I'd like to see what your opinion is on this idea. If I am not in a hurry to get my first rental started, is buying a new build for rental a good idea?
Upsides:
1. It is a bit below market price, not by a lot, but at least 10-20k in my neighbourhood.
2. It will be brand new, which means the CapEx would be low relatively.
3. You design it the way you want your rental properties to be!
Downsides:
1. It takes 6-8 months to be built, which means almost a year without making any return.
2. There are relatively less data for you to evaluate the rental property.
Rental Property Investor · Concord, NC · Member since 2016 · 1k+ posts · 3k+ votes
6y
After buy/repair/hold 19 SFHs, I'm building a couple new 3BR/2BA 1100SF SFHs on a split lot for around $140K each. About the same as I can buy and repair currently. I'll GC and PM to keep the cost low. It's an OK deal, not a brilliant deal. But I'd much rather get up in the morning a walk a building site than a golf course.
Depending on your connections and market.... Good labor is hard to come by and either expensive or you have an existing relationship.
Funding is also more difficult to secure for new construction even more so for investments vs primary.
Funding in terms of from the banks, or just in general?
In general, it's way different then the traditional 20-25% down. Takes a lot more cash as it's more risk and that's if you will even find a lender willing to let you borrow.
and once it's done you could have issues with market value if there's not enough comps..not to mention you're about a year out and at the mercy of the market.
get your funding lined up before you put to much effort into it...
Depending on your connections and market.... Good labor is hard to come by and either expensive or you have an existing relationship.
Funding is also more difficult to secure for new construction even more so for investments vs primary.
Funding in terms of from the banks, or just in general?
In general, it's way different then the traditional 20-25% down. Takes a lot more cash as it's more risk and that's if you will even find a lender willing to let you borrow.
and once it's done you could have issues with market value if there's not enough comps..not to mention you're about a year out and at the mercy of the market.
get your funding lined up before you put to much effort into it...
Rental Property Investor · Saint Louis, MO · Member since 2016 · 123 posts · 84 votes
6y
New construction for a rental sounds too expensive. Hopefully the numbers make sense. I think it is better to buy a lower priced home in a C or B class neighborhood and make a better return.
New construction for a rental sounds too expensive. Hopefully the numbers make sense. I think it is better to buy a lower priced home in a C or B class neighborhood and make a better return.
I purchased in Calgary, Canada. The new construction is actually a bit cheaper than the other ones. However, it does take 6-8 months to build it.
I also want to look into buying a lower priced home and bring up the value that way. Just want people (your) opinion/thoughts on this as well.
Edmonton, alberta · Member since 2016 · 49 posts · 10 votes
6y
Not The greatest for the velocity of your money. Great to have a worry free house with warranty but your money is now trapped there unless you bought it drastically under market value.
With that being said I actually did fluke out buying my personal residence as a new build. I went with a smaller builder, with a house that was nearly complete, at a time where house's were not selling last year. I was able to get the place for 400k but I needed to do the landscaping. Being my personal residence I did that myself because it was another reason to enjoy the sun. I had a friend buy a very similar suited house 5 doors down (which was less sq ft) for $475k which had me wonder what I could get mine appraised at. Came out to 500k the way it stands with a brand new school going up walking distance away.
Kind of a fluke with this one but I did a ton of shopping around prior to buying it. Speaking with my mortgage broker he mentioned he could re-fi this for me at 80% ltv which would get me my down payment back.
Moral of the story, just like any investment buy it right!
Real Estate Broker · Fayetteville, AR · Member since 2018 · 75 posts · 50 votes
6y
@Jonathan Yeh
If the numbers work then a new build can be fine. From a pro forma perspective, if it pencils then it’s worth looking into. But obviously new build is riskier because of potential time and cost overruns. The general contractor can make or break you so choose wisely. Permitting and city inspections can cause delays or changes. And keep the design simple. But In my market, lots of developers are building new, as long as they can get A class rents.
I know nothing about lending in Calgary, but you will need some equity. Often, if you purchase the lot with cash and you are a solid guarantor (or can bring on a solid guarantor), then a bank will loan the full amount needed for construction. It’s usually based on appraised finish value. When you run the numbers, include the cost of financing (origination fees and interest payments) in the loan budget. Where I am, I can draw from the loan to cover monthly interest payments.
Not The greatest for the velocity of your money. Great to have a worry free house with warranty but your money is now trapped there unless you bought it drastically under market value.
