Do new construction SFH make good investments?

Question

This is a topic that came up around my office.  Do new homes make good investments?

In Reno, NV we have investors buying new construction with 5.75% interest rates after the builder credit buy downs.  We are seeing $700-$800 per month in cash flow because of the lower interest rates and discounts at the end of the year.

What are some of the pros and cons of buying new construction for investment properties?

Cara Hobbs · Answer

Bradley, just curious what price point are you seeing investors purchasing new construction?

What’s the average rent for these homes in your market?

Bradley Buxton · Answer

@Stuart Udis

Great points! Always check market rents near by neighborhoods, and sold housing comps.  Also check the area master plan to see what is planned in the next few years. Is there a school or a cement plant going in across the road.

Stuart Udis · Answer

New construction SF homes as rental assets can be a good investment but focus on homes that meet specific demand in the rental market. By way of example, I am seeing more and more people who might fit the financial profile of a home owner renting for longer due to delayed life events such as marriage or having children, or due to the financial burden of student loan debt but don't view themselves as renters and as a result prefer to be in a home as opposed to an apartment.  Similarly, I am seeing a lot of empty nesters/down sizers opting to rent as opposed to buying a downsize home but the transition from a home to an apartment is difficult and a new home is more marketable to this particular tenant as well. These are just a few examples.

With any new construction single home purchase, it's important to vet the builder as builder warranties are generally only reliable if the builder will stand behind it.  Also, keep in mind most builders who are offering rate buy downs are merely grossing up the sale price of their homes in order to offer the reduced interest rate. Most home buyers are wearing blinders and are more focused on their monthly payment as opposed to the value they are getting and as a result many of the larger builders have experienced record profits over the past two years by relying on rate buy downs to differentiate themselves from the market.

Glen Wiley · Answer

Not a pro or con, just reality...New construction does not always mean no maintenance. Most new construction have a break in period of working out issues lingering from construction. Many of these are the kind of things that get fixed once or rarely recur during the life of the structure. Be prepared to work these items, don't expect that all new means no problems.

If you can cash flow, new construction makes a good investment.