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Looking to invest $175k - should I buy a new construction rental property?

3,610 515 December 2, 2017 at 12:55 AM
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I'm outside Charlotte NC and in my area there are new neighborhoods with 1700-1800 sq ft 3/2 homes in the $160k range. They are on .20 acre lots. I'm thinking rent would be in the $1300/month range. Being new construction I'm thinking they would be relatively maintenance free compared to cheaper yet older homes at around $125k.

Homes above $125k around here mean nice neighborhood with stable people (teachers, nurses, cops, etc.). Paying cash for the home means my only expenses would be property tax (~$1800/year), home insurance (~800/year) and maintenance from wear and tear of renters.

Let's say I gross $15,500/year and net $10k. Do you think this would be a good rate of return compared to other investment avenues? I'm a little uneasy about the stock market, but people always need places to live which means a house could always be rented or sold, right?

Another option I've thought of is buying two homes in the $80k range which would probably gross an extra $300/month but would be in somewhat questionable neighborhoods while being 60s/70s construction.

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HIDDEN
12-02-2017 at 03:22 PM
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Our community has rated this post as helpful. If you agree, why not rep siid?
#3
Honestly - run the numbers on a spreadsheet first and foremost. What's your return on asset value and what's your cash on cash return?

Then figure out what the occupancy rates/vacancy rates are like in you area.

Assuming a 1 month vacancy (bare minimum) - you gross $14k in collected rent. Subtract $2k in property tax, $1k homeowner's insurance and $3k in maintenance reserves which gets you 5% cash yield plus appreciation.

Compare that to VYM (Vanguard High Dividend Yield ETF) where you get 3% yield plus appreciation.

Is the 2% extra yield worth it the headache of managing a property? That's something you have to decide.
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#4
Quote from siid
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Honestly - run the numbers on a spreadsheet first and foremost. What's your return on asset value and what's your cash on cash return?

Then figure out what the occupancy rates/vacancy rates are like in you area.

Assuming a 1 month vacancy (bare minimum) - you gross $14k in collected rent. Subtract $2k in property tax, $1k homeowner's insurance and $3k in maintenance reserves which gets you 5% cash yield plus appreciation.

Compare that to VYM (Vanguard High Dividend Yield ETF) where you get 3% yield plus appreciation.

Is the 2% extra yield worth it the headache of managing a property? That's something you have to decide.
Thanks for the info. I wonder what I'd be looking at if I just funneled the 1300-1400 rent into VYM for 10 years and paid all expenses related to the property out of pocket. I'm guessing the major components like roof/plumbing/HVAC/electrical are good for at least 20 years. Stuff like painting I can do myself...with a family members military discount and discounted gift cards I can get stuff like carpet pretty cheap.
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#5
Quote from niceperson77
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Thanks for the info. I wonder what I'd be looking at if I just funneled the 1300-1400 rent into VYM for 10 years and paid all expenses related to the property out of pocket. I'm guessing the major components like roof/plumbing/HVAC/electrical are good for at least 20 years. Stuff like painting I can do myself...with a family members military discount and discounted gift cards I can get stuff like carpet pretty cheap.

That is a very difficult question to simply answer. It really depends on so many different personal variables in your life. Have you paid off your primary mortgage? Annual income? Age? College funds & Retirement plans? Is the 175k discretionary money that won't effect you if you lose half?

New construction comes with a premium pricing because of the whole everything is new thing. You won't have much appreciation if you need to sell it. Best thing to do is look at communities that were built 5-10 years ago see what they sold for then and what they sell for now.

Me, I feel safer putting my money in mutual fund and ETFs than renting out a home.

I like easy math because its always true. If you net $10k a year it will take you 17.5 years to roughly double your money $175k in home value and $175k in rent. I understand that the home value is a +/- variable.

Had you invested the 175k in the aforementioned vanguard fund ( 10 year return 7.79%) you account would be at $675k


You may not be comfortable investing in the market because you're not familiar with it. The fact that you have $175k to invest is a testament that you do have a brain in your head and that you know what you are doing. Well done and Bravo.

P.S. If you do end up looking into investing in the market, find some one that will explain in way that you fully understand and makes you feel comfortable. Trust your gut.
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#6
Their is a lot of questions to factor in OP here. First of all do you have any basic DIY if something happens to the rental? Its always good to know the basic at the very least from as you mentioned painting, plumbing, some electrical knowledge basically a basic handy man. Another thing I am not sure if I understand is it a property that your going to be close to or or a bit distant. Having a distant property can be a headache especially when you have to have a property manager handle it because if problems happen than it becomes costly.

Also buying a new house you shouldn't expect issues however I would not rent out a new home. I just don't like the idea because its a risk of who your going to rent it to. What I mean by this tenants never take care of a property as you the owner would take care of your own home.

I am putting my pops for example I help him out with some paper work, but when issues happen like plumbing, electrical he does what he can if not he has a handy man. Where he has saved a lot of money is two factors one have the properties close to him and when their is issues he goes and fixes them (note my pops is retired so he has the time to go fix the issues he can himself). Factor number two is having a handy man. My dad hit the lottery found a friend that basically knows how to fix any issues at a very cheap price. He charges a fraction of what someone that works for a company would charge him.

