Purchasing an STR can be challenging in this market but there are still good properties available and many different strategies to acquire one. One strategy is to skip the bidding wars and go directly to a builder to purchase a new build… Brilliant… but lets look at the advantages and disadvantage to this strategy.
1. How will you finance your new build?
New builds fall into two categories… Those that require a construction loan and those that DO NOT… Spoiler alert. Those that DO NOT are generally the better option.
Builders that do not require a construction loan usually take a non-refundable deposit during the build time and then you apply for financing when the property in complete. These builders are funding the build on their own and in general are well established.
The other option is a builder that requires a construction loan. In this scenario you apply for a special construction loan that pays out to the builder as the project progresses. At the end of the build you refinance your construction loan into a conventional loan or DSCR loan depending on your financial situation.
I prefer the deposit option as this frees up capital to purchase additional real estate during the building phase.
2. Will funding a New build result in opportunity cost?
This is a tricky one and my crystal ball is a little fuzzy. With that said, it is important to consider your options. If you take a construction loan with a 10% down on a 9-12 month build what will be the opportunity cost? Would you be better purchasing an existing property, close in 30 days, and begin renting with positive cash flow immediately…
The construction loan option actually has you paying out during the build process.
On paper it seems like an easy decision but not necessarily.
If you are in the financial situation to handle the construction loan and are ok with passing on 9-12 months of income it may be worth it to acquire a property in a desirable rental market. In addition, many new builds are under the current market price and will likely resulted in increased equity. There is more speculation with this type of investing so we still recommend only making the purchase if the property will cashflow on completion.
3. How will you furnish your New build STR?
This is an expense to consider. Some new builds include an allowance to furnish the property, which is a great option. In this case, you are essentially rolling the furniture into the purchase price, rather than paying for all the furniture upfront. This is a decent option to assist in maintaining cash reserves. The less out of pocket cash the better.
4. What is the reputation/history of your builder?
How many builds have they done? Do they develop neighborhoods or build individual custom properties? What do current owners say about the builder and their work? These are all things to consider before committing to a new build.
5. Does the new build still work if it goes over time or budget or both?
The old saying goes…. Construction/remodels always cost twice as much and take twice as long as quoted…. Now granted no seasoned investor will accept this but nonetheless it is a common phrase for a reason. Make sure to run your numbers with worst and best case scenarios. If the numbers still work in the worst case than you are likely still in good shape.
Lauren and I think that new builds are a great way to grow your portfolio but you will want to balance new builds with some “ready to go” properties that you can get up and going quickly. The sooner you put a property into service the sooner you will see a return on investment. If you purchase only new builds right now than you may miss out on the tax benefits of bonus deprecation if your properties are not completed before the end of the year, 2022. Like most things in life there is a balance. We hope you find a new build strategy that works for you
Enjoy your Journey to Financial Freedom