Are new construction rental properties a good investment opportunity? [Ask Coach]

 

 

About This Episode

Episode #219 – Most investors buy older properties to rent out, but what about new construction or “build-to-rent” investment properties? Are those a good opportunity for real estate investors? This is the question Coach Carson tackles in this edition of the Ask Coach Podcast.

Episode Transcript

[00:00]

Our new construction rental properties at Good Investment opportunity. Most investors talk about buying an older property, fixing it up, and then keeping that as a rental property. But what about building from the ground up or maybe buying from another builder who’s built a property and then keeping that as a rental property? That’s the question I want to tackle in today’s episode of Ask Coach, and we’re getting started right now.

[00:28]

Welcome to the Asked Coach edition of the podcast. If we haven’t met yet, I’m your host, Chad Carson. You can also call me Coach. And the mission of the show is to help you get out of the financial grind so you can do more of what matters in the Asked Coach podcast series is where I do my best to answer your burning questions about real estate investing and personal finance. Today’s question came from Heather Louder, and the question was within one of my courses, a course called Find Your Focus, which is my beginner course, which helps you find your real estate investing strategy at the very beginning of your journey.

[00:57]

I’ll have a link to that in the video description and the podcast description. But this is a very timely question because what she wanted to know is my thoughts and advice on whether it was a good idea or not to invest in what’s called a build to rent strategy or a new construction rental strategy. And my short answer is yes. I think it is a good opportunity. It’s something that I have done in the last few years with my own business partner in our investments.

 

[01:22]

And I want to unpack a little bit and explain why I think it’s a good opportunity. What some of the challenges are, and in general, why I like new construction rental properties is because you can buy and own a low maintenance rental. One of the biggest challenges of older properties, which I also love older properties, too, is that you have long term capital expenses that are often have been deferred. Maybe you have some plumbing, some electrical, some sewer lines that eventually are going to wear out. Everything wears out.

[01:48]

You might have older other pieces of the property structure that needs to be fixed. So those are some long term capital expenses that sometimes catch up with people. They don’t realize those things are coming when they own older rental. There’s also some layout issues. Often, if you don’t fully remodel the property, it might just be dated in some ways from the flow of the property.

[02:07]

So a new construction typically has more open floor plans. It kind of fits the current needs and current desires of the people in the market. So for that reason, both from an operational standpoint, efficiency of maintenance and also just the desirability standpoint, new construction is great. One of the challenges, or a couple of challenges are making the numbers work. So if you’re paying more for a property, construction costs have been going up and up.

[02:30]

And so you’re paying more for a property often than you could for an existing older property, especially back in the great recession. But even today, you can find existing properties you can buy for well below the replacement cost. That’s a good incentive to invest in existing properties. So when you buy a new one, it can be a little bit tougher to make the numbers work. And I’m going to talk some about the numbers and how you might be able to do that.

[02:51]

You also have to get the money to build the property. You have to buy the property, develop it, or somebody else is developing. And I have to loan the money to the builder or front the money for the builder to cover all the costs. And so where are you going to get that money? It’s not quite as easy as going out, getting a conventional loan, putting in some money down, and then buying the property.

[03:09]

So with those challenges in mind, though, let’s talk about what a strategy might be. And I’ll tell you a story of how we bought one new construction rental. And then I’ll unpack a couple more ideas. So we bought a property in a little town next to our my town in Clemson. And the situation was a builder was developing several lots, and we ended up selling another rental property we had, and we didn’t want to pay taxes on it.

[03:33]

We did a 1031 exchange, and we negotiated to buy one of these properties from this builder. So we bought it, I believe, for 1400, which is two or three years ago, which that property is now worth $220,000. It’s gone up a lot in value. But even when we bought it, he gave us a pretty good deal. And it might have been worth 170 or so when we bought it.

[03:54]

So we bought it below the full value. You might not be able to always do that. But I think even if you bought it for 170, in that case, the full value, it might have made sense because we rented the property for about $1,300 right off the bat and had, again, very low maintenance costs. We still had taxes, insurance, things like that. And it’s been a pretty good not a home run cash flow deal for us, but a solid cash flow deal.

