Twenty years ago interest rates were much higher, in the high single digits to low teens. Try cash flowing anything but multi-family during those times were extremely difficult; unless the home you purchased was in a less then desirable area of town. Now that interest rates are below 7 percent, a brand new home can cash flow with even just 10% down. If you put 20% down, you will be very cash flow positive. And with new homes prices declining with all other home prices, now is the time to purchase quality new construction at reasonable prices and lock in the low prices and rates now.
What is some things that make brand new construction desirable now? I'll go into further detail below on these 7 points.
1)Interest rates are at some of the lowest levels in decades. 2)Home prices have dropped. 3)With lending requirements tighter, there is a much larger pool of tenant prospects then 2-4 years ago. 4)Home warranty. 5)Nothing to repair for at least 10 years. 6)Most new construction is in desirable areas of town. 7)Closing costs paid by new home builder. 8)Higher quality tenants, higher rents, higher cash flow. 9)Home appreciates in value more.
I've already mentioned the low interest rates and lightly touched on the home prices. With new construction, I have seen some fabulous deals in the Indianapolis real estate marketplace. For example, here is the details of a new home I purchased last year: Original price was $175k. Home was discounted to $135k. 3,000 sq.ft., 4 bedroom 3 bath with a bonus loft and was almost full brick. I am able to rent this for $1,600/month, and I actually then lease optioned this home for $180k. This home was an inventory home. Inventory homes are typically homes that are built for an owner occupant, but their financing falls through at the last minute. Home has already been built, and builder wants to get rid of home asap. The builder has all their money tied up in the home.
Since lending requirements have tightened, many of the people purchasing new homes have now gone back to renting, and most of these people want a brand new home to live in! The rental market in the Indianapolis real estate area is the tightest I have seen it in 10 years, and I know it's the same in other market places as well. And most tenants in general would rather have new construction over a 40 year old home that needs updates.
A new home will have a home warranty of at least two years on everything in the home and also a 10 year structural warranty for any of the major items, like roof, the structure of home, outside siding, etc. And with it being a brand new home, the maintenance costs over the first 10-15 years is very low. I purchased a brand new home I lived in for 10 years, but now rent out. I have not had to do much at all to the home over these past 10 years, much less repair work then any of my 40-80 year old homes I own.
Most new homes are being built in high-growth areas, areas that people would prefer to live over the older inner-city type areas. These homes are easy to rent. In fact, the average time it takes me to rent a brand new or newer home is about 1/2 the time it takes to rent a home in other areas of town.
You are probably saying, "but Craig, I can buy a 40 year old home in the inner city for 50k and rent it out for $800/month". Let's look more closely at this scenario. On paper, it will indeed look better. But, factor in vacancy rates(at least 2x as long to rent out),repairs from tenant upkeep(on average, tenants paying $600-$800/month do not keep a home up as well as someone paying $1,600-$2,000/month), and all the maintenance headaches and that extra $100-$250/month in additional cash flow gets eaten up very quickly and it becomes a money pit.
And compare the home appreciation potential of a brand new home overall an older inner-city home: I have seen people purchase lower quality homes, own for 10 years, and it's worth the same or less then they purchased it for.
For a synopsis, brand new construction may not look as good on paper for cash flow, but after factoring in all items, including quality of tenant, price appreciation of home, and speed of renting home, new construction wins hands down over older construction.
Article provided by Craig Bartels. Craig is the co-founder of Crager-Bartels Real Estate in Indianapolis, IN. Armed with one of the most unique marketing programs available for real estate sellers and investors, the Crager-Bartels Indianapolis Real Estate Triple Play at http://www.RealEstateTriplePlay.com triples the marketing on your home for sale or for rent and puts more money in your pocket. Additional information can also be found at http://MyIndianapolisHome.com or via voice at 317-839-8786.
Posts
