Turning a New Build into a Rental Property
Member since 2024 · 10 posts · 3 votes
Hi Everyone,
I'm considering buying my first home as a new-build and was wondering if there was anything I should watch out for if I plan to turn it into a rental one day. I can see myself renting it out at some point. I know the HOA documents would have information on that, but I'd like to know if there's anything else I can do to confirm that I won't be restricted (with the builder/community) if I turn it into a residential rental one day.
Thank you and Happy Holidays!
Hey @Ricky Hernandez
Great question, and it’s awesome to see you thinking ahead about the potential for turning your new-build home into a rental. As someone who’s spent a couple of decades in real estate investing, here are a few things I’d keep in mind:
Here's a quick story: A friend of mine bought a new-build in a suburban development a few years back. Everything seemed great until the HOA implemented a cap on rental properties due to complaints about absentee landlord's. He ended up having to sell the home instead of renting it out, which wasn't part of his original plan. Lesson learned: Always think of a Plan B in case renting isn't an option anymore. @Pat Aboukhalen was the agent there sorting it all out for him there after his previous agent missed it - so if you don' already have an investor-friendly agent there that's who I would use.
Lastly, I’d recommend running the numbers for your long-term goals. Is this a cash-flow play or an apprecation play? In markets like Phoenix, you might find a mix of both, but it’s always better to invest with clarity.
Have you looked into whether the builder is still selling homes in the same community? Builders often adjust pricing based on rental saturation, which could impact future appreciation.
Hey @Ricky Hernandez
Great question, and it’s awesome to see you thinking ahead about the potential for turning your new-build home into a rental. As someone who’s spent a couple of decades in real estate investing, here are a few things I’d keep in mind:
Here's a quick story: A friend of mine bought a new-build in a suburban development a few years back. Everything seemed great until the HOA implemented a cap on rental properties due to complaints about absentee landlord's. He ended up having to sell the home instead of renting it out, which wasn't part of his original plan. Lesson learned: Always think of a Plan B in case renting isn't an option anymore. @Pat Aboukhalen was the agent there sorting it all out for him there after his previous agent missed it - so if you don' already have an investor-friendly agent there that's who I would use.
Lastly, I’d recommend running the numbers for your long-term goals. Is this a cash-flow play or an apprecation play? In markets like Phoenix, you might find a mix of both, but it’s always better to invest with clarity.
Have you looked into whether the builder is still selling homes in the same community? Builders often adjust pricing based on rental saturation, which could impact future appreciation.
@Dennis Bragg, Thank you very much for the insight! Excellent points about checking the different documents and thinking of a Plan B (just in case). I appreciate it. Thanks again!
@Ricky Hernandez We bought in two different communities that had no rental restrictions then later imposed cap of 10% rentals. We ended up selling those properties. In somce other areas we have invested there have been zoning issues with the muncipality. Several have zoning restrictions saying no more than 3 unrelated people can live in a property. Their goal is to eliminated group homes, half way houses etc, even STR, so check out the local zoning as well. In a university town nearby, student housing is restricted to certain areas of town and prohibited in other areas of town.
On a positive note we did build a new house to the specifications of a specific tenant. We jointly designed the house to their specs. We compromised on the desing as well as the tenant. My condition was that they rent the house for 1% of the costs and sign a 3 year lease. They have lived in that house now for 24+ years and just signed a new 3 year renewal. Why would they move, its built to their design?
David Krulac
Bigger Pockets Podcast #82
All of the comments are spot on for things to consider.
One thing to add is that when you buy a new build, your PITI will likely not be factoring in the correct state tax number. That's because the city won't calculate the actual amount till a structure is built, aka it's not just a plot of land anymore.
This will obvious cause your property tax bill to go up and also your mortgage escrow account as well (sometimes these things can make your mortgage shoot up a few hundred a month).
These can make crunching numbers a bit more difficult because due to the guessing game.
Regarding the HOA and CC&R's, the builder can make changes to the CC&R's pretty easily while the development is under Declarant Control. So, as previously mentioned, the rules can be changed at the developer's whim. Under Declarant Control, which is defined in the CC&R's, the developer is the HOA Board.
@David Krulac, Good to know about the zoning and how things can change with the HOA in the future. Thank you for the tips!