Purchasing a brand new house to rent vs existing?

Question

There are a few home builders in the denver / castle rock / colorado springs area that are starting new communities. Some of their base houses (with no options or upgrades) have a decent price point that might make sense for a rental (after some initial analysis).

Has anyone purchased a brand new house to rent? What are the pros and cons?

Has anyone purchased a brand new house to rent?  What are the pros and cons?

Account Closed · Answer

Would there be HOA fees?  I'm very against HOA fees and HOAs, personally.  You have to consider the cost and the unknown future cost and control freaks on the board.  I'd always rather buy something without an HOA.

Plus, some new homes have additional tax assessments that older homes don't have.

When I was looking for houses to buy, it always seemed the newer ones were overpriced compared to older ones.  Plus, the older ones usually have mature trees and landscaping, which is valuable in my opinion.

It just seemed that they were kind of like buying a new car that immediately depreciated once you signed the dotted line.

Of course, there's a line where an old place can be a maintenance/rehab money pit, too.  But, overall, I always thought the older homes were the better value.  Especially, if they were not part of a HOA.

Adam D. · Answer

If you're going to hold the property for 7 years or more, new is probably great! Nothing should need to be replaced because it's all new so maintenance may only be landscaping, which can be the responsibility of the tenant. After that, you'll have to budget for exterior paint around 7 years, then maybe a water heater, builder grade WHs are only the 6 year kind. However, if you plan to sell within 5 years, from my experience, unless there is high appreciation, you may not be able to get back what you paid for the property when new. New properties tend to sell at a slight premium to 10 year old buildings, but that's because everything is new, you get to pick colors and finishes to customize it to your taste.

If, however, you can buy the model home, these are usually the last ones to sell and builders are sometimes obligated to sell the models before opening up a new section on which to build. If that's the case, you may find a motivated builder seller to buy from. However, it's not really a "new" house then because they've used it as an office and had thousands of families tour it so there will be a bit of wear on the flooring already.

Good luck and happy investing.

Brian Kohn · Answer

It might be a good deal, but really depends on comparable rents, which were all over the board for the area I was looking at.

I noticed that Challenger Homes was building in Peyton.  The base model with no frills was ~235k.  I am slowly educating myself on the Colorado Spring area.  I've made several trips to explore various neighborhoods, but don't know it very well yet.  I do know that Castle Rock is crazy right now, with most single family houses out of my reach.

I am still a newbie learning as much as I can - here were my assumptions:

Price: $235000

Closing Costs : $3000

Est Repairs : $0  (new house under warranty)

Down payment : 25%

Int Rate : 4%

Term : 30 yr

Prop Mgt : 0% (I'd manage myself)

Vacancy : 7%

Cap Ex: 0% (at least for first 7-10 years since its new and under warranty)

Maintenance : 5%

Property Taxes : $1300 (guess)

HOA : 30/month (guess)

Insurance : $50/month

Rent : $1600 (guess)

P&I : 841.44/month

Total Monthly Expenses : $1222 (including vacancy, maintenance, prop mgt, and capex)

Cash Flow : $378

Down Payment Total : $58750

Total Cash : $61750

CoC : 7.350%

1% Rule : .68%

Joseph Graeve · Answer

What are the numbers you're thinking of. post an example of a base price and the market rent in that neighborhood. I have usually found that flips and rentals are all tight in new neighborhoods but would love to run the numbers with you to get proved wrong.