How valuable is a new build home to a buy&hold investor?

Question

I am about to invest into a brand new build property in Mississippi. The cash flow has been reduced a bit by the recent interest rate hikes, but it is still about 7% return . I'ts a turnkey deal in a B+ neighborhood. I was offered other, older, renovated properties with slightly more cashflow. Now I wonder how much it should be worth to me that it is brand new and should have everything pretty much under warranty and not require any major repairs in the first 4-5 years. Following Brandon's advice I like to see $200/month cashflow on SFR. This is slight less. What do you think, is the fact that it's new enough of an offset?

Thomas S. · Answer

A new build should translate into higher cash flow for the first few years. Over the life of a property it all balances out and, in the case of a SFH, your expenses will be in the 50% range. If you held for 5 years and sold new would be a benefit. Since your plan is to hold very long term there is no advantage to buying new and likely a disadvantage in paying a higher initial price.

Higher end B+/A SFH properties rarely have positive cash flow and depend on appreciation to generate true profit. Your daughter will likely see a profit when she cashes out her inheritance.

Higher end B+/A SFH properties rarely have positive cash flow and depend on appreciation to generate true profit. Your daughter will likely see a profit when she cashes out her inheritance.

Account Closed · Answer

It's as valuable as any other. What I mean by that, is each property is unique and each will have their own set of numbers. Is new the way to go? I don't know, you tell me, what does your market say?

If a person can get a new home for close to the price of a used one, the new home is clearly the better deal, due to the depreciation of components. If you are paying a premium for the age, then go back to my first statement.

Axel Meierhoefer · Answer

@Thomas S. Thanks. Got it

@Will G. Yeah, that would be a cool idea but then I would have to be a flipper. I would even consider that in partnership with an experienced flipper, me more being the investor and helper, but in San Diego county I can't see that happening

@James Wise That's what I thought and i all the deals with older properties a few, sometime all of those items have not been replaced, mostly with the argument that they have 5 or 8 or 10 years left.

Vivek Khoche · Answer

@Dr. Axel Meierhoefer- 2010 construction @178K  sold for $129K  No city taxes. Run the numbers.

Good Luck

Vivek

James Wise · Answer

When investors are looking at a new house vs an old house it's fairly easy to break down what you are getting. Me I operate in the Cleveland market so I will use numbers and examples from that market. I imagine that depending on the market you are in there will be some differences to what I write below based upon that market's economy and weather.

All houses are going to have the same 3 big ticket items that have a finite lifespan.

• Roof
• Hot Water Tank
• Furnace

Each of the following big ticket items is going to have a similar lifespan no matter what house it's on.

• Roof is going to last you about 30 years.
• Hot Water Tank is going to last you about 15 years.
• Furnace is going to last you about 40 years.

Each of the following big ticket items are going to cost a similar price when you need to pay a contractor to replace them.

• Roof is going to cost around $5,000 depending on the size.
• Hot Water Tank replacement is going to cost around $1,000. (40 gallon tank)
• Furnace replacement is going to cost around $3,000.

So with that information in mind it's pretty easy for an investors to break down what they are getting when looking at potential investment properties for purchase. It's not often that a roof will magically break. You always have a general idea as to when you'll need to fork over the coin for these big ticket items.

Will G. · Answer

thomas s nailed it! now if you could build and specify components to make it work better for the long haul, like metal roof, granite counters, real wood cabinets, stained concrete floors, no maintenance exteriors etc, i wonder if you would eventually save money?

Axel Meierhoefer · Answer

@Leon Li I hear you. Good points

I can only say that in some cases inspectors I trusted did not find stuff I felt they should have, so I could be screwed either way :(

Axel Meierhoefer · Answer

@Dan Heuschele Hi Dan, yes, the overall is 12.3%. Not 15% but not bad and that's all apples to apples. Even though I do not expect the repairs I calculated the % withholding the same to make it really comparable. I am probably considered conservative to want to have a certain amount in the bank rather than just betting that the new house would not have repairs. If it doesn't I can turn of the flow and collect as cash flow or increase principle payment on the loan.

How valuable is a new build home to a buy&hold investor?

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