Not too long ago I went to a neighboring town to check out an investment possibility for an investor I work with – rental subdivisions. The owner had built these homes in a college town 15 years ago and they were all basically the same style, cottages — some 2/2, some 3/2, 1400 sq ft and 1600 sq ft, respectively. This particular deal didn’t work out because the owner wasn’t budging on price and the numbers didn’t quite work out — I think he was basically satisfied to sell them one by one unless he could get his price for all of them, but it got me to thinking.
If it’s true that rentals will increase for awhile because of buyer caution and lender tightening, these, what I call rental villages, might be a good investment. Two reasons I think they might be a good investment are lower construction costs in this market and lower land cost. I looked online and found a cottage design that to me would be perfect — attractive and not too difficult or costly to build — and with the same basic design throughout the village it would be more efficient. My one concern was when you go to sell would all the cottages being basically the same style hamper sales.
The owner of the ones I looked at had already sold half of what he had, about 64 units, so it didn’t seem to hamper his sales. They were all painted in different colors (or not the same side by side) with minor differences among them, so they didn’t all appear to be the same house. It was actually an attractive “village” with nice trees and shrubbery about.
My thoughts were that a rental village of single-family homes would be more attractive to renters — I mean, if you are going to rent, why not rent in the best living environment possible. Most people don’t like apartments and the available rentals of single family homes is sort of hit and miss, at least here. I know that the vertical building of apartments is more cost effective because of land and construction costs of single family homes, but I looked at the prices of land slightly outside high priced land in town and they were attractive. I also think that when an investor goes to sell after holding them for awhile and letting the market improve, he/she might do better selling individual homes rather than one apartment building.
I think the key would be to make the village attractive with a common social area. I also think it would be wise to keep the properties in good condition and allow them to appreciate by putting the necessary money back in from cash flow to keep them updated and maintained. The owner I previously mentioned was getting top rent in his area and had such a demand he could pick and choose the most qualified renters who met his strict requirements. He had worked out sweet deals with businesses in town when carpet needed replacement or a paint job was due or appliances needed changing. He also had worked lease/purchases with some of the renters who needed time before purchasing.
I have put together a proposal for the investors I work with and wanted to pass this along. The numbers look good. The key is to be in an area where appreciation is likely to return in a few years. That’s the risk.