New construction versus 1% rule

[Dan Inness]

Good evening Bigger Pockets community! First post here. 

I’m just starting out and live in Wichita KS. I’ve evaluated over 700-800 properties so far and been beat out by cash offers on the few I have been interested in. My realtor just suggested a duplex. 

The duplex is $330k and each side rents for $1300 (2600 total or 0.8%). But they are brand new (2020) and currently both occupied. Here are my thoughts:

1.  $330k is too high and doesn’t get close to 1% rule.  Maybe I could get in the 315-320 range but still high.

2.  Rent probably can’t be raised since all or most in that area are the same and rented for the same amount. 

3.  I would manage so I would save fees there. 

4.  With it being new I would not foresee big repairs for at least 5 years conservatively (hopefully closer to 10) so repair budget could be lower  

5. Mortgage, HOA, specials, taxes, insurance would be 1800 with 2600 income per month.

Overall my thoughts are that the price is high for the rental value but it’s new and is currently rented which provides some stability and risk reduction since I can almost definitely count on rental income until the leases are up before I have to be concerned about vacancy or repairs (hopefully).  If they have 6 months left on the lease (working to find out details now) it would provide a $4800 of income in addition to rent over that time period to provide a cushion due to lower margins.

on its face it seems like a not so great deal but the fact that it’s new so won’t have any major repairs soon makes me wonder how important the 1% rule is in this case. 

Open to any thoughts or feedback. Thank you!!

Dan

[Joe Splitrock]

@Dan Inness you are just exposing one of many factors that the 1% rule doesn't consider. You could have a property that is 100 years old and meets the 1% rule. It may require thousands of dollars of deferred updates, but the 1% rule takes none of that into account. New construction never meets the 1% rule, just due to building and development costs. Everything is new, so you have to take into account lower CAPEX and repairs, plus a new property should be able to attract A class tenants. Better quality tenants means less wear and less risk.

I am moving all my portfolio to newer properties in better locations and in the process taking a little less cash flow. I am doing it to reduce expenses, reduce management time and position my portfolio for the next 20 years.