into account when analyzing the deal!

Suman Kumar · Answer

May I ask the reason to avoid communities that are almost built?

This is my first time home buying for rental. If I buy first homes, will it attract rentals as there may still be construction going on and people may hesitate to come for rental?

What are the pros and cons of buying in new community.

I am looking in Lathrop, CA where the builder plan just got approved. The builder website is yet to get updated with brochure and details. What are the tips to negotiate price and/or details from the builder?

Jeremy Gaal · Answer

James,

Of course! Bought (or will be buying next week) in 80911. Its a 3/3 townhouse at 1501sq/ft with a two car garage. Price is 248 and is a conventional 20% down deal. Jenny Bayliss (apologies if I misspelt her last name) just closed on one very similar and like her I will be renting it out. Market in that are is looking like it supports 1700/month rent. I ran rent numbers a little lower just to be safe but overall I am happy with the deal. The builder is opening up a new phase soon (I believe in the next few weeks) and prices should 15-20k higher. Let me know if you're looking for any additional info.

James Carlson · Answer

@Jeremy Gaal

Congrats on the townhouse. Do you mind sharing more about it? Where is it in location? Price? What do you plan to do with it?

Purchasing a New Build for Rental?

Purchasing a New Build for Rental?

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