New Builds are Actually Good Deals Right Now...?

Question

This chart is pretty interesting. In Reno, NV I've seen new homes that are sitting have significant price reductions, free upgrades, and lower interest rates.

Based on this data and first hand experience, people that want turn key options should definitely be exploring this option in my opinion!

Eric Fernwood · Answer

Hello @Jake Andronico,

Whether new construction is a good option depends entirely on your target tenant segment. In investment real estate, everything depends on having reliable tenants occupy your property. Reliable tenants pay rent on schedule, stay for many years, and take care of the property. Reliable tenants are the exception, not the norm. However, there are tenant segments with a higher concentration of reliable people than others. Success depends on buying properties that attract this segment.

So, reverse the approach. Instead of focusing solely on the property and hoping it attracts reliable tenants. Start by identifying a tenant segment with a high concentration of trustworthy people. You identify this segment by interviewing property managers. Once you know what and where this segment rents today, buy similar properties. This approach dramatically reduces the dependence on luck and opinions.

This approach mirrors how national retail chains select stores and localized offerings. They don’t pick a store location and hope customers will come. Instead, they identify their target customers and open stores near them. They also adapt to local preferences. For instance, McDonald’s offers spam and poi in Hawaii and wine in France.

Does new construction make sense? It depends on the tenant segment you want to attract. We've focused on the same tenant segment in Las Vegas for over 17 years. New single-family homes in desirable areas start at $550,000, but our target tenants can only afford to rent properties priced between $350,000 and $475,000 today. While new construction might seem appealing with its lower maintenance costs and move-in-ready condition, these properties typically attract tenants who stay just one to two years. In contrast, our target tenant segment stays an average of over five years. So, new construction is not a viable option in Las Vegas.

Jake Andronico · Answer

@Austin Wolff

Yep, sounds about right! A big factor that people don't typically use when underwriting is "headache factor".

Austin Wolff · Answer

I bought a new build OOS. Pros: Got into an appreciating market for an affordable price. Cons: It's going to be awhile (a few years) until there's any meaningful cash flow.

Pure long-term, hands-off appreciation play (yes my upside is limited).

Todd Anderson · Answer

@Jake Andronico,

Great point. this is an area that I have been investing in a lot lately. I have found that in many markets an investor is able to find a doable and sometimes better deal with new construction.

I found that there's a number of advantages with this type of investing. Not only are you investing into a new property that will have far less maintenance and need for immediate improvement.  But the investors that I work with find that the deals on new construction can solve for many of the problems in today's market.

Many of the builders that I work with are offering great incentives that solve the biggest problems that investors have today.  This would be firstly interest rates.  any of the builders that I've worked with are able to offer more of a rate by down, because the property is new construction, than you can find anywhere on the MLS.  The other benefit that investors find is because of the lower cost of maintenance, and sometimes management, the properties that we find normally cash flow day one.

This is a great and growing investment class and I believe one that not everybody knows about.   thanks for bringing some for it and I hope it keeps working well in your market.

Best of luck.

Sam Kahl · Answer

That's incredible! I love the idea of a turnkey new build where the numbers work. (Ironically I just came from another thread where I'm arguing against out of State investing, but here I am wanting to learn more about this!)

Sam Kahl · Answer

I know the new build market varies a lot market to market (in my area here in central Maryland it doesn't quite work usually), but the "newer" builds can be a good option. I think there's a lot to be said for the newer options and the Capex/maintenence you're likely to save, especially for investors who are aiming more for simplicity and appreciation over the highest cash flow.

Anecdotally, one contributing factor to new builds not working for investments where I'm at is most of the building is happening in higher value areas or they're just luxury homes on 2 acre lots for $800k+. Some of the "newer" communities built in the last 10-20 years seem to be located in areas with a bit lower values and can be a sweet spot.

What's your new build market there in Reno? Is it a mix of townhomes/SF? Around here 4,000-5,000 square foot homes on the world's smallest lot got pretty popular. In the suburban/rural County where I live, we also see smaller developments of those luxury homes on 1-2 acre lots for about a million, like I mentioned earlier. Even the newbuild townhomes we have seemed to be priced at a premium for their market, although builder incentives may help somewhat.

Jake Andronico · Answer

@Sam Kahl

Interesting! That makes sense.

There are some DR Horton builds out in Reno that actually pencil really well with enough down.

We analyze the entire market based on rental data and assign NOI's to all single family and multifamily simultaneously, then rank them.

These new builds are in the top 10% in terms of cash flow out of 1,400+ properties.

New Builds are Actually Good Deals Right Now...?

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