[04:17]

And also I really like this location. It was kind of an infill, what’s called infill. Instead of being on the outskirts of town, it was within a town kind of close to the downtown square. I already knew this location. We had rentals right around the corner from it.

[04:30]

And so we picked the location first and like that location and bought a new construction rental there. So we’re investing in that location for the long run. It’s a buy and hold property. And it’s turned out really well for us. And we also have the exchange, which is a whole other topic, but we didn’t have to pay taxes on the other sale.

[04:47]

And now our basis, our equity, that was from that other properties now in this new construction rental. So that’s my story. But how could you do that, especially if you’re not a builder? If you are a builder and you are in the construction business, I would say strategy number one is you instead of just flipping properties, try to build one that you keep every once in a while. Maybe you flip in four or five, six and then pull one back and keep one every once in a while.

[05:12]

Builders are notorious for the selling, selling, selling. And often that’s because of the financing. That’s because they got to pay their overhead. And it’s understandable, especially today, with the way the supply chain and the labor markets are, that’s a big challenge. But if you can wake up ten years from now as a builder and you kept back five or ten properties in good locations and you know the plan and you know the property, you build it yourself.

[05:35]

What a great opportunity. What a great long term wealth building tool. So that’s for the builders in the room or the people who have family members who are builders, if you don’t, the strategy that I think would be a really good approach. And if I were out there buying, starting new, I would do a lot more of this myself is that you as the investor, go out and find the land, the lot to buy the property. And then you either pay a builder a fee to build for you.

[06:00]

And this is going to be networking and finding that builder. That’s going to be a step, of course, when you trust one who could do a good job for your building and also at a fee that makes sense for you. But you hire the builder either to build your rental property for you or you partner with the builder. So here’s a couple of ideas. Like what if you go out and find a lot and I’ve had several lots come to my desk just in the last week from wholesalers.

[06:24]

I want wholesaler lists in my area, and they know what I’m looking for. And so instead of just sending me properties, they’re sending me pieces of land. So these wholesalers go out and find a lot. So maybe you find a lot in my area. Maybe you find one for like $30,000, $25,000.

[06:38]

That’s a pretty good price for a single family house. Maybe you have to spend another ten to 15 grand grading the property, clearing some of the trees, getting a sewer tap. If it’s on a sewer, I probably wouldn’t want to do septic. I’d rather have a sewer line. That’d be one criteria I would look for.

[06:54]

But you spend the money, maybe 30 grand plus 10,000 and clearing costs. You have $40,000 in this lot, and then you go to the builder, negotiate a fee. You talk about a plan, you figure out which plan would make sense for you. I like a three bedroom, two bath, simple layout, not many lines on the roof, not many. I want to be, again, a very simple, efficient property that’s also going to be desirable.

[07:18]

So you’re not building a 3000 sq. Ft. House. Probably going to be more like a 1200 square foot house or 1500 square foot house. Maybe you have a garage in there, maybe you don’t.

[07:26]

You’re going to look at what the rent will allow in those areas. But you’re going to get the construction loan or a private money loan to build that house. And so you own the lot, you own the construction. You’re paying that builder fee as they go along. Usually it’s either like a flat fee, they’re going to make 20 grand for building it or 15 grand for building it, or a percentage, maybe it’s ten or 20% of the cost of the house.

[07:48]

Those are pretty typical. And then at the end, then it’s just like a remodel, but just bigger. You’re getting invoice for that amount. You have to get the money from your private lender or your construction loan. And if you do a construction loan with a bank, there’s typically a lot of draws along the way and a representative from the lender will come out and make sure things are being built.

[08:07]

So the financing is a piece and figuring out how to do that, that’s going to be one of the challenges. But if you can figure that out, you can find a good builder. You pay the fee, you get the house built, and then you turn it over to whatever rental strategy you use, whether it’s a property manager or your self management. You get it rented out just like you would in the other property. So that’s one strategy, another strategy I like, instead of just buying the lot, maybe you could create the opportunity with a lot.

