New Construction buy and hold

[Michael A.]

I'm thinking about buying a new construction home in Dripping Springs as a buy and hold type of investment that will eventually be converted into a LTR. The issue that I'm seeing in Austin is that cash flow is non existent unless you drop a significant amount down. I have money tied up in other investments so cash on hand is limited. However I will be using either a VA loan, FHA, or conventional loan to finance this deal and I'm fine with being cash flow negative for a few years if it means having less headaches and actually having a property that I'm happy with owning. This is particularly important for me because I''m planning on being out of the country for an extended period and do not want any surprises or distractions while away. I am pretty set on buying in the Dripping Springs area as this area in my opinion has the kind of RE I would eventually want to bequeath to my children. I'm not keen on the northern part of Austin tbh.

what are your thoughts? I know some might call this speculation but I see it as an opportunity to buy something that is most definitely going to increase in price in the short term. Of course I’m sitting on the sideline atm and waiting for further drops 

[Leo R.]

@Michael A. I think you may be operating under a few assumptions that I'd suggest re-considering...

First, buying a cashflow negative property with the assumption that it will appreciate and become cashflow positive in the future is the definition of speculation. ...which begs the question: do you have a net worth that can withstand the hit if your speculation doesn't pan out?  ...Warren Buffet has a net worth that can withstand a few speculative purchases that don't pan out...but, unfortunately, most of us are not Warren Buffet :(    

Speculative purchases should only be a very small percentage of an investor's net worth because, at the end of the day, nobody knows what markets will do in the future.

Second, you mentioned that you're focusing on new construction because you want a property that has minimal headaches/maintenance issues.

One of the biggest misconceptions by inexperienced RE investors is that new houses are inherently less costly/less headache to maintain than older houses. This is true some times, but in some scenarios, brand new properties end up producing significantly MORE maintenance/repair headaches than older properties.

The reasons are:

1) Some building techniques/materials are far superior to those used in the past, but some are not, and some are unproven. For instance, I'm very doubtful that pex will have a longer service life than copper plumbing. The trend toward flat roofs is just silly in most areas (bc it causes water diversion problems, which then cause a myriad of other problems). Lumber quality today is mostly trash. Etc., etc.

2) A new house hasn't gone through its "growing pains" phase. All sorts of problems can emerge in the first few years. For instance, inadequate/improperly designed water diversion systems can cause major problems (e.g.; rot, masonry degradation, foundation settling) that won't emerge for several years. I personally know people who bought brand new, multi-million dollar, beautiful luxury homes, only to have serious foundation settling over the first 5-10 years of ownership (and the repair bill was in the hundreds of thousands!).

On the other hand, an older house has been around so long that these types of problems have either occurred and been addressed by previous owners, or they're often plainly visible. For instance, if there's an unresolved settling issue, you can probably see cracks in the foundation, buckling, un-level floors, un-plumb doors, etc. ...but, if everything is solid now on an old house, it'll probably remain pretty solid for the foreseeable future. As my GC says: "if it's stood straight and true for the last 100 years, it'll probably make it at least another 25".

I own properties from the 1910s, 1940s, 1960s, and early 2000s –and frankly, the older properties are some of my best performing, and least headache-causing properties of the portfolio!

Don't get me wrong; there are plenty of issues/problems/quirks that old houses have that new houses don't, and an old house can obviously have hidden problems and big repair/maintenance bills too--which is why thorough due diligence is fundamental to REI...but, the point is: a brand new house is not a foolproof solution to repairs/maintenance headaches (and in some cases, a brand new house can be a much bigger gamble than an older house).

This is a particularly important lesson for inexperienced investors, who tend to be the most prone to "shiny object syndrome" (the tendency to let nice aesthetics distract from real, underlying issues). There are no shortage of lipsticked pig properties out there, and learning to spot them is essential for successful RE investing...we're all susceptible to "shiny object syndrome", but being aware of it is the first step to avoiding it!

Good luck out there!