Active real estate investors primarily profit by acquiring properties below market value. SDIRA Wealth specializes in constructing and marketing brand new houses at full retail prices, claiming that five of such properties can generate approximately $100,000 in annual income. Interestingly, the majority of that return isn’t reflected in rental income. Here’s the breakdown:

• SDIRA Wealth constructