"Cash back at closing from developers"

3 Replies

Hey All,

I'm trying to get started in investing and, since I have a full time career that I enjoy and pays me well, I'm not really looking to have REI be my new full timer.

I've seen various deals that all sound fairly good. What I'm not sure about are these new developments that offer cash back at closing and guaranteed rents for X years.

Have you all seen these types of deals? I'll be getting all the information on one specifically soon so I'll put it up but I'm just wondering if there is something specific that I need to look for or stay away from.

Thanks!

Yes, these are pretty common. The developer/seller gives you cash at closing and gives you rent that supposedly generates cash flow for 1-2 years.

They don't properly account for all the expenses. They sell you, at best, a marginal deal. After the guaranteed rent period you're on your own.

Some of these are not horrible deals. Some are. I've yet to see one that's better than "not horrible".

If you want to invest in rental property, learn the rental property business. Learn what expenses really are. Learn what rents and vacancies in the area really are. Rest assured the developer, who has a very vested interest in getting you to buy, will spin the deal in the most positive possible light. So, realize that whatever story you hear is the absolute best possible outcome, and that it could be significantly worse (lower rent, lengthy vacancies, higher expenses.)

As Jon mentioned, evaluating the financials is very important on any deal, not just new construction. I too prefer new construction for many reasons. One, the capital expenses are way down the road (new roof, ac, etc) and I am out before that.
2. New properties are easier to rent than ones built in the 50's and 60's or evn the 90's.
3. New const. investments will appreciate better and hold value better (majority of the time).
4. New const. offers an easier entry point for the passive investor. Quality management is the key here so pay special attention to that.

As far as offers with incentives such as rent for two years, cash at close, etc. pay very special attention to detail there. Why is that being offered? What price could you have bought the property for if you didn't get cash back at close? Would your cost be lower without the 2 year rent guarantee? Does the property cash flow after all incentives expire? (Most important of them all) If not, don't buy.