New build homes investments provide some unique and financially sound benefits to real estate investors.
These unique benefits are not available to investors purchasing rehab or existing rental properties an offer greater ownership advantages of a new build homes investments then rehab investments.
We will discuss the considerable benefits and the numerous advantages of acquiring single family new build homes through a strategic relationship with Houston home builders.
Before one can understand the benefits of purchasing new single family construction homes, one must first recognize the challenges associated with purchasing, rehabbing and selling distressed properties.
There are 3 principal stages in the entire process of a rehab purchase.
- The first stage is locating and qualifying a subject property.
- The second stage is the actual construction repairs.
- The third stage is marketing and selling the renovated home.
These stages require one of your greatest resources, your personal time.
We will compare the fundamentals of both the rehab investment factors and new construction real estate investment factors.
Challenges with Investing in Rehabs
Buying for the ARV – locating and researching undervalued houses is time consuming and difficult.
This stage first requires the ability to recognize the potential of the immediate local housing market.
This means being acutely aware of the neighborhood market values. This can be achieved by you spending countless hours researching comps or working with a licensed sales agent digging up information.
If the subject property is not being offered at a price that is discounted at least 30% or more from after repaired market value (ARV), it is unlikely that it will be a potentially profitable contender for acquisition under new construction home investments.
Location – profitability is not your only concern, buying a house that is in a good location is also key.
If your target area has a reputation as a crime area or the schools are considered inferior, it can cause you to sit on a property far longer than anticipated.
Evan factors like shopping, dining and available parks can make the deciding difference to a prospective buyer.
These types of items are a significant part of the required due diligence of buying a subject property for rehab and holding or selling.
Sellable floor plan – buying a house with a reasonably good workable design is often an overlooked or ignored feature of purchasing a distress property.
Many buyers are so concerned with buying the house at a deep enough discount that they do not give the finished floor plan enough consideration.
The result is that they feel that home builders in Houston can move a few walls and sprinkle some nice finishes and the house will sell itself.
This type of thinking has caused more than one property sit on the market long enough to result in reducing the asking price to sell substantially.
Contractors – who has not experienced a general contractor not showing up as scheduled or experience job price creep on routine work or required them to redo work that ended the relationship.
Just when you think that your contractors can independently perform, something goes haywire.
It is quite normal to have a good working relationship with general contractors in Houston, but renovating a house is a business and in business not everyone has the same agenda or goals.
Warranty – lets discuss the concept of the contractor providing warranty service on the products for homes that are rented instead of flipped.
If it is not a clear issue of failure of a product, more than likely you will be paying a contractor for a service call to return.
It is very frustrating to complete a home renovation and to have renters making complaints.
Hidden renovation problems – if the fore mentioned items are not enough risk, let me point out one of the highest risk factors of renovation and rehabbing.
Hidden surprises…. Even the pros will miss a major item that requires a mad shuffle of the construction budget to remain profitable.
Not every house has a major surprise item, but almost every home has something materialize that was not anticipated even by the Houston general contractor.
Market cycles – one of the characteristic issues with the rehab hold or flip business is the market cycles that causes swelling with supply and demand and buyer competition.
During recessive economic conditions, the supply of distress properties escalates. During expansive market conditions, the supply of distress homes decreases.
This creates numerous challenges for a rehab investment model around these conditions.
Working With a Home Builder / Developer
As of 2008 financial crisis, single family homes have become a widely accepted alternative real estate investment mechanism.
Large investment funds such as Blackstone, Silver Bay, America Homes 4 Rent have begun to produce huge portfolios of new build homes for rent.
The rental market historically has been small investors or private investors active in distress house sales. Blackstone with its start up $10 billion REIT called Invitation Homes, has made new build homes an asset class acceptable on Wall Street investors.
It took this asset class 3 years to develop the same credibility that it took apartments 25 years to acquire.
As the barriers of entry for home buyers continue to grow with higher home prices and a changing demand for the American dream, this asset class is likely to change as well.
Embracing this investment concept allows an investor to consider a vision of where and how this market can grow in the decades ahead.
Start from the idea of creating a real estate development team that consist of a home builder, marketing & management team and an extension of the investment group.
