Sharing this was inspired by Emil Shour's radical transparency about his investments. Definitely check him out... nothing but great stuff! 🙏
Last July my wife and I did a cash-out refinance to pull out $91,308 but that decision was predicated on our ability to put that cash to work (let me know if you’d like to see a deep dive on that!). Given the market was all over the place, we decided to push it back into real estate and build a place in Phoenix, AZ to diversify outside of California (where our other 2 properties are at).
Why Build?!
Two words: risk mitigation...
We made the decision during a very tumultuous time (2020... enough said) and going into a new build we were able to "experience" the market—up and down—for a year without full exposure. Builders were only requiring a deposit of $7,500 to start the build process. We then could opt to let go of the deposit and move on, keeping the remaining $83,808 to invest elsewhere.
We also got a big discount for our patience (and luck).
By our estimates, the house we built would immediately appreciate 10% upon completion for the simple fact that it's move-in-ready. My guess is people moving to the Phoenix area are relocating for jobs meaning they aren't able to wait the 9-12 months it takes to build a new house.
Most builders are having to do monthly drawings for lots and some people have been waiting 3-5 months to get one! This told me there was high demand without price increases to reflect that demand... which meant artificially low prices.
We were 1 of 31 other people on a Zoom call drawing for 5 lots and happened to get one 🤯
Quantitative—The Numbers
When we initially decided to pull the trigger on this property we estimated that we could get $2,600-$2,700/mo in rent—roughly 6-7% cash-on-cash return. Pretty solid, safe, long term returns! Below is the full breakdown:
Expected property profile when making the investment decision
Now, about 5 months later, the numbers have evolved quite a bit. By the time the property is finished being built we'll be closer to the $2,900/mo and are already seeing some intense appreciation (even if it's temporary). In short, comps are pegging this house conservatively at $535k—about 14% appreciation, or 51% cash appreciation, and 8.8% cash-on-cash return.
Expected property profile as of February 2021
Qualitative—Future Prospects
Phoenix is one of the fastest growing cities in the US and is projected to double by 2040... this will lead to intense run off into neighboring cities such as Mesa
Eastmark is one of the top master planned communities in the greater Phoenix area, has a young vibe, 3 brand new schools (K-12), and nearing the end of the development.
In addition to the appreciation hike from a completed house, builders were also raising prices about 0.5-1% per month since November 2019 and at the time of writing this, our house now starts $31k higher than what we paid for it—a 7.75% increase.
Mesa making moves with Elliot Tech Corridor — Apple data center, Google building $1B data center, and infrastructure built out for other large facilities which basically translates into higher wage earners near by.
Proximity to a regional airport — as population grows and PHX gets congested, I envision this airport turning into the equivalent of LA's surrounding regional airports (BUR, etc.). They are already making moves toward this future by building a new tower with the FAA paying for 80% of it.
After the fact, a number of additional developments have reinforced our thesis here; Legacy Sports Complex announced, wavepool/surfing/waterpark announced, etc.
Risks/Assumptions
Phoenix got hit pretty hard in 2008. The local housing market took a pretty dramatic nose dive compared to other major cites and experienced a long road to recovery. Though, my guess is with the upward trend toward remote work and fragmentation of tech-cities Phoenix would have a less dramatic downside than in 2008
We all know the housing market is on fire right now and it can’t sustain this level of growth indefinitely. For us, appreciation is a bonus that could potentially allow us to refinance and move into other properties quicker. If we see inflation start rising off the back of all the QE going on, I'd fully expect the fed to start pushing rates up and that could be pretty rapid... this will have a direct impact on home values. Overall, we got in at a great time but probably wouldn't touch much in the area at current prices.
The size of the property could lead to some bigger repairs, especially if a tenant doesn't take care of the place. Vetting and keeping a good tenant will be paramount to making this a successful investment.
A bit more of a learning curve than anything but this will be our first property that we manage remotely. We may end up getting a property manager at some point but with some basic systems and a team of professionals (handyman, electrician, etc.) my thought is we can bypass the 10%-ish fee with minimal headache... especially during the first year when we have a builder warranty.
