If you have any experience buying a builder's model home as a leaseback was it profitable? I want to figure out if this is a good area to get into and what any pitfalls may be. It seems like if you can get a 2 year or longer lease from a builder and not have to worry about tenants it could be enticing, but I have no experience with this route. Please advise on the good and bad. Thanks.
I suppose it depends on your long term plan with the property. I am looking at one right now that I highly doubt the market would support 1% rent after the builder's lease is up. So that means I would need to sell it in year 2 or 3 when the builder leaves.
Few things I am running into with this:
- Purchase price needs to be less than final appraisal value. Cannot buy at retail. Otherwise when you sell it in two-three years you will lose money due to transactional costs.
- Rent rate would need to be tip top of market to make it cash flow. Again, this depends on the purchase price and financing term. It is probably in an up and coming area, hence the new development, so prices are somewhat being set by that new development and that makes it doubly important to purchase it well.
- Financing it seems tricky. Is it a new construction loan then refinance into a commercial longer term loan?
- However,when you do sell, you will have had a fantastic tenant and your property will probably have all of the bells and whistles like models typically do - so you should stay competitive in the newly built neighborhood.
Let us know how it goes and I will do the same!
I never ended up getting into a leaseback so I really can't advise.
Same here. I met with a few builders and some in my area do participate in this, but I have not inked one of these deals.
I am interest in this program as builder
I work as a preferred lender for a mid size builder in Ohio. The way most builders do the leaseback is:
Purchase price of the home will be around 95% of market, you need 20% down.
The lease is 1% of the purchase price for 2 years.
Right now this is a great deal as the builder is raising prices by $2000 for every house sold. With this model, within a year the home you are leasing back to the builder has gone up at 12,000 per year. Sounds great right?
The down side is this, after two years the market value will go up about $24,000(low side). When you sell it will cost you about $20,000. So you've made 4k in value, about 16k in paydown, and about 12k in rental profit.
So you've made about 32k in two years. Makes sense to me, you know the builder will pay you, you also know the home will be perfectly maintained.