New Construction for Rental Property??? - Posted by Doug

Posted by Eric C on February 23, 2001 at 01:17:13:

Hi Dewey -

I agree with David on more than just the issue of new construction. I also believe in “contrarian” investing. I know that everybody says that, but in my experience, very few actually take it to heart and act on it. It can be awfully lonely out there on the edge sometimes.

I don’t use any “rules of thumb” to determine my investment strategies or criteria. There isn’t a “hurdle rate” or anything like that; it’s all scenario dependant.

I purchased my first property, a duplex in 1973; there’s never been a year since that I haven’t made a significant portion of my income from RE in some form or fashion.

I think I was lucky to begin at that time. I saw first hand just how fast inflation could make me millions – on paper – and how an oil crash (and recession)could take away those millions even faster.

Do you know how difficult it was to get a loan in Texas during the mid and late eighties? And not only Texas, you couldn’t get to real money in Colorado, Oklahoma, Arkansas, or Louisiana either. At the time, paper buyers (yes, there were paper buyers and sellers back then) actually redlined this group of states completely. “We don’t purchase anything in the C-O-A-L states or in Texas” was the usual answer. Thanks a lot Metro, Kent, Old Dominion, and …

What do you do when nobody wants what you have to sell? How can you keep going when there’s no more money to be had? When just seeing a Real Estate loan on the books is enough to trigger a knee jerk reaction from the FDIC auditors?

I don’t know about you, but I had to come up with ideas that worked for my employees, my investors, and for me. It’s no different today. Ownership seasoning, L/O’s, flips, rehabs, discounted paper – all of those issues were alive and well back then too. You just have to adjust. And to survive. Learn to think long term.

I hired my crew foreman in 1978; he’s been with me ever since. Today he owns about 50 rental homes himself. We built every one of those.

Lately (past ten years or so), I do commercial deals a lot more than I fool with SFH’s. It’s a decision primarily motivated by time constraints. Plus, I can’t seem to get as motivated by a SFH deal anymore.

Doesn’t mean I won’t do them, just that I like a slower pace. And part of that slower pace is deciding (a long time ago) not to sell very much. Period. I keep almost everything. I find it easier for me, that’s all.

As for building new projects for my own account, that’s really about all I do anymore. Like I said, it may be a commercial project, or a small apartment, maybe even a SFH, but you can be sure that it will be kept in house and not sold.

A lot more people do this than you realize. I knew a fellow in Houston who owned 14,000 apartment units and another gentleman in North Carolina with over 20,000 houses (all paid for, mind you).

This is a good business and you can make a great deal of money. It can be a simple business, but that’s not to say it’s always an easy business.

On balance, I’d say that I was really lucky not to have access to easy credit when I started out, or to have a “hot” market, or a long list of cash rich paper buyers waiting for my product.

No, I think it worked out just fine. After the hard times, these days seem like a piece of cake. And make no mistake, the hard times will come again. They just won’t ever come my way again.

If you want more particulars, yell. Or you can drift over to the commercial board and do a search or two. There’s almost always something interesting going on over there.


Eric C

PS - this was going to be a longer post, but between the Nyquil ( a little flu,I think) and the new install of Linux on my computer, I’m too tired to think.

New Construction for Rental Property??? - Posted by Doug

Posted by Doug on February 19, 2001 at 15:30:27:

There are some nice entry level SF homes in our area for around $100K. What are the odds that the builder with take a lease option? Has anybody had any luck getting a builder to finance?

It would seem that renters would love to opportunity to rent a new home. Also, you might have quicker appreciation, right?

What are your thoughts on purchasing new homes for rental properties? At first blush, I assumed it was a bad idea, but I’m rethinking…

By the way, I’m looking forward to being successful so that I can help others the way folks have helped me here!

New Construction can work for Rental Property! - Posted by David Krulac

Posted by David Krulac on February 20, 2001 at 18:21:46:

But as the other posts here indicate, its not a slam dunk, and prevailing thought is don’t do it. They say you can make any money. They say blah, blah, blah. Who are they? Have you ever heard of contrairian investing. Find you what ever one is doing and do the opposite.
There is a niche here, but you have to find it and make it work. I built a brand new house for rental,
and it worked out well. The developer had some lots that were slow moving. I knew a tenant who was looking for a particular type if house to rent. great tenant who planned to rent long term. The renter could find a house to their liking. So I step in and build the tenant their house on the developers land that wasn’t selling. I picked that only lot that had a well and didn’t pay anything for a well the developer spent $3k. Got the lot at a good price and built the house and get positive cash flow. Everybody is happy.
The benifts include low maintenance, the builder has a 1 year warranty. No problems with the pre 1978 lead based paint and the house is modern and built to todays taste, such as 2 bathsm 2 car garage and central air not always present in the resale market.
It can work out but you have to make it work and crunch the numbers.
David Krulac

Not totally out of the question… - Posted by ken in sc

Posted by ken in sc on February 20, 2001 at 09:50:57:

Builders do get in distressed situations! Times are good now but if that changes they may need help. You are looking for a builder with excess inventory, especially at the end of the year when he will owe taxes.It does happen but now is not the time with low rates and going into spring. Still, I would never hesitate to tell a builder what you do.

One thought, a brand new home would have VERY LITTLE maintenance when compared to an older home, at least for the first 5-7 yrs. Would help the cash flow. I like to go into neighborhoods that are 2-3 yrs old and catch the people trying to sell and competing against the last phase of building. You can get a good deal and have a fairly new house.


