Rent out a newly built home?

Question

BP community,

I've got kind of an odd ball question I wanted to get some opinions on. My wife and I recently moved from CA to IN (work related move). During the move process we decided to build a new house in IN. As you can image, the price of housing in IN vs CA is much lower and we thought yeah, why not build a new, big house? This of course was before I found BP and read books such as Rich Dad, Poor Dad, etc. I've come to regret the decision to build the big house as we are just two people living in a 5 bedroom 3,000 sq ft house. I've just more than ever started asking myself why?

I own one rental condo in CA and just purchased a rental SFR in Indiana so I do have a bit of land lording experience. My question to the BP community is: would it be wise to rent the above mentioned 5 bedroom newly built house? We do not want to sell it because we don't want to lose money on it. It is in one of the nicest communities in our city and would attract a more affluent tenant. My only worry is for such a large and new house, does it make sense to rent it? It would cash flow by about $300-500/month I believe. Any thoughts are much appreciated.

Thomas S. · Answer

I agree there are areas where SFHs do cash flow in the US the problem is most investors that are buying SFHs are new to the game and have zero understanding of the economics of the investment. A SFH generally has 50% expenses and most SFHs are over priced for the rental market due to the fact that a home owner will pay a higher price for a home that a investor.

Buying a $100,000 home and renting it for $800 - $1000 per month can work but many novice investors are paying closer to $200,000 and expecting positive cash flow with a rent of $1200. Yes it covers the mortgage and expenses today but in 10 - 15 years when the major repairs occur their 15 years of positive cash flow disappears.

A  SFH in a normal residential community will never cash flow because the price to rent is out of balance, a low priced SFH in a rental area probably will cash flow. Buy why bother.

SFHs in some areas may cash flow but nothing even close to the scale of a multi in the same area. Why pay for a roof for every tenant when a single roof can cover multiple tenants.

Account Closed · Answer

That is not true at all. Most will not agree with you though for some reason you think this is some sort of hard fast rule. Lots of single family homes will cash flow, all over the country. It's easy to do if you aren't totally clueless at being a landlord. My house where I live in Oregon would easily cash flow. Many properties I am buying in North Carolina easily cash flow. I could show you at least five rentals for sale, under $100k, that cash flow from day one with a tenant in place. Or evict them and bring in your own tenant and cash flow even more. And of course the OP here says his SFH would cash flow.

If SFH's didn't cash flow then nobody would be buying them for rentals. That isn't the case. It doesn't matter if you are on the east coast, the west coast, a rich neighborhood, a poor neighborhood, or anywhere in between, I can show you stuff that cash flows all over the country. It's not hard at all.

Joseph Leonard · Answer

Thomas S. - not too sure to be honest. I've looked online and there are some 5 bedroom houses for rent in my area but Indiana is a much different market than SoCal.

My whole reason for considering renting this out is just because I'm paying a mortgage on a house that is so large that I don't need it. I feel as if I am just paying for a lot of space that I'm not using. I'd love to get into a smaller 3 bedroom house under 2,000 sq ft to help cut down on mortgage costs, maintenance, utilities, etc. I'm wondering if it just makes sense to cut my loses and sell even if that means I'll lose money on it in the short term but gain long term by having a much lower new mortgage.

Account Closed · Answer

A good deposit, tenant screening, and regular inspections can eliminate that. You definitely do not want to rent out a brand new house and then never inspect it to make sure it stays new.

Account Closed · Answer

Even properties that do not cash flow are not necessarily bad. If you can rent the house and come close to breaking even, then maybe you can keep it longer until it appreciates enough that you can either charge more rent or sell it for more than you paid. There are a lot of people that buy houses knowing full well they do not cash flow, they are banking on the appreciation. It's not the most profitable thing to do, some cash out every month is nice, but, it's not losing money either. It's probably more profitable than investing in stocks or a savings account...

Joseph Leonard · Answer

Ryan R. - good points. Thanks for the perspective!

Joseph Leonard · Answer

@Justin Fox @Lee Smith Ryan R. - Appreciate all of your input. I was off on this quite a bit and I'm not sure why I called it $300-500 in cash flow. Here is how the numbers would work out:

$1850/month is my mortgage, insurance and taxes currently.

It could rent for $2400. Figuring 8% vacancy ($192), 6% repairs ($144) and 10% CapEx ($240) I would be losing about $25 per month.

This obviously isn't a good idea. Frustrating because as I mentioned I don't really want to sell it and lose money on selling it but again we have realized it is just too much house for 2 people.

Joseph Leonard · Answer

Thanks all. I'm going to analyze the market and see how much I indeed would lose if I was to sell it. If I am able to break even or even make a small profit then I'm definitely going to sell.

Jeanni Prescan · Answer

@Greg S  SFH's can most definately cash flow- you just have to buy them at the right price.  Same as multi's, right?

Joseph, how much money would you lose it you sold it?  The thing is, it will never be in as good of condition as it is right now without spending a lot of money down the road if you decide to sell it later.  Tenants can be very hard on a home; even after just a year of renting you may have to put lots of $$$ into repairs.  Even the most upscale tenants can hurt your property.

Keep it and enjoy it or sell it and cut your losses.  Based on what you said I can't see it working out as a rental and could be a lot of work and headache with no cash flow to show for it.

IMHO

Stephen E. · Answer

@Greg S. I am interested, if you don't rent SFH's what do you rent? I have done a few condo apartments but am mainly in townhomes. High demand and definite cash flow. The best rental property is in general cheap rental property since renters have low incomes and can't afford much. So townhomes fit the bill, you get a lot of room for the money, they are usually in a popular 3 bedroom size, and the exterior maintenance is looked after for you as is snow removal, landscaping and building insurance. I find it works quite nicely.

Rent out a newly built home?

Most Popular Reply