With that being said I actually did fluke out buying my personal residence as a new build. I went with a smaller builder, with a house that was nearly complete, at a time where house's were not selling last year. I was able to get the place for 400k but I needed to do the landscaping. Being my personal residence I did that myself because it was another reason to enjoy the sun. I had a friend buy a very similar suited house 5 doors down (which was less sq ft) for $475k which had me wonder what I could get mine appraised at. Came out to 500k the way it stands with a brand new school going up walking distance away.
Kind of a fluke with this one but I did a ton of shopping around prior to buying it. Speaking with my mortgage broker he mentioned he could re-fi this for me at 80% ltv which would get me my down payment back.
Moral of the story, just like any investment buy it right!
If the numbers work then a new build can be fine. From a pro forma perspective, if it pencils then it’s worth looking into. But obviously new build is riskier because of potential time and cost overruns. The general contractor can make or break you so choose wisely. Permitting and city inspections can cause delays or changes. And keep the design simple. But In my market, lots of developers are building new, as long as they can get A class rents.
I know nothing about lending in Calgary, but you will need some equity. Often, if you purchase the lot with cash and you are a solid guarantor (or can bring on a solid guarantor), then a bank will loan the full amount needed for construction. It’s usually based on appraised finish value. When you run the numbers, include the cost of financing (origination fees and interest payments) in the loan budget. Where I am, I can draw from the loan to cover monthly interest payments.
Contractor · Nashville, TN · Member since 2014 · 1k+ posts · 1k+ votes
6y
We have built several houses to rent. Some notes to add to the convo:
probably best to buy land and hire a builder. That's what we do and average 25% equity (build and land costs 110, appraised 145k)
it does take a while but the interest payments are small, especially at the beginning.
for best cash return, build small. 1500 sf house doesn't rent for much more than 1100. You miss out on some equity when you sell some day, though. I prefer a little cash flow rather than break even for a sale in the future.
we buy in lower end neighborhoods. Rental neighborhoods basically. Land is cheap and rent is reasonable. Allows cashflow.
gotta stay conservative on finishes to keep costs down.
the ROI is fantastic. Basically no repairs at all first couple years.
Rental Property Investor · Concord, NC · Member since 2016 · 1k+ posts · 3k+ votes
6y
After buy/repair/hold 19 SFHs, I'm building a couple new 3BR/2BA 1100SF SFHs on a split lot for around $140K each. About the same as I can buy and repair currently. I'll GC and PM to keep the cost low. It's an OK deal, not a brilliant deal. But I'd much rather get up in the morning a walk a building site than a golf course.
We have built several houses to rent. Some notes to add to the convo:
probably best to buy land and hire a builder. That's what we do and average 25% equity (build and land costs 110, appraised 145k)
it does take a while but the interest payments are small, especially at the beginning.
for best cash return, build small. 1500 sf house doesn't rent for much more than 1100. You miss out on some equity when you sell some day, though. I prefer a little cash flow rather than break even for a sale in the future.
we buy in lower end neighborhoods. Rental neighborhoods basically. Land is cheap and rent is reasonable. Allows cashflow.
gotta stay conservative on finishes to keep costs down.
the ROI is fantastic. Basically no repairs at all first couple years.
Thanks for the tips! I actually upgraded mine from 1400 sf (3 bedrooms) to 1750 (4 bd) + basement suite. so 5 rooms in total. The upgrade is about 30k. Still debating between renting as SFH or duplex. What do you think?
After buy/repair/hold 19 SFHs, I'm building a couple new 3BR/2BA 1100SF SFHs on a split lot for around $140K each. About the same as I can buy and repair currently. I'll GC and PM to keep the cost low. It's an OK deal, not a brilliant deal. But I'd much rather get up in the morning a walk a building site than a golf course.
Investor · Austin TX · Member since 2016 · 1k+ posts · 2k+ votes
6y
@Jonathan Yeh This is not a bad idea, but it is really only profitable at scale. There is an entire subdivision here in Dallas that was just built and all the houses in the neighborhood are rentals. PM me and I will send you the article. Building one house to rent it out...it seems like theres a lot more risk than reward.
Rental Property Investor · Member since 2017 · 84 posts · 41 votes
6y
@Jonathan Yeh
Starting with a sprint!!!!! It’s a risky venture being your first. If u can take on the risk (loss of time, money, sanity)......do it! Two possible outcomes if you r ok taking on the risk:
1.) it works, u learn A LOT, and apply what u learned to your next one.
2.) it doesn’t work. Totally fails. But u learned EVEN MORE than u did in first scenario and can apply what u learned going forward.