3 Reasons Why New Construction is the New Choice for Investment Property

Three great tips for buying new construction for investment properties:

1. Builders typically pay closing costs
Builders will draw in new customers by offering to pay for all of the closings costs in the transaction. The caveat to this is they want to steer you to use their lender. There are lenders out there that will match the builders incentives, however. Another solution to the caveat is some builders will just have an “allowance” per say for you to use towards either upgrades or towards closing costs (regardless of lender). Since it is a rental property that will more than likely require some maintenance or upgrading at a later date anyway, it makes more sense to use that allowance towards closing costs and not on upgrades. Now all of your upfront costs are going directly into the equity of your property and not on fees.

2. The property is new & warrantied

One of the biggest fears when becoming an investor in rental property is the hidden costs of maintenance. You can’t put off fixing something when a tenant occupies the property like you could if you were occupying the property. Purchasing a property that is new and comes with a warranty will allow you to build your reserves before any costly maintenance arrives that is not covered by a warranty. Most builder warranties cover 1 year “bumper-to-bumper”, 2 year craftsmanship and 10 year structural.

3. You can buy a spec home for less than market value
I’ve actually written another BLOG post about this previously. When a builder has an inventory home sitting on the market you are typically able to purchase the home either slightly below market value or receive more incentives such as additional closing costs assistance or upgrades. Everyone wants to purchase a property and have instant equity—-even more so when purchasing property for rental investment.

My husband and I, after taking an investment class, decided that we will be purchasing a new construction townhome as an investment for our children’s college. We have 2 children under the age of 2 and they will start college only 1 year apart. Real Estate, we have found, is not only the most secure investment for our children’s future but also provides the largest return. We will be financing the property for 20 years, but paying off in 15. See below example:

*Down Payment: Most lenders who loan on investment property require between 20% and 30% down
*Interest Rate: This rate is based on a recent quote from a friend who lends on investment property.
*Insurance: Because this subject property is a town home the insurance for the structure of the property is included in the HOA fees and your tenant would be responsible to obtain insurance for their contents.
*Reserves: I always recommend having a reserve of at least $7,500 in your rental account for maintenance, turnover, and vacancy prior to utilizing your income for other things such as paying down the principle or additional investments. With this example it will take approximately 21 months to build your reserve or 1.75 years. After this point, you can begin making additional principal payments on your mortgage to pay off the property faster or you can put that additional on the side to build a downpayment for a 2nd investment property.

I will leave you with a few tips that I have learned “the hard way” over the last 5 years of owning rental property:

1. My next investment property will be new construction with a warranty!
2. My next investment property will be a condo or townhome so that there is less maintenance required.
3. If lawn maintenance is not included in the HOA, I will increase the rent to include it. (It is very expensive to overhaul a yard if disregarded by your tenants).
4. Increase rent every year. I once was so happy to have the same, great, tenants staying in my property that I didn’t increase rent for 4 years! On year 5 I had to increase due to increased insurance and taxes and they threatened to leave because of the increase—it took putting a sign in the yard to sell it for them to re-consider staying and paying the increase! A yearly increase should be expected not a surprise.
5. Hire a property management company to place your tenant. Even if you are managing the property yourself you will want to hire out a company to run a professional background check, credit check, and verify rental history/references for your tenant. This helps to protect your investment and eliminates the risk of accidentally violating the Fair Housing or Landlord & Tenant Act. (Education is key—study the laws in place federally and locally in your state regarding becoming a landlord).

Remember when dealing with new construction homes that you should utilize a Realtor® with experience in new construction.  They can help you navigate the contract and ensure timelines given are realistic and are met.  Should any issues arise you want to know you have your own representation that is experienced with this type of real estate.  Call Amanda Houser, Realtor® at 904-466-0092 to schedule an appointment today to view the available new construction homes in St Johns County! For more new construction updates follow Amanda’s facebook page at www.facebook.com/amandasellsjax.