How brand new homes can be a great investment, long-term

Question

After the 2009 real estate meltdown, may home builders and developers were unable to maintain their holdings and had to foreclose. The result was thousands of discounted homesites, now owned by the banks, flooded the market. I was able to swoop in and buy pieces of land (build-able lots) at discounted prices.

An average 60'x125' lot that was originally selling for $60,000 was now able to be purchased for as low as $10,000. The best part about buying lots is that you only have to pay the taxes and cut the grass until you are ready to build.

Eight years later I was able to build this 1770 sq. ft. home that I've dubbed The Everest. This 4 bedroom 2.5 bath seems to be a winner with my tenants.

I built this home in a mostly homeowner community and it blends in with the existing homes. The property rents for $1500 per month and cashflows very well. An added bonus is that this home is in a county only area, so I pay about 1/2 in taxes when compared to an area that is City & County taxes.

The other advantage to brand new homes as a rental is that the tenants love the idea of living in a brand new home! I can choose from several potential tenants vs. hoping to find a qualified renter.

Most of the lots that I acquired were in suburb areas, just outside of Memphis. These areas offered better schools and lower crime rates.

Although the included features are basic the homes are more energy efficient than older homes, simple due to the changes in building code updates, over the years.

The homes are mostly brick, the siding is made of HardiePlank, and the windows are double pane vinyl. This makes the exteriors nearly maintenance free.

I have a local property management company, so this is easily the most passive investment I have found. Everything in the home from roof to appliances are less than one year old, so I do not expect to have many high dollar repairs in my future!

The financing that is available is probably the most attractive part of the whole deal. The banks will loan the money to build, and once the home is complete I have one year to convert my construction loan into a permanent  loan. The ARV was significant enough that I was out of pocket very little cash to own this home, even after paying closing cost, with a 30 year fix rate mortgage. This made my Cash-on-cash skyrocket and I only wish I could have afforded to by more discounted lots, when they were available.

James Wachob

Jay Hinrichs · Answer

@Audrey Ezeh  Average length of ANY home ownership or property ownership is 7 to 10 years. .across the spectrum  we all buy and sell.. buy and hold for 30 years is pretty rare.. but it does happen of course.

Audrey Ezeh · Answer

@Jay Hinrichs I can totally imagine that. I am still starting out everything is rosy and peachy right now lol!!!

Sunny Shakhawala · Answer

@James Wachob are you selling pre-construction? Do your investors qualify for same financing strategy?

David Grabiner · Answer

How much did it cost you to build?

Jay Hinrichs · Answer

@Audrey Ezeh  40 years dealing with the public in this manner will do that to you... and my kids don't want to do it.. so there ya go.. time to retire.

Audrey Ezeh · Answer

What kind of counter tops are those? I just put Formica on my rental rehabs that looks like granite from a distance...looks really nice. I did the same ceramic floors too. My contractor was able to get them for about 65cents/sqft!

Audrey Ezeh · Answer

Thanks @James Wachob for the detail. It is an area I am actually exploring now but in the MF space. My city is very interesting....high demand for rentals so landlords generally don't take care of their properties because they will always find a tenant. Yet they still want top dollar when they go to sell despite all the deferred maintenance. I am exploring building and I have found a way to build cheaper than replacement costs so hopefully in the next few months I will be breaking ground on something :)

@Jay Hinrichs "Only have two left... .then fully retired from landlording  praise the lord  :)" Now that's funny!!!! Thanks for the caveat:)

Jay Hinrichs · Answer

James I agree with the new home rental concept.. I bought 12 of them in MS for go zone benefits  50% write off year one on section 179.... so made about 400k just buying them.

now 10 to 12 years later I am selling them to homeowners... they basically broke even ( my price points were a little higher than yours but rents stayed flat all those years at 1500 )

the little gotcha though is I am having to put on average 10k in cash into each one to get it saleable to a homeowner..  And investors won't pay as much as retail buyers.

so at the end of the day once you feed back your 10 year rehab to resell.. you have to adjust your profit numbers.. but I think I still made 250k or so...

Only have two left... .then fully retired from landlording  praise the lord  :)

James Wachob · Answer

@Sunny Shakhawala I do have new construction that I build and sell to investors and yes, this is available to my investors. However, the magic to this strategy is finding build-able lots. The lots that were once abundant, are not hard to find.

James Wachob · Answer

@David Grabiner I'd be happy to discuss details, off line.

How brand new homes can be a great investment, long-term

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