New Construction purchase?

Question

Hey everyone! I'd love to hear thoughts on our current situation. Here are some details of what we are looking to do. My wife and I own a 2900 sq/ft 4BR, 3BA home in south Charlotte, NC area. We paid 240k for it two years ago with 20% down and our current mortgage is $1200/month (PITI). Current value is around 265/270k. We are considering turning it into a rental and buying a similar property as a permanent residence to start our investing career. Based on what our realtor says, our house should rent for 2000 - 2300/month giving us anywhere from 800 to 1100 in cashflow. The average time on the market for rentals is 43 days. We have two small children so I don't think we're quite ready for a live in flip or house hacking, as most of the multi-family properties are not in great areas where we live. We're looking at new construction in a small neighborhood that's going up near us. There will be 17 homes total in this small neighborhood, so we think it will go up quickly. We're planning on putting 5% down on a ~240k property, therefore giving us roughly a 1400/month payment. We are not looking at it as a strong investment opportunity, but more so a new "base of operations" that we think we can rent or sell in the next 2-3 years and continue our REI journey. While living there, we'd obviously be looking for new REI opportunities around our area (wholesaling, flipping, buy and hold) as we learn and grow.

My question to the BP community is really three-fold:

1. What do people think of this strategy for beginner investors?

2. Is new construction a bad idea?

3. I'm concerned we're being too cautious by not jumping in the deep end and buying a live-in flip. But I don't want to "burn-out" on our first go around. I have a full time job and my wife is busy staying home with two small children (2 and 4 months).

I would love some insight from the BP community. Thanks in advance!

Michael Yim · Answer

Have you accounted for operating expenses of a rental such as vacancy, repairs, capex, and property management?

Colleen Goldstein · Answer

Hi Devin,As far as new construction, as long as the numbers work I have no opinion on new vs old- however would keep in mind if converting to a rental if the property is in an HOA the dues will be coming right out of your profit. Even though you're planning on selling the property in a few years, I would run scenarios in converting it into a rental. Since the market is pretty hot in Charlotte right now, I think it's best to be prepared for either scenario with a new purchase in case things change (which their are mixed opinions, but it can't keep up at this pace forever, and you can't time the market).There are three types of real estate investing models, and it depends which strategy you're aiming for. With the higher end home (+$200k), you're aiming for appreciation and proceeds on the sale of the property. These properties typically will not cashflow as much as lower-end homes ($50k-$150k), however will appreciate at a much greater rate. If your goal is to hold the homes for the long haul and cash out eventually then the numbers may work. However, if your goal is to cashflow and maximize supplementing your income, I'd pursue a lower priced investment home. Personally, I aim for the $125k-$165k range as I feel it has ability to appreciate and cashflow (try: Mint Hill, Matthews, Stallings, Belmont). My hesitation with the higher priced & larger homes in Charlotte is you're concentrating your risk into one property. Much to the tune of why investors love duplexes, having your risk spread between properties is beneficial to ensuring profitability when things go off plan. In addition, the 2,900 sqft home Capital expenditures is not included in your cashflow above, which I would figure once all said and done this property may not be as profitable as you're calculating. Once you factor in at least one month vacancy, maintenance repairs, all capital expenditures (accrual on monthly basis), I would bet you may change your perspective on converting to a rental. In addition, the $1,200/mo mortgage is quite a large risk if you're placing your trust in one tenant to pay. If you for some reason have a bad tenant, vacancy, etc. this mortgage is coming out of your profitability and it's a lot to be on the hook for in my opinion. On the same note of markets, you also have to be flexible to cut your rent if circumstances change. In bad markets, you'll find renters trading down to the less expensive homes and $2,000-$2,300/rent is a hefty sum in a bad market and you won't be the only one in this scenario. I'm not very familiar with areas closer to uptown, but the reason I've stayed away is due to all of the construction and massive amounts of apartments being built.My recommendation would be to spend some quality time with the numbers and plug in some other rental models. I would also not necessarily trust the realtors opinion out right, do some digging to find out what comparable homes are renting for (zillow, craigslist) and how yours stacks up. Calculate all of the benchmark metrics (1% rule, 50% rule, Cashflow (this includes capex & operating expenses) Bigger Pockets has an investment calculator on here, though I made my own excel spreadsheet to manipulate some of the inputs as well. I'm happy to share the template if you're wanting. If you're interested in checking out my neck of the woods, I could also give you an example or two of homes I've found lately that I would consider or at least plug in to compare against your primary home.

Colleen Goldstein · Answer

@Devin Borders No problem, hopefully this it was helpful! If I were you, I would factor in all the capital expenditures even though they may not be immediate. Even though it was recently renovated, you would still want to factor in all capital costs (even those 10 years out) to ensure the property makes sense as a rental. It neutralizes when the repairs were done on any property when running the numbers, and ensures if one of those larger expenses arises sooner than anticipated you're still profitable since you've accounted for it. Plus, unanticipated things always arise as well (sink leaks, clogged pipes, appliances, extra wear on flooring, doors, siding issues, roof/window leaks, etc.) buffering that number gives you a good safe view of the investment from a long term perspective.

Devin Borders · Answer

Hey @Michael Yim, we have accounted for them based on discussions with our realtor, who we've worked with for a while and trust. Our house is in really good shape, and the only thing it will need in the next 5 years is a new HVAC unit which we've already got quoted at around $5k. We think overall, $800-1000 is a good cash flow on a $1200 mortgage and gives us room for covering expenses. Thanks!@Nick Danaluk thanks for the insight. I don't think we can buy the lots in this neighborhood because the builder is selling the lots and houses as a packaged deal. We are meeting with them today to find more info. Thanks!@Thomas Weidner my wife and I tend to agree with you in that it would be miserable, even though I'm pretty good with repairs. With my full time job and the kids, that would be tough. Maybe one day though! Thanks!@Colleen McCann wow, thanks for all the insight. Our current house was actually flipped by a larger company 2 years ago, so it's very "nice" with mostly new everything. We took it off their hands at a steal based on similar houses in the area. The only thing that is going to need replaced in the next 5 - 10 years is the HVAC which I said earlier is roughly 5k expense after talking to the guy that services it for us. I will definitely spend some time on the investment calc, and consider the capex, repairs and maintenance and vacancy. I think that because of the neighborhood, proximity to schools, and size of the home we're hoping that we have a good family tennant rent it out. We have the ability to stay with my wife's parents while we wait for a good renter, so we don't have to pay two mortgages. We are considering a lot, but with our current family situation, we feel it would be easiest convert this to a rental and then as we learn more and meet experienced people, get more into the flipping, wholesaling and distressed property purchases. Thanks again for all your insight!

Thomas Weidner · Answer

Everyone is different in the way they invest by their goals and interests. In the end it is what is good for Devin and his family. If your kids are little I think a live in flip would be miserable for everyone. I don’t think there is nothing wrong with buying a new construction home. Who doesn’t want a new home in a new neighborhood? There isn’t going to be any maintenance for several years. On top of that it can be paid for mostly by someone else with the rental. I think the cash flow is a little high because maintenance and management haven’t been taken out. But still should cash flow nicely. The key is to find a good tenant that takes care of the place. With that size house I would say they are going to have children. All in all I don’t see nothing wrong with your strategy. Best of luck!

Nick Danaluk · Answer

I have lived in 6 new homes, not counting the specs I resold. It's the way to go if it is available. If you had more cash you might do better buying up the vacant lots in the neighborhood and sit on them for 2 years instead of building. Probably as much profit, but with no tenants.