Hi guys I’m new to REI and I’m considering doing some pre-construction in order to get my feet wet, will you share any of your experiences with it and what should I be looking for?
Thanks ahead,
RL
Real estate investing and building are two different things. I don’t know your background… but, If you don’t have any experience in business or real estate… I doubt that building would be the place the start.
Hi Ralora. By “pre-construction” do you mean buying in brand new developments? I started that way about a year ago and have 3 properties now, all brand new homes. You just have to be very careful about selecting the right area.
What are you going to do with the homes once you purchase them? Are you planning on renting them out or do you want to be one of the first in the development and sell it after the series of price increases the builder has? Our (my husband and I) goal was to build long term wealth by keeping them for a while and renting them out. We could easily have sold them in a matter of months and made a very nice profit. We did a lot of market research and selected great areas. It helped that we have a wonderful real estate agent who has worked in the area for about 20 years and really knows what she is doing.
Buying pre-construction has given us a great amount of education on conventional lenders and mortgages, the paperwork involved in loans and closing a deal, and what actually goes into the building of the house. We also learned that there are “professionals” out there who are anything but.
I would recommend doing all the research you can. Find a good real estate agent and use all of his/her knowledge. My husband and I are now looking into more short term investing for a balance and I have found that our experiences with pre-construction have given us a head start in our education but it is very different than other types of investing.
Good Luck!
David & Jeniffer, thanks for your replies.
David, I do have a some business experience as I have owned a business for the past nine years. However I’m looking to diversify a bit by investing in RE. No I’m not looking into building, but rather buying at pre construction prices from builders.
Jeniffer, I will most likely be buying properties to rent out for three to five years at the most (depending on tenenants & the market). If the situation is the right one, then I may sell for profit. I think I’m on the right track as I have associated myself with a few good realtors. They are basically keeping me informed of market areas as well as new developments by builders. I will also try to work my way and test into foreclosures and fix-uppers to see which of these yields what i want which is additional long term wealth.
Can you share any experiences of what to do and what not to do, things that I should look for or be careful about?
Raul
My first advice when buying new construction homes for rentals is to be smart about what you put into the home when you go to the design center. You want to pick colors, designs, materials, upgrades that are neutral and that fit the house, the neighborhood, and the renters you are trying to attract. Don’t go overboard. That was one of the hardest things when we started. We were selecting upgrades that we wanted in a home we would live in. We quickly realized you can’t do that, fortunately we realized it before we left the design studio the first time. Make it nice and give it a touch that will put it a notch above other rentals, but remeber you are trying to keep costs down. Make your selections based on ease of cleaning, ease and cost of replacing, sturdiness, how long it’s useful life is, etc. There is a rental house across the street from one of ours (both brand new homes) that was vacant for 6 months. Ours rented out within a week. We peered into the vacant house and saw that the carpet was a dark brown, it had those metal mini blinds many apartments have, the back porch was just an uncovered small slab. My salesperson told me that the owners were investors from CA and they had a local real estate agent make the selections for the house. It’s amazing what appealing colors, a few ceiling fans, and do it yourself faux wood blinds can do…and it is all inexpensive, lasting touches.
One other thing to think of is what type of people you want to rent to. We buy in middle class areas near major area employers. The rental market would be great in the area of the University but we do not want the hassle of dealing with college kids and all the inherent issues so we stay away from the area.
Sorry for the rambling. There are so many thiings to think of when buying a rental property. You’ll learn something from each experience. I have learned so many things that I hope to remember next time I buy. Just do your research and you’ll be fine.
