I'm a home builder but want to build my own portfolio: Buy and Hold or Build and Hold?

Question

I'm new to the forum (thanks to all that are so active and open!), and am just starting my own home building business, I am also looking to build a portfolio over time (no hurry) starting in 2016.

My goals include me NOT being a property manager, and NOT rehabbing. So I figure I could buy decent retail properties, or just build my own.

Decent SFR properties in this area start in the low $100's. I could build new on the right lot for around the same thing. My estimations say I could build a 1400' 3/2 for around $85k, lots in the area I am looking range from $30-$50k. So at max, I would have $135k in a brand new rental that I could rent for $1250-$1450 per month.

Assuming those numbers are correct, wouldn't it be better to build and hold instead of buy and hold? My thought process is I would hopefully have less maintenance issues, less vacancy (newer home), and better value when/if I sell.

Karen Margrave · Answer

@Elizabeth Colegrove I'm sorry but your analogy makes no sense. Of course a new house will age. However; new homes, built to the standards of 2014-2015 are going to be built to a much more stringent building code than the older houses were built to, and much more solid, lasting longer than the old house you buy. In addition, new homes are energy efficient and cost less to maintain, etc. , meaning more money in the owners pockets. Though old houses do have character, the reality is, houses reach a peak in value, and then fall. No matter how you remodel an old house, the age of the house is still considered the original age, and all you will ever have is a remodeled old house. In addition, on older houses, unless you really know what you are looking for, you can be opening a huge can of worms that cost a great deal to fix. As for the size of lots of new homes, not all homes are built in new subdivisions with small lots, in fact, there are many opportunities to buy larger lots in established neighborhoods.

Jay Hinrichs · Answer

@Keith Bloemendaal answered your own question its a no brainer.. the other thing is new construction usually brings much better and higher paying tenant,, as opposed to what @Elizabeth Colegrove mentioned... I bought 11 new homes in MS for Go Zone tax benefits 7 years ago and they are hands down the best rentals I ever had... I also owned 350 plus older homes in the South the tenant and maintenance was not even close. I know a few builder developers here in Oregon that's all they do.. they build new... and rent half or more of the new builds sell the other half and have created monster portfolios of very decent housing not 50 year old junkers.

Jason Brown · Answer

Keith, this is very similar to what I've been thinking about lately. Keep us updated!

Jay Hinrichs · Answer

Its not a bad thing to have TRUE equity.. my bank here in PDX does 20 due in 5. and I need to pay cash for the lot as well. Only I am on the other end of the investor life cycle selling all rentals and just doing short term JV deals these days.. My days of tenants is soon coming to an end... LOL

Keith Bloemendaal · Answer

Thanks for all the responses, hope everyone is having a great Thanksgiving!If I can buy lots in an area that has a good rental market (I actually don't know of many areas around me that don't have a good rental market) and can build for ~20% less than I can buy turn key (as I stated, I have no desire, nor the time, to try to find the really good deals and rehab them), then that makes sense to me. The homes I build to sell are at the beach and would only bring about .50% for long term rental, but I can profit $50k on a sale (15-20% after realtor fees/closing costs). The lots cost 3x as much here as they do on the mainland. Anyway, for me, if the right turn key comes along, I'd buy it, but I will also run more detailed numbers on build and hold projects I am thinking about, which I could also do with multi family. I am thinking longer term here, something I can pass on to my daughter after I am gone.... would rather that be a bunch of 30-40yr old homes and not a bunch of 100yr old homes and a headache.

Arlan Potter · Answer

@Karen Margrave I am a builder as well. In our market we could build new and maybe get .75 %rent to cost. We buy old and rehab and get 1.5-2%. I like building new, but we sell new, keep vintage rentals. The cheaper the better.

Karen Margrave · Answer

@Keith Bloemendaal We are builders, and I could not imagine buying a house already built if there were lots available for sale. It's like being a manufacturer and going to a retail store to buy your product, doesn't make a lot of sense!

Keith Bloemendaal · Answer

Yes, the lots I have been watching are not a part of any HOA or covenants, and I have actually built this particular plan I am speaking of 6 or 8 times in the last several years and watched the numbers closely. Granted, those numbers are all builder grade low end specs, and I might want to add tile etc.. to increase longevity. I just hate dealing with rehabs personally, just never know what is behind the walls, under the flooring, under the shingles, etc... New home that I build, I know exactly what is there. Also, regardless of how nice you rebuild, it is still a home built 10, 15, 20, 30... years ago on paper right?

Keith Bloemendaal · Answer

Update:I just got off the phone with my banker I use for commercial lending to fund my new homes I am starting. He said they would basically do a "rental" loan (his term), they would fund the construction interest only for 12mos, then P&I would start on the 13th month 15 yr amortization on 5yr term. I could make this work, but would have to leave my equity in the lot, which I would pay cash for. I see the negative in this which is the 15yr term and the cash out of my pocket, but I am looking long term gain, not short term. The property would still cash flow, and I would have approx 50% equity from the start in a brand new rental home. I am sure I will explore other options as I get closer, these are goals for 2016...

Keith Bloemendaal · Answer

I actually am the general contractor.