@Cameron Skinner @Tarek Soliman
I too thought that was a fantastic podcast. Interestingly enough my area has about the same kind of numbers as his did in terms of costs and rents.
i.e. 3/2's, 1500 sq ft homes are going for about 180k. And rents for those homes are actually going for about 1600/mo. Taxes here are probably higher than there though (about 5k) so I'm guessing the net is going to run about the same.
But what really caught my ear was the loan down payment he was getting 10% down (as long as it was at 70% LTV or better). I just don't see that anywhere in my area though. All the local banks want 20% down regardless of LTV. I guess I could refi later on to get some of my money back on the ones I buy/hold.
But in terms of your questions Tarek, there were a couple I could answer:
1) Is the cash flow lower with new construction? Generally yes. I've got a decent number of homes (54) and have a handful of newer stuff (2005 or newer). For the most part its about the same to be honest.
The newer stuff costs more but it also rents for more. And lt has less maintenance.
So an example:
1) In Manteno, I have a 3/2, 1400 sq ft built in 1992 that I'm getting 1300/mo rent. My all in on that one was 100k.
I have another one thats a 3/2.5, 1500 sq ft built in 2008 that I'm getting 1450/mo. My all in on that one was 110k.
2) I've got a 3/2.5 in braidwood 1450/sq ft that I was all in at 110k. I'm renting that for 1450.
I've got a 4/2 in braidwood built in 1992 that I was all in at 96k, I'm getting 1300/mo for that.
Thats about what I see in terms of numbers. Those houses that are less than 10 years old are going for a rent premium of about 100 to 200/mo. But they're running about 15k to 25k more which means a higher mortgage payment and a bit higher taxes too because they're assessed for more. But the maintenance costs are less too.
If I were to have a 3/2, 1500 sq ft new construction home in my areas and rent it, I could get 1500 to 1600/mo. The same size house that is 20 to 30 years old only gets me about 1350/mo to 1375/mo. But new construction would cost me more that would give me higher mortgage payments and would be assessed for more so more taxes. But less maintenance.
So to me, I think the cash flow would end up being roughly the same because of the higher premium for new construction.
2) In terms of cost segregation or, as I refer to it, Accelerated depreciation. Here is my understanding of it. When you put any house in service (new construction or older house that you bought, rehabbed and get rented), you have the option to use straight depreciation (27.5 years on the purchase plus rehab minus land) OR accelerated deprecation - where you break out the individual pieces of the house and then do cost segregation for allocation depreciation schedules for those pieces.
My understanding is you have to make the depreciation type election when you initially put the house in service. And once you do, you can't change the method you went with. But I've actually seen where you have the ability to go back 3 years and amend your return and then get the savings today.
But any time you talk accelerated depreciation / cost segregation and such, it is an absolute requirement to speak with your cpa before you do anything. The key is knowing that it exists and then asking them how you can use and what the implications on your business would be to determine if its worth doing or not.
In terms of whether you qualify or not depending on builder or not, that won't matter. You can use a builder or not. You can partner with them or not. If you ultimately decide to make a house a rental, when you put it in service and start renting it, you can choose to elect accelerated depreciation.
In terms of who should help you, if you are going to choose accelerated depreciation, you are going to want to have your cpa do that. There are a ton of rules that just make sense to have a cpa do. Less risk to you and a lot of time and effort saved.
My understanding of it is that they do just as Cameron mentioned on the podcast. They break up the house into logical pieces (roof, windows, cabinets, flooring, etc) and then they assign a depreciation schedule to each one.
But here is a good example of the benefit: If you spend 8k in flooring for rehab or new construction on a house and use standard depreciation, you're going to get a deduction of 8k/27 = 300/yr.
If the IRS says you can deduct flooring over a 5 year period (I'm not actually sure what period of time each item is), that would mean you could deduct 1,600 a year instead.
Not all items will give you that kind of bump. But carpeting is definitely an obvious one.
The rest of the questions on here are outside of my knowledge base. Hopefully, someone with some new construction experience can weigh in on those.
But as I stated above, this was a great podcast. Its one of the few where I think the model could actually work in my area and I'd really like to take a shot on one. The key for me is to find a lender that will agree to 10% down like Cameron was getting.
If I could find that, I would start working on lining up all the knowledge I needed to build a home. I already have a good builder in mind and if I could make the numbers work like Cameron was doing (i.e. building a 1500 sq ft house for 130k, I could make the numbers work as a rental too if I had to).
In a perfect world, I would build one for 130k, sell it for 180k and make about 20k. Then build another new construction home as a rental using the 20k as the down payment.
Build one hold one. Build one hold one.
At 110k to 115k loan, that size house would still cash flow about 400 to 450/mo gross profit. I'd take that all day long. And it would be 10 times easier to manage. They rent faster and low maintenance.