Guess… I’m sorta the negative voice… when really… just telling you to learn your market before you go out and start colecting rentals… and have plenty of cash reserves in the bank…
Not to mention… personally think it’s crazy to look to new properties as rentals…
So, that aside… there are far easier ways to go out and buy properties without risking credit, and you can still pick up the newer properties… Just that instead of paying retail… you buy wholesale…
You always make your money when you buy… "Never bet on appreciation as your plan… Sometimes it goes the other way… ask the guys running from the stock market right now… that are running now to real estate…
As far as business goes… the only real thing you need to understand is how far you’ve come along in business… I know I’ve been in business for myself for about 20 years… The first ten years of it… I really didnt’ get it…
I owned my own job… I was woefully self employed…
I am thankful today to be “Fully Unemployable”…
What market are you in and how fast is the market moving??.. one of the mistakes I can say I made… is that during the market moving fast… I didnt… cash out enough property… I held most everything… so, I went past the top of the market… when you start losing 20k equity here… 50k equity there… it adds up quick…
One thing you are telling me… that I would approach with caution… is the reliance on realtors… Like anything some are good and some aren’t… but, most realtors believe they know everything there is to know about real estate… but, because of course they are realtors and they went to school for it…
And the reality is… most know about tenth of what you need to know as an investor… I’m not saying don’t use them… just saying consider the source and double check the info…
David
I agree that not all realtors are knowledgable about the market. Like I mentioned, the realtor for the investors who purchased a home across from one of my rentals cost the investor probably close to $10,000 by not being knowledgable about rentals and the market and making the selections for the interior of the house that she made. David is right. Tap into their knowledge but the one who makes the decisions and the one who is at risk is you. You must know your market inside and out.
[What market are you in and how fast is the market moving??.. one of the mistakes I can say I made… is that during the market moving fast… I didnt… cash out enough property… I held most everything… so, I went past the top of the market… when you start losing 20k equity here… 50k equity there… it adds up quick… ]
I made the same mistake as David in regards to planning on holding onto rentals for an extended period of time when I first started investing. I have since adjusted my plans accordingly. Every deal you make is a learning experience.
Dealing with pre-construction I think would depend on where you are buying. The new growth here is tremendous and the market for new houses is so great. We have people camping out overnight to get into an owner occupied home in a new development when they open more lots. I like pre-contruction, especially when they do their “pre-sales” because I can get in at the lowest price for the neighborhood and for the year or two that I rent it I don’t have to deal with any maintenance issues. Any that come up are under warranty. This is very beneficial to me right now, especially starting out and still working on getting my team together to include people who can do more than the minor maintenance issues (I do anything minor). I do plan on trying older rehab homes but pre-construction has been very good to me starting out.
Jen
Jen,
here in Texas… if you were to rent out a new build… you’d get your clock cleaned…
Here in Texas… typically… when a new mortgage is put on a new property… The exscrow is way of…
For instance… the estimated… might be $150 a month for taxes and insurance…
But, that is based on the prior land value… not the after built… So, what happens… is fast forward a year down the road… the property taxes are recalculated…
And low and behold… It should have been $300 a month… Except… now that your payment for taxes and insurance went up by a $150 for the coming year… they still have to go back and collect the $150 deficit from last year… total and extra $300/month… That will efficiently kill 30k in equity worth of cashflow…
Add that to the fact that here in Texas if your property is not homesteaded then you taxes and insurance are 1 - 1 1/2 % higher anyway…
That goes a long way to kill cashflow for rentals… and is making an abundance of foreclosures with No Equity…
David
David, don’t get me wrong I appreciate all your imput, I was just answering your questions. The main reason for me to look at new properties is because of the personal experience I’ve had with my own house. Mine has grown 101% in exactly five years and the area shows no signs of slowing down over the next three to five years. Also, the personal situation that I’m in which makes sense to go new. My sister had some personal problems and was laid off 6-7 mo. ago. She currently works for me, however she won’t be able to buy at the moment so my plan was to buy a new property and do a 1 or 2 year lease option with her.
If the opportunity comes up, where i can get into an older type of house at a discount then I will go that route. It just hasn’t happened yet and I need her out of my house !!!
Why don’t you recomend new properties as rentals? How would you get them wholesale if it’s not a pre-cons.?
I’m in the South Florida market and it is definitely a fast moving one. I have considered the possibility of cashing out on my personal property, however there still some construction going on good for another 3-5 years.
In terms of the realtors, I basically use their imput to gather info. I will not do anything unless it makes sense to me.
I know I have a lot to learn about investing and this forum is a very good way of getting in contact with people with experience.
Raul
This is exactly the same situation where I’m at, and it makes a lot of sense to me.
RL
Hi Jennifer,
I am a low-profile newbie pre-construction investor learning this side of investing. I bought and sold a property in South Miami a year back and am putting the profit back into the market. I saw u mentioned u had researched a lot about the good areas for investing. Can you pl share with me as to what resources you used for researching what areas? Do you think Tampa(specifically New Tampa area) could be the next SOCAL or South Florida?
thanks,
Vishwa