We will have a discussion comparing the fore mentioned disadvantages of a rehab program to the advantages from the idea of investing in new construction homes.
Your time is money – most rehab home investors measure their ROI by pre-tax investment returns, rightfully so. Although an investor’s real time value is their personal time.
If an investor was to measure their hourly rate measured by their time evaluating, executing and selling their properties, their ROI would be much less. This is one of the best benefits of working with a builder /developer.
Location – one of the unique benefits of working with a real estate developer / home builder is the ability to buy at opportunistic land values.
This means instead of searching for existing properties ARV, the builder assesses the potential investment value of developing and building out a multiple housing project that fits the demographics of the targeted buying audience.
Simply put the land is evaluated to fit the needs of the local buyer’s priority list.
Location – small acreage projects can be specifically developed for the buying market’s needs, the optimization of the lot size density while providing neighborhood security.
The new build homes density can be optimized to address the home design, while being adjusted to make the home site cost work with the proforma.
Contemporary home design – regardless how good your home designer is, a well-designed rehab is still a rehab.
One of the major advantages of new build homes is the ability to capture highly desired contemporary architectural features by Houston builders.
Items like floor to ceiling glass windows, high ceilings and master bedroom / bath suites.
These types of architectural features are complicated and expensive to achieve in a renovation of a rehab.
Contractors – when you are working with a master builder, as an investor most of the concerns with contractors become issues, they have dealt with for 30 years.
Items like schedule commitments, complete scope of work and contractual matters are a normal course of business to a general contractor.
Warranty – in the State of Texas a new build homes by Houston home builders or any other builder comes with a warranty as a matter of law.
The statue requires a 10-year structural warranty, 2-year mechanical, plumbing and electrical warranty and a 1-year labor / material warranty.
More to this point large ticket items such as appliances, air conditioners and roofs have extended service lives not normally available on rehabs unless you purchase new products.
No hidden cost – new home construction cost is different from house renovation cost in that new construction cost do not have unconcealed cost.
That is not to say that there are not things that do not happen in new construction that can cause line item overruns, but as a general rule they do not happen as frequently and do not have the magnitude of impact like rehab projects.
Market cycles – new construction homes activity have its cycles much like any construction industry segment, but the nature of these cycles is much longer for demand cycles then supply cycles.
Home builders In Houston and other Texas cities do over build and cause supply issues during high interest rate periods.
More often over supply of Houston home inventory results from major shifts in the population or local economic factors that trigger the imbalance shifts.
Although the expansive market cycles in new home construction are much longer cycles then the contractive cycles in the distress rehab market.
Portfolio investment opportunities – big investment REITS have begun to offer completed rehabs in portfolio funds.
These would be REITS for various risk and return. The concept of developing strategic based investment portfolios for new build homes may be coming of age.
These portfolios could represent small private gated communities in desirable areas and be sold off to larger investment groups or kept as rental income properties.
Sell or hold strategies – New construction homes have the same investment strategies as do rehab investment.
The investor can place the homes into service as rental property or sell individually or as a portfolio.
The benefits of new build homes are that there is less down time for maintenance between renters and a higher demand for a contemporary home.
One of the benefits of a selling strategy is that new construction homes can be sold separately to individuals or collectively to portfolio investors. The implementation of this selling strategy can be done during construction or years after rental service.
Financial structures – working with a residential general contractor can add a lucrative incentive to the traditional home investment purchase.
As an investor if you are part of the capital formation group, the returns are twice as much as the expected returns on a rehab investment.
Typically, as a capital structured fund partner, your distributions are issued prior to the general partners distribution.
Depending on the exit strategy for the fund and the community project, the distributions can be structured to maximize tax benefits.
The fund provides transparency, liquidity and income performance and the ability to transfer capital gains to another investment without capital gains.
This can be achieved by the implementation of a 1031 exchange.
The overall greatest advantage is that the investor saves time. The investor does not have to spend countless hours looking through 1,000’s of deals a year.
They do not have to waste time managing these properties or dealing directly with owners.
Finally, the investor can avoid the aggravation and loss of time managing the construction improvements.
In conclusion, when comparing rehab investment to new build homes investment, new home construction offers better returns, mitigated risk to the investor and less time committed implementing investment strategies.
