New home build... HELP!

7 Replies

Possible deal in place through KB Home...

$126,990 is base line price...

  • tile entry
  • vinyl kitchen/utility/bath
  • carpet in living and bedrooms
  • energy star qualified home (more of a selling point to renters?)

area rent comps are around $1100-$1300

2 year plumbing and HVAC/electrical warranties

10 year foundation/framing/structural warranties

If we use KB's lender they cover 2% of the closing costs...

no rehab is needed.. it's a brand new home with warranties.. seems like a good move.. but i'm stuck! first deal.. $300~ monthly cash flow if we can rent it at $1300.. it's a go right?!?

I do not have much REI experience yet, but maybe my situation can offer you a little help.

I purchased my first home for 140k with FHA 3.5% down. My Mortgage(Including taxes&PMI) is $860/month. My area is 1100-1300 too. In 10months time my house is now appraised at 163k. I did not expect such a large appraisal.

I think this is a good deal to make because buying a new home, mostly likely in a new subdivision? seems to appreciate quickly. You would not have to worry about major repairs for many years to come and it being a brand new home should positively impact potential renters, hopefully keeping your rental occupied 100% of the time.

Hope this helps.

It follows the classic 1% rule (rent is 1% of the purchase price)--or is that the 10% rule where yearly rents are 10% of the purchase price...I never remember. My 2nd rental was a new build and it still is my best buy. I showed up at the table with less than 20% (due to builder credits, etc.) and walked away with 20% equity, then it has continued to appreciate. However, the reason it is my best is not because I purchased new construction, it's because the very first tenant I took 7 years ago is still the tenant in there today. So it could be a great deal, but it could be a nightmare: set your tenant standards high and stick with it. Best of luck!

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You still have to do the hard math and calculate all of your cost.

Principle & Interest + Property taxes + HOA dues + Insurance + Annual Maintenance + Property Mgt Fee + any other cost like PMI or Sewer bills = Cost to Own

Then subtract cost to own from 90% of monthly rental income, this allows for vacancy.

Then you have your true net profit from the property.

Even tho the house is new, you still need a maintenance fund to take care of items that wear out, like your roof in 20 years.

And if your dong your own PM, you should still charge a PM fee unless your going to work for free.

I am in exactly this spot. Well, maybe one step ahead of you. I put together a major rehab project about six months ago and it is a month from being complete. I recently decided I would keep it! It just hit me. I was like "I saw the thing get built, I know the area is likely to appreciate, it's a neat house, and my partner will let me buy him out, so hell, why not? I would caution you that you can't necessarily get 1% of the purchase price per month. Of course, it depends on comps. But I don't think there is a need to feel bad if you get .08. I mean, it has a lot to do with your numbers, and your expectations, but I would possibly be happy with .08 if all else was good (my cash flow was present, it was a good build, good location, likely to appreciate, etc). In fact, I am stuck with .06 on this house! It has a market value of $380,000 and you just can't get $3,800 per month, no way in hell. I am willing to live with $2,000 because, hey, $2,000 is a lot of money, and I'm hoping for 5-7% appreciation per year, which if I am right, could equal enough to pull the rent up to an equivalent $4,000 per month.

Anyway, this is a fun, exciting time I know! I would recommend that you get really comfortable with the condition of the house and the quality of construction not only on that particular house, but the whole subdivision if it was built by the same builder. That is what got me off-track with a seemingly-perfect 4 bedroom house RIGHT across teh street from my house - D.R. Horton was creating a new subdivision. I just couldn't feel confident about the build quality (e.g., the ability of my investment to last, and to be sold successfully in 20 years) because a) there are websites out there that impugn the building integrity of the company, and b) I didn't get a chance to inspect it prior to the drywall going on. I mean, if you had a contractor friend who would spend an hour in the place, that would help. Or hire one. Better yet, hire an expensive, ASHI-certified home inspector who has an infrared camera. I am a home inspector with a camera, and it can go a long way to figuring out how a building is actually functioning. Of course, it works better when some time has elapsed. One thing you can definitely say about big builders from a critical or skeptical perspective is that they tend to build them to perform well for about as long as the warranty period lasts, but no better. Remember, building code is a minimum, "won't fall down in medium winds" kind of mandate. And often the City building inspectors are incompetent, corrupt, or terribly busy, so you kind of have to do the legwork yourself.

In a word, a new build can be cool for certain reasons, but you have to do some due diligence on the builder, the subdivision, and the condition of this particular house. Spend $400 on an inspector with a camera so that you can be 85% sure about this house in particular. In regard to your original question then, I would rather be 85% sure the house was correctly built and make $100 a month than to not really know and plan to make $300 a month. Because if it's not, you are going to be spending a lot of that $200 a month painting and dealing with moisture issues.

KB homes are built as cheap as possible. They are high maintenance homes because of this. Expect things to wear out fast and need replacement.

I also wouldn't bet on much appreciation in a KB neighborhood either. These houses are easy for buyers to get into, they are expensive to maintain and the KB neighborhoods in my area stagnate; overgrown yards, old leaning fences, worn out siding in need of paint, foreclosures on every other block, loud music etc.

For most landlords, rentals are supposed to produce positive cash flow. So you will need to have a much better grasp of what some of the real world expenses are - I will venture to say that if you listed the ones that you used to calculate your earlier net cash flow, that the BP members will expose a bunch of other expenses that you neglected to consider.

1% rentals at your price points are more likely to be break even deals unless you have lots of good fortune so that things just go well for you and so you encounter no mishaps along the way.