Is this SFH deal in oil boom North Dakota a reasonable deal?

Question

This is advertised to me.

http://www.hotmarketinvestment.com/#!brand-new-home/c19f6

$250k for 3bdrm new SFH with $3000 monthly rental in place already.

It does not fit 2% rule I know. But sounds like pretty good cash flow opportunity.

With 50% rule, ie expense to be $1500 instead of quoted $573, the final cash on cash return (assume same $986 mortgage payment as stated) will be about 8%.

This is a new property with pretty high rent so I think probably the expense would be lower than 50% so the actual return would be higher. What do you think of this deal?

I understand this is not a killing deal. But is this a reasonable turn key deal for a passive investor?

Account Closed · Answer

I wonder question anyone who guarantees returns. I am suspicious of both deals. Too vague. I would need more details. They seem to be man camps. The area is less receptive to man camps. There is money to be made up here.

Account Closed · Answer

we invest entirely in the Bakken. This website seems very suspicious. No where does it mention what town it is. You can find a used home cheaper in Dickinson, Minot or Williston. Contact a local real estate agent.

Bay H. · Answer

Thanks so much for all the feedback. Extremely valuable!

Michael, what do you mean by "secondary investments that grow during these cycles"? I'll look into those. Thanks a lot!

Michael Power · Answer

This is a "man-camp" deal.  They are popping up in the area quite readily.  @Aaron A. can attest to that.  They are semi-permanent housing and have a fairly short shelf life.  The communities are typically self-contained, (water, sewer, etc,).  I've worked in these camps years ago.  They get beaten up very fast since the workers are not the gentlest of folk, (not that there is anything wrong with that).

Once more permanent housing surfaces, (apartments, MHP's), the camps will vacate somewhat with the more appealing alternate accommodations.  At $4,000+ per month, this is not sustainable even by oil patch pricing.  At the end of five years you will get your money back and nothing more.  The company that installed and operated the camp will thank you.  At $55k for a 'studio', they are the more expensive ones I've seen.

By the way, you get to keep your share of the quad unit you would own.  For a 500 person man-camp, what will all of you do with your units in ten years?  The developer won't take them back and dismantle the farm.  There is also no secondary market available for an exit strategy.

What you cannot dispute is the population growth experienced and expected over the next 10-years.  There is a local housing crisis and there certainly is money to be made.  If you are experienced with oil towns and the boom/bust cycle, then seek out the secondary investments that grow during these cycles.

Man-camps are not real estate investing...it's more like oil venture capital without the tax breaks.  It would almost be better to invest in Haliburton, Exxon and Mobile.

Mike P.

Elizabeth Colegrove · Answer

@Bay Home  I have one fundamental issue with the concept. The company is betting that nothing will change this supply and demand concept. Real Estate is fundamentally a non- guaranteed proposition. One "shouldn't" bet that this is a sure thing based on appreciation (look at the current housing crash). My issue is that this development company is staking there and your money on the fact that no one will exploit this niche. From what I can see, there is nothing else out there. The only industry is oil.

Yes some have gotten rich by playing russian roullete.  Many more have lost everything.

BTW I invest in military towns. So I do understand where you are coming from. I also evaluate what the risks are if/high likely they will be too pull out. we buy depressed housing at reduced rates with a history. We can evaluate the town, the people and the future. You are investing in undeveloped neighborhoods. There doesn't seem to be any "discount" for all the unknowns that you are facing.

Before you do this deal I would ask these questions at a mimium

*Why is this area undeveloped to now?

*Why do the houses cost so much, ie why are they not in the mid 150's? If the land is in the middle of nowhere it should be cheap. In Texas/California/Virginia you can build a 3 bed 2 bath 2 car garage house for 100k.

*What level/how many employees of the oil company are receiving these subsidies? For example if only managers get $3,000 rent subsidies and there are only 10 managers. A development of 100 cannot be build by these managers alone.

*What's the tax rate going to be? If there is no infracture available, and one is anticipating a huge boom (schools, roads, sewers, water....) who's going to pay for it.

One HUGE main industry towns/areas are my specialty for investing and this investment would REALLY make me nervous. I am not trying to be the debi downer.  These are just some knee jerk thoughts.

Bay H. · Answer

Thanks for the feedback. Great to see a local investor, Aaron!

The same company advertise a mini-studio type of investment with developer guaranteed 25% annual return for 5 years or about 40% estimated floating return for $54,950/studio.

http://www.hotmarketinvestment.com/#!mini-studio-investment/c1kki

The developer is called "North Dakota Developments"

http://northdakotadevelopments.com/project/great-american-lodge/

The location for the mini-studio project is close to Watford city.

The capital for this investment is not very large comparing to SFH, $54950 vs $244950. Of course, the construction looks like some mobile home type of temporary housing. The nightly rent is $139, shared with the developer. I figure with 25% guaranteed return for the first 5 years,  basically I can recover the cost. After 5 years, even worst case if the rent drops to $40, there is still some positive cash flow anyway.

What do you think?

Elizabeth Colegrove · Answer

Personally I think this is a too good to be true house. The leases are only for 1 -3 years. What is going to happen if the oil goes away? Honestly that is a *huge* rent price for the house. Most $245,000 houses go for $1700-$2200 (tops). Honestly my $285,000 houses goes for $1700 and that is due to high military bah rental rates.

Since these are "new" houses there are no long term rental history. Plus these are in the "boom dogs"  so probably no other industry to keep them filled if the oil goes away.

Ben Skove · Answer

I would delve deeper into the "neighborhood". From my admittedly limited knowledge of the fracking boom, you can ask $3K in rent for a 3BR because of the current supply/demand situation. How long is oil/gas in this particular area of ND supposed to flow? As the fields mature, will the population drop?

You might have nothing to worry about, but on the other hand you'd hate to find out in five years that you were only able to ask 1K in rent.