Old house vs New Development?

Question

Hi everyone!

My dilemma is, buy an old house (BRRRR) or buy a brand new home and rent it.

I know, it will broadly depends on my goals. So, here are some cons and pros I can think of:

PROS:

- Old house can be cheaper, specially if the owner is distressed and we are able to get a good deal.

- We can fix it and refinance it (getting back the initial investment)

- New home will need very very very low maintenance (specially Cap Ex.)

- The new home can be rented a bit higher than the old house

CONS:

- Additional time I need to spend in the old house to repair. In this case, for me, fill be very hard (my job demands me 60+ hours/week and I will have only weekends to work on it), unless I have a partner to work on the deal, will be too hard for me.

- Old house will have constant maintenance issues and Cap Ex will need to be a special consideration.

- New home we cannot refinance and get our investment back. Maybe after a year if appreciation goes up like crazy (but I prefer not to count on that).

- New home will be more expensive vs. the higher rent. At 20% down, the ROI will be close to 8-10%, which for the old house will be higher (infinite if we got our investment back).

- In Portland, OR, where I am from, I realized many new homes come with HOA ($100+ in many cases)

Comments? Ideas? Anything I may have missed?

I would like to see other people ideas and approaches. As I mentioned early, it may have to do with each person's goals. For myself, my goal is to buy and hold for very long term.

Thanks a lot!

Daniel

Daniel Chang · Answer

Account Closed thanks for you input and reading my other post :)

You are right! Sometimes I just spin my wheels trying to over think on deals. I think is time to take action when it makes sense. Thanks!

Steve Moody · Answer

@Daniel Chang  There are lots of pros to a newer home, but in the Portland area I haven't seen any chance of positive cash flow unless you get a distressed home at well below market value, and even then the ROI is pretty low (some of my stocks in my IRA have made 4x what I'm projecting a Portland buy/hold to make in CoC). If you can find brand new homes in Portland that will cash flow with our low rents, buy as many as you can and then sell them to the people who are paying retail for buy & hold here (there seem to be a lot).  Ok, I'm being a bit over reactive, but only a little bit :-)

I'd still be really reluctant to buy into an HOA as they're often times mismanaged and run by homeowners who may not have your best interests in mind when making decisions. I feel that way about HOAs in general, except maybe in a condo situation where you're essentially paying them to maintain the exterior of the building and in some cases plumbing is covered by HOA. In this sense you're just paying some of your CapEx to the HOA. They'll replace the roofs, paint, etc when needed (IF they managed their funds properly).

If you go with newer I'd say that CapEx will be slightly less, but not significantly. You still need to paint the outside in X years, and get a roof in Y years, furnace, water heater. Do the math and save the CapEx. Maintenance will be lower as everything is new. If you go with old, and not renovated, the maintenance will be higher, and CapEx may be higher as well if you think the big items need replacing sooner than in a new place. Of course if you renovate and replace all the big things (water heater, HVAC, roof, paint, etc) then the CapEx is almost the same as the new place, but you want that maintenance buffer in there for little things that will go wrong with an older house.

Good luck with whatever you decide, and keep us posted

Don Wede · Answer

It depends of your preferences. If you want to save money buy an old home. If you want to save time in repairs and other kinds of hassles, buy a new home.

Account Closed · Answer

@Steve Moody's goals may or may not be the same as yours @Daniel Chang. Obviously you want to cash flow, so you'll run the numbers for whatever you choose, but your picture makes you look young and based on what you said, it sounds like you're making a decent W2 income. Your goal may be to hold onto property for a 27 years while tenants pay the mortgage and you get tax benefits, not necessarily to replace your income. I don't factor appreciation into my calculations but Portland is an appreciating market, and I personally think it's fair to invest here based on that.

Everyone has their own strategy and reasons behind it, but it's important to not get paralyzed by over analysis. Yeah, you probably won't cash flow if you buy a brand new neo-craftsman near Alberta Arts for $800k, but a modest 2009 skinny house in Clackamas? It's possible. You don't have to hunt down the best deal ever, you just need to start.

Good luck--but I have a sense you don't need it as you'll be fine. :)

Account Closed · Answer

In another thread you said you wanted a newer house because of your job taking a lot of your time. I think, for your first investment property, given your experience and time or lack thereof, just go with a newer home, or one that has been renovated well, so you won't have to replace plumbing or electrical or roofs or finishes or fixtures etc.

Yeah, you might not be able to get as high of a profit if you sell in a year, but why would you do that? If you want to hold, hold.

What your time is worth? Just because you can get an old house cheaper, even managing contractors is time consuming.

It seems like you may be over-thinking things with your pros and cons list. Simply get clear on what you have time for and what your long term goals are, and the decision will make itself.

Steve B. · Answer

Daniel read @Steve Moody advice he is offering you some good wisdom.  No matter what your goals are it is unlikely new construction is a good investment for cash flow in this market.  CapEx wont be much less if any on new construction, as renter expectations are going to be lower for a Class C than Class A new construction.  Now if you were developing to sell not rent that would be a different situation.  As he said also stay away from HOA's.  In your situation as you describe it I would look for high rents vs. purchase price, think fixers or the non-judicial foreclosures they sell on 5th and SE Hawthorn.  Or you would likely get even better returns in outlying markets like Marion and Yamhill county's.

Old house vs New Development?

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