OOS Investor - Raleigh NC New Construction

[Steven Nguyen]

Hello BP members,

I am an OOS investor based in CA.  I see new construction in Raleigh NC for a 3 or 4 Bed / 2 to 3 bath costs around 220k to 270k.

I had a few questions: 

1. Do new home builders sell to OOS investors ? I know some only sell to people who will use as their primary residence.

2. What is the expected rent to value ratio ? I'd be happy with a 0.75 RV ratio given new construction has lower CAPEX/maintenance.

Thanks for any insight.

[Jiri B.]

I'm not sure where you got the numbers from, but most new construction starts from 270k+ for base model with no upgrades, etc. But will likely be over 300k unless you go very far out from Raleigh.

And for that reason, 0.75 is not realistic. If you get 0.5 - 0.6 on new construction, you will be very lucky. Most renters don't care about new build, shiny kitchen, etc. Most long term renters will prefer value. You could get 0.75 on resale homes though.

As for the new construction sellers, they don't really care who the buyer is as long as they get to sell their inventory. But you will need to check the HOA covenants, many of them that I see have something like 80% of properties needs to be owner occupied. But that is usually not an issue in that case.

Nothing wrong to buy new build but it wont be as profitable as if you do small rehab in comparison. Everyone has their own reason..

[Steven Nguyen]

Originally posted by @Jiri B.:

Thanks for the useful insight! The builders were Smith Douglas Homes and it was more on the outskirts of Raleigh and the prices listed were probably base pricing.

 I would be interested in seeing any resale homes with 0.75 RV that require more cosmetic rehab 

[Chris Martin]

Originally posted by @Steven Nguyen:

Hello BP members,

I am an OOS investor based in CA.  I see new construction in Raleigh NC for a 3 or 4 Bed / 2 to 3 bath costs around 220k to 270k.

I had a few questions: 

1. Do new home builders sell to OOS investors ? I know some only sell to people who will use as their primary residence.

2. What is the expected rent to value ratio ? I'd be happy with a 0.75 RV ratio given new construction has lower CAPEX/maintenance.

Thanks for any insight.

See Jiri's answers. Spot on. There appear to be pockets in Johnston county, off US 70 and US 40/42 where you might get better ratios with new builds...  possible along 210 and maybe even 42 in south eastern Wake county. I'm sure there are pockets elsewhere... but not like 2% of 5-8 years ago or 3-4% like after the great recession. 

One thing is pretty sure. Your taxable income will be negative after depreciation if you leverage. I met a guy a year ago, just before the pandemic, who didn't realize that he had built himself not only a negative cash flow, but also a large IRS limited tax loss after depreciation expense. Just something to think about up front, before you are strapped with a new problem. 

Disclaimer: I don't know your financial state, so this is a generic answer. Check with your tax guy/gal for tax planning. 

P.S. I see guys buying lots that perc along various routes in S. Wake, N. Johnston county where they buy land then plop on a mobile home in decent shape and rent them out. Might be tougher for OOS types, but these deals cash flow better. There is limited appreciation upside, though, which may be a show stopper. 

[Adam Schneider]

@Steven Nguyen. The devil is in the details, as they say. You mentioned beds and baths, but not square footage. Without knowing the location, the square footage, and a couple other variables, it's really tough for anyone to provide you with any type of insight. 

[Will Kaufmann]

Originally posted by @Jiri B.:

I'm not sure where you got the numbers from, but most new construction starts from 270k+ for base model with no upgrades, etc. But will likely be over 300k unless you go very far out from Raleigh.

And for that reason, 0.75 is not realistic. If you get 0.5 - 0.6 on new construction, you will be very lucky. Most renters don't care about new build, shiny kitchen, etc. Most long term renters will prefer value. You could get 0.75 on resale homes though.

As for the new construction sellers, they don't really care who the buyer is as long as they get to sell their inventory. But you will need to check the HOA covenants, many of them that I see have something like 80% of properties needs to be owner occupied. But that is usually not an issue in that case.

Nothing wrong to buy new build but it wont be as profitable as if you do small rehab in comparison. Everyone has their own reason..

To expand on the new construction purchase as well, I have spoken with some builders and they are very stringent about selling for or above list price as they have the current leverage in the seller's market to keep prices up. As for the HOA covenants, I have not seen anything restrictive in the handful of deals we reviewed last year; however, none were new construction. I get the general vibe that those types of restrictive covenants are pretty uncommon in our area.

A point I keep mentioning because I think everyone should keep this in mind, our prices have jumped considerably in the Triangle and surrounding areas yet rents have not really moved. From various macro perspectives rents need to catch up to prices and thus the ratios are prime for expansion rather than contraction in the next few years, as long as prices stabilize. I, and I believe @Chris Martin, have addressed the data in some other posts as well.