Is it always wrong to buy a newer house at retail?
Hello Bigger Pockets, First Post! Thanks for such a wonderful resource!
Question: Is buying a house at retail really that undesirable?
I’m speaking in the context of buying a house for long term rental income, not flipping.
Pretty much every book / resource I’ve read up to this point (12+ books or so) have stressed the importance of buying below retail. Many authors insist one should buy a fixer-upper house, fix it up, and rent it out. I can see how this would make sense for someone who makes a living on real estate, but I am not seeing how this would apply to my situation.
For example, let’s take a tenant-ready house worth $120,000 that rents for $1,200 a month. Suppose instead, I buy the house for $90,000, fix it up for $10,000, and rent it for $1,200. Great, now my annual cash on cash is 14.4% instead of 12%. I saved myself $20,000. Great.
Now here is the problem. I’ve never worked with contractors before, so there is a near-certain chance that I would overspend on the repairs / underestimate the cost. One could say that should have been more aggressive in shopping and tried to buy a $120,000 house at $100,000 (e.g. by flyering or something).
But here-in is the problem. I don’t have the time (or desire) to shop around like that. In my situation, if $20,000 was plunked into my lap, my life would not change very much to be honest. The time I would spend trying to save that $20,000 is quite likely better spent in a consulting side-job that would recover the difference in about 100 hours, for a lot less risk. My thought is that there are thousands of real estate investors who are way better than me at buying below market, so why compete with them at their game? I’d rather spend the time in my area of expertise (software) where I can earn more money per time spent with far less risk.
I’m not trying to make a living off of real estate – it’s more to park cash in a tax-efficient vehicle and remove the temptation to spend it on luxury items (let's be honest, I'm not as frugal as many of you ;-) ). Obviously, I want returns at least as good as the stock market, but I’m not trying to hit home-runs. If I combine the 1% rule with the 50% rule, I get 6% returns per year on an asset that usually at least keeps up with inflation and has a lot less volatility than traditional equity. Those returns are not good if real estate is the primary source of income, but I personally can be happy with returns like that.
I’ve used a turnkey company before. Let’s just say that did not go well and I sold the house back to the turnkey. This time around, I want to do it myself. I’m okay with spending time finding a manager and doing the random tasks that turnkey companies overcharge for, but I don’t want to spend dozens of hours trying to buy below retail.
Basically, I want to pick a new-ish construction house off of the MLS, negotiate to roughly retail price, do the due diligence, get a managing company, and get on with my life. I'm leaning towards a newer house because I don't want to deal with big-ticket repairs right off the bat.
Has anyone been in my situation and can provide an opinion? Thank you so much!