New Cosntruction Homes: Good Investment?

Question

Bigger Pockets team,

I am moving to TX in the not-so-distant future and am looking to buy a duplex (owner occupy initially and then rent out both units in the future). There are two new constructions on the market (should be complete just before I move) that I am considering. I wanted to ask for advice/thoughts/comments on buying new constructions. They are obviously more expensive than other houses in the local market but you are getting a less worn product. Does buying a new construction immediately put you in the hole as it will decrease in value once lived in? Or does the value stay pretty level and appreciate like any other property? My fear is there is an initial drop, similar to driving a car off the lot, before appreciation kicks in. Happy to provide more information if necessary to get feedback.

Thanks!

Pete Harper · Answer

@Bennett Smoot Welcome to Texas!  We own a 4-plex in Killeen near the border with Harker Heights. I think I know the subdivision you are looking at. Our place is a couple blocks north of there. It is a good area. Try to avoid downtown Killeen. Look at crime stats on Trulia to see the rougher neighborhoods.

The Killeen market is super hot right now. Good properties don’t stay on the market for long. Be prepared for multiple competing offers. Most go for more than asking price. There is still plenty of inventory so be patient.

You might consider doing a house hack. Buy a newer duplex or 4-plex and do some light reno. New floors, paint, and appliances. This way you can drive some equity into the property to give you a buffer. For new construction you are going to buy at the top of the market.

Cassi Justiz · Answer

Hi @Bennett Smoot, I can tell you a little bit about what I see in my market. I can't speak for every market but I think it's probably going to be a pretty similar situation overall. One issue with a new construction duplex is that most duplexes are primarily going to appeal to investors. While multifamily properties are hot right now, a lot of investors are still going to want a "deal" if you try to sell it. A duplex is also typically going to price out a lot of the first time buyers because of the higher price point and up-front investment cost compared to the equivalent 3/2/2 SFH.  (Most non-investors don't exactly aspire to buy their dream duplex either.)

I have several investors that like to buy new construction homes for investment properties. They plan to buy and hold for at least 15+ years, so immediate resale value doesn't really matter at that point. They prefer the newer construction homes because typically you get a builders warranty for at least 1-2 years and most of the systems will also have their own company warranties. You typically don't have to worry about cap-ex on a new construction for at least a little while.

The dangerous place to be with new construction for resale purposes is the 1-3 year mark. It's not necessarily that the property depreciates, but it is now a "used" house competing with the brand new construction. As a buyer, it's hard to justify a "used" house when you can build a brand new one in the same neighborhood with options to customize for the same price. During those first few years, it usually hasn't appreciated enough to make up the 9ish% that it will to cost to sell on the MLS.

So for long term wealth building, new construction is just fine. It's more expensive up front, but as long as you are comfortable with the cashflow numbers it can definitely work for you. But for live in flip purposes or other short term plans, it doesn't usually make sense.

Poem Turner · Answer

Hi @Bennett Smoot. An early welcome to the area :-) Assuming you don't overpay, buying new construction doesn't have to be anything like a new vehicle depreciation. Consider that your maintenance will be significantly lower for a few years while all the systems are new (and under warranty!) and ideally your CapEx will be zero for a while as well, allowing that pool to build up.

The biggest concern you have is about appreciation. Continued new construction in the area will suppress the value of your purchase, but not depreciate it. If you try to sell while new construction is available, you'd probably be looking at a sales price below what the new ones are going for. After that initial hump, you and all the other new houses will appreciate at the same rosy rate, whatever that is.

There are a few areas that have great cash flow opportunities for new duplex construction; Georgetown, Leander, San Antonio. I'm curious where you found yours? DM me if you don't mind.

Bennett Smoot · Answer

To add some information to the post, I will be moving to the Killeen area. Looking specifically at Harker Heights and not trying to wander much further south towards Austin.

Aaron Bihl · Answer

Welcome to Texas @Bennett Smoot! If you are moving to San Antonio (or somewhere nearby feel free to hit me up).

I think @Cassi Justiz hit the nail on the head with her post.  I recently had a similar situation with a friend and a new build.  In single family homes I think it’s a bit worse (once you factor in new houses being built, the buyers and their purpose for the house, and all the incentives that are placed on buying a new build).

Some of those items are a little less severe with multi families I would believe but I think you will still see similar impact.  And just as a side note the new build multifamilies I’m seeing in San Antonio don’t cash flow well or make that much sense from a numbers perspective.  They seem to attract out of state investors that are looking to park money in an asset and put enough down that it cash flows.

Bruce Lynn · Answer

Welcome to Texas.  What part and maybe even what city do you plan to move to?   That can help the experts here better advise you.  Remember Texas is a giant place.   Remember driving from GA to the border of Texas might only get you 1/2 way if you're moving to El Paso or Amarillo.   Even after you drive through AL, MS, LA, you might only be 1/2 way home.   Austin market is very different from Lubbock market and so on.   Generally I say buying a new home is not the best for investors.   Normally better deals to be had on resales.   I like what one of my early investor clients taught me.  #1 if you sell me an occupied property I know 100% what the rent is.  Otherwise it is just your best guess.  Maybe that is a good guess, maybe it is an educated guess, but in the end it is a guess if you sell me a vacant property.  #2.  If you sell me an occupied property I don't have to pay you a one month leasing fee, so I'm already ahead first year by 8% or so.  #3  No vacancy...otherwise probably 30 day vacancy...maybe longer....so if you sell me an occupied property again I'm ahead another 8% or so vs selling me a vacant property.   That sold me on selling him an occupied property.   Just something to think about.

Michael Jones · Answer

Do NOT buy something from a national home builder. I've observed how these homes are built and even been involved in the construction of a few similar homes. They cut corners in the sake of time and profit. I would recommend a gently used home if at all possible because your future maintenance could be substantial depending on what they cut corners on, sub par materials used, etc.

Greg Scott · Answer

Houses don't drop in value in the first year, like cars do.

However, plexes tend not to appreciate as much as SF houses.   So, I would only buy if the cash flow is really good (assuming both sides rented)

Khanesia Washington · Answer

The value will ultimately depend on economy and local conditions. Highly depend also if area has ability to retain value with no significant value drops. New home construction for Rental housing investors are trending. Especially in Florida. Renters love new homes so it wouldnt be hard to attract or retain a renter. Your ultimate decision depends on the type of renter you are trying to attract. If you will be living in one unit its a no brainer as you will receive the benefits of rent going towards your mortgage bill. Message me for specifics on the area you are intending to purchase in. I am happy to help

New Cosntruction Homes: Good Investment?

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