[08:31]

So a lot of the times I’ve found properties where I understand the zoning of the property, you find a single family house that has an extra big lot, and you look at your local zoning regulations on how wide lots have to be, what the density requirements are, and maybe you can carve off a lot from the house that you bought or the duplex that you bought and you can create a lot out of the property you already bought. That’s an amazing way to do that. In infill neighborhoods, which again, are my favorite. I don’t like going on the edge of town. And what I mean by new construction isn’t buying from the big national builders who are building big neighborhoods on the edge of town.

[09:06]

I like to go in the neighborhood that I’m already buying rental properties in and find that little wooded lot that nobody is building on and buy that or buy a house that has this extra big lot and then do what’s called a sub plat, where you go to the local zoning and codes office and you read the rules and regulations. And this is before you buy the property, by the way, to make sure you can do this, then you get a surveyor and a landscape architect to draw up a new map, a new platform for that property. You get it approved by the local office, and then you get it recorded in the local county register of deeds. And you now have instead of one lot, you have two lots, especially if you’re using creative financing like private money or even a bank, local bank, you could get financing on the house that you carved off. And then you get separate financing on the lot in the new construction.

[09:56]

So that could be a great way for you to then go do the same thing, hire the builder, pay a fee, do it that way. One final idea is if you’re out deal finding and you find a little bit bigger parcel, maybe you find a piece of land that you could subdivide into, three lots, five lots, ten lots, something like that. And you partner with a builder. So this is building a relationship with them. Maybe you are the deal Finder to find them land which they’re always looking for and maybe a partner on that where maybe even finance or bring in some other people to help finance this builder.

[10:27]

They could sell some of the houses and make some money on those. But then as part of the deal for you bringing the deal and selling them these lots, maybe they build one lot at cost for you and you get a rental property at cost by adding value to them in other ways. So you see how this works. There are relationships involved, there’s financing involved. But the end result is you want to get a rental property and you just got to think outside the box, be creative.

[10:50]

And if you just start with this idea, though, and then take it to the people you’re networking with, there are opportunities out there to do this type of property. And you will have added new construction rental property to your portfolio. And I think you’ll be happy with that. I hope you enjoyed this edition of Asked Coach. If you’d like to have your question featured in a future episode, just send me an email to [email protected].

[11:11]

You could also leave a comment on YouTube. I use a lot of those comments as you’ve already seen on future Ask Coach episodes, and both of those will give you an opportunity to have your question featured. But just keep in mind we can’t answer all the questions we get more than we can cover. But to increase your chances of your question being chosen, number one, keep your question as clear and as short as possible. And then number two, keep it relevant to the topics of real estate investing personal finance, early retirement and personal development.

[11:38]

If you like the show, I’d like to invite you to subscribe to my free email newsletter at coachcarson. Comrehtoolkit. In addition to weekly updates, articles and behind the scenes tips from me, my email newsletter subscribers get my real estate investing toolkit which includes a property closing checklist that I actually use when I buy properties, a real estate deal worksheet, a tenant screening criteria checklist and other spreadsheets and goodies that will help you on your journey to financial independence using real estate. You can get it all for [email protected] Rei toolkit. I also want to take this time to thank some people behind the scenes who make this podcast possible each and every week.

[12:15]

This includes my podcast editor extraordinaire, Michael Win, my amazing virtual assistant Megan Thompson, my wife Carrie who helps me behind the scenes and is my partner here at Coach Carson. And of course thank you to all of you, the listeners of the show who make everything possible. This show exists for you. It exists because of you and I really appreciate you being here for another episode. Everything I’ve shared with you in this episode has been for general education purposes.

[12:37]

I have not considered your specific situation or risk before buying your own investments. Be sure to consult a financial real estate and or a legal professional until next time, I’m Chad Carson. You can also call me Coach and this is a show all about helping you get out of the financial grind so you can do more of what matters. See you next time.

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