Why??? - Posted by Tim (Atlanta)

Posted by Tim (Atlanta) on February 20, 2001 at 06:31:03:

Unless you get a real good deal on the purchase price, the appreciation on the new home is the same as any other home. Also, if a builder is willing to do a L/O, it is likely that the homes aren’t selling very well. So demand is low, and the appreciation just wouldn’t be there. Also, with the higher purchase price, would the properties cash flow? Don’t get into a negative cash flow situation unless it is very short term.

Why not buy a fixer-upper and then rent it out? You can make the property look nice, and keep the rent reasonable and make a good cash flow. Then maybe you could retail it later. Your options would be open at that point. Plus I can normally get a much better deal from a homeowner who is motivated than a builder.

Just my .02

Re: New Construction for Rental Property??? - Posted by Nate

Posted by Nate on February 19, 2001 at 18:16:28:

I agree with Dewey…highly unlikely a renter would pay enough of a premium to cover the premium you would be paying to get into the property, and the builder really has no incentive to L/O unless sales are really slow.

Re: New Construction for Rental Property??? - Posted by Dewey

Posted by Dewey on February 19, 2001 at 17:08:32:

As a builder, I would not consider lease option on a new home especially when new homes are selling at a premium in my market. Generally, the new homes appreciate at the same rate as other homes in the area.

Additionally, since new homes sell for a premium, negative cash flow would result.

In my opinion, they are not a good deal. I would buy fixer uppers in good neighborhoods.

Just my two cents.

Good luck.

Re: New Construction can work for Rental Property! - Posted by Dewey

Posted by Dewey on February 21, 2001 at 09:28:37:

Did you actually build the home yourself? Just curious.

Re: Not totally out of the question… - Posted by Nate

Posted by Nate on February 20, 2001 at 10:43:22:


One thing to consider, on the flip side, is that when people have been in the house 2-3 years and have experienced little or no appreciation at all (which is often what happens when the builder keeps on building the same house all around them), they have a hard time making the decision to sell because they expected some appreciation and it’s not there. Of course if they are transferred or are forced to sell for some reason, then you can pick up a good deal.

Good luck!

Re: New Construction can work for Rental Property! - Posted by David Krulac

Posted by David Krulac on February 21, 2001 at 15:12:19:

pick up a hammer? no. But I designed every inch and hired a general contractor

Exactly… - Posted by ken in sc

Posted by ken in sc on February 20, 2001 at 15:24:42:

that is what I mean. I look for people who are marketing there houses FSBO in those neighborhood because they already know they have little equity and are just trying to move without losing their shirts paying a commission. They are prime candidates for a ls/op purchase or taking “subject to” their loan.

Re: New Construction can work for Rental Property! - Posted by Dewey

Posted by Dewey on February 22, 2001 at 15:36:57:

In my area, a new home built by a general contractor would definitely result in serious negative cash flow, regardless of whether the home owner designed it or not.

Although I can understand it worked for you, I don’t think it would work in many markets because rents would not be high enough to cover the PITI, repairs, and vacancies.

The poster would definitely have to gauge his market. Nevertheless, I do not recommend building new homes as rentals. There are easier ways to make money.

Good luck in your decision.

Not every New house will work for Rental Property! - Posted by David Krulac

Posted by David Krulac on February 23, 2001 at 10:50:33:

I think Eric and I are in agreement, there are advantages to building new and renting. And it can be profitable. But not every new house works. You still have to be selective. Look for the edge. Renters and Buyers have different expectations. You can use that to your benefit. Look for some bargain edge. It might be a lot that a developer has left in a nearly built out development. He might sell way below market just to move on. Is there a lot that has a feature that is not fully valued by the market, say a $3,000 well, that isn’t reflected in the price. And lastly don’t underestimate the value that tenants place on new. It just like new cars. There’s a segment of the population that buys a brand new car every 2 years, they are the same people who will pay a rental premium for a new house. It can be done, it can be profitable, and I like it that everybody, except Eric, says it can’t be done.

Re: New Construction can work for Rental Property! - Posted by Eric C

Posted by Eric C on February 22, 2001 at 16:18:27:

Hi -

I agree with David – building new homes that I intend to hold long term has worked for me in several markets (3 states)over the years.

However, you are also correct that knowledge of your local marketplace is critical. While it may work for some,for others it is simply not practical (nor profitable).

Quite frankly, I’d rather tackle new construction than rehab anyday; my biggest concern is always the timeframe, not funding, ordinances, etc.

As you say, to each his own.


Eric C

PS - I always get a rental premium for a brand new house.

Not for everyone - Posted by Dewey

Posted by Dewey on February 24, 2001 at 09:31:39:


You are mistaken in your belief that only Eric believes new homes built as rentals can be profitable. I know a new home can be profitable. I have built many homes in the past ten years, but I, generally, don’t think it is a sound investment vehicle for most investors.

There are too many potential problems with constructing new homes for an investor. One mistake could completely erode the potential profit.

If the investor hires a general contractor to do all the work, cash flow is significantly reduced.

I don’t know the particualrs about your deal, but I assume you have very little cash flow from your rental. If your tenant moved on, I hazard to guess any money generated from earlier cash flow would turn from positive to negative in a few short months.

As for Eric, he is a builder. He can build the home for far less than market value. (The same as I can) His cash flow would be much better than yours from the same home.

Therefore, although I agree new homes can be profitable as rentals, there are much easier, more profitable, and less riskier ways for investors to make money.

By the way, what are the details of your deal? Then everybody can then evaluate the merits of new construction as a rental.

The last home I constructed was a three bedroom, two bath home within a few blocks of a lake that appraised for $95,000. I built it for $55,000. Without a doubt, I would have positive cash flow from this home. Nevertheless, I am selling it for cash.

Re: New Construction can work for Rental Property! - Posted by Dewey

Posted by Dewey on February 22, 2001 at 16:47:23:

Please give some details on the rentals.