Last but not least you either going to get a smooth easy tenant or headaches. You can scan a tenant as well as you can, but their is always going to be the possibility of running into smooth cash flow or a headache. The best thing is to do a intensive background check get to know the person and just ask questions. Although its not always going to assure a smooth tenant but will get you closer to getting someone that is filling the requirements you seek. If you do its checkmate.

Bottom line is being a landlord can be very easy cash flow, but it requires some work. I think the best cleanest way to make money is always the stock market, but theirs risk of losing not as much as being a landlord. Another factor OP is your putting a lot of money for little return although you are getting more return than you would in any savings account its just up to you if your determine to give it a shot as a landlord. Another thing is learn your laws its always good to be aware of the basic laws that a landlord has vs a tenant.
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#7
If you are not familiar with BiggerPockets I would highly recommend you check it out, it is all about investing in real estate. Website, podcasts and books are all available. The book on managing rental properties is pretty good, you can get it on amazon or audible. The books are clean summarized presentation of the information that is spread out over podcasts and the website. If you are serious about real estate, take a couple of months and learn everything you can, it's OK if the cash just sits for now.

Another thought is you do not need to compare your returns to the stock market. You already said you do not want to be invested in the stock market. Good investing is all about finding something that will work for your life. It has to fit your personality and provide the income you need to live whatever life you choose. Who cares if it hypothetically returns two percent less then some Vanguard fund if it works for you (past returns are not a guarantee of future performance). Everyone has a different situation, life is not a textbook with only one correct answer.

Since you have that much cash to invest consider a larger property, some sort of multi family or even a small apartment complex. Might be easier to manage then several single family homes, just a thought.
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#8
Quote from timbertdi
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That is a very difficult question to simply answer. It really depends on so many different personal variables in your life. Have you paid off your primary mortgage? Annual income? Age? College funds & Retirement plans? Is the 175k discretionary money that won't effect you if you lose half?

New construction comes with a premium pricing because of the whole everything is new thing. You won't have much appreciation if you need to sell it. Best thing to do is look at communities that were built 5-10 years ago see what they sold for then and what they sell for now.

Me, I feel safer putting my money in mutual fund and ETFs than renting out a home.

I like easy math because its always true. If you net $10k a year it will take you 17.5 years to roughly double your money $175k in home value and $175k in rent. I understand that the home value is a +/- variable.

Had you invested the 175k in the aforementioned vanguard fund ( 10 year return 7.79%) you account would be at $675k


You may not be comfortable investing in the market because you're not familiar with it. The fact that you have $175k to invest is a testament that you do have a brain in your head and that you know what you are doing. Well done and Bravo.

P.S. If you do end up looking into investing in the market, find some one that will explain in way that you fully understand and makes you feel comfortable. Trust your gut.
Your math is a little off, $175k at 7.79% for 10 years would be worth $370,529
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Quote from psu77
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Your math is a little off, $175k at 7.79% for 10 years would be worth $370,529
My math is based on 17 years of compounding.
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#10
I don't know about you OP but I'd much rather spend the extra effort studying/digging up undervalued companies than getting that 2% extra yield and the associated headache that comes with being a real estate investor.

But then again - there's no one size fits all solution. Your mileage may vary.
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Last edited by siid December 3, 2017 at 11:29 AM.
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#11
definitely do not assume little to no maintenance on new construction. a lot of stuff happens in the first few years. i would shoot for 3+ years old and hope most of the settling is done.
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#12
lots of good advice here from obviously smart people. my rule of thumb is simple. there's no money to be made from renting single family homes. especially new ones. the fact that you have cash helps, but still...
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Last edited by kevin63 December 11, 2017 at 03:20 AM. Reason: more info
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#13
Quote from Mydiscover
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Just buy Bitcoin...
I came in to literally say the same thing. Visit coinbase.com and thank us later when Bitcoin is over 100k up from 18k in a few months.
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Quote from errorunknown
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I came in to literally say the same thing. Visit coinbase.com and thank us later when Bitcoin is over 100k up from 18k in a few months.
Do you really believe it will go over 100k ? (genuine question). What do you think about Litecoin?

Is coinbase.com safe? they ask for a lot of personal information.
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Last edited by TATYS00 December 13, 2017 at 12:54 PM.
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Quote from TATYS00
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Do you really believe it will go over 100k ? (genuine question). What do you think about Litecoin?

Is coinbase.com safe? they ask for a lot of personal information.
100k for sure, Litecoin I am not too sure. LTC solves some of the challenges that Bitcoin is facing in terms of transaction speed, but thats not to say that Bitcoin couldn't adopt those changes.

Coinbase is the safest place you can buy right now if you are located in the US. They are FDIC insured and have been around for a long time. They ask you personal questions because they have to by law, KYB know your buyer anti-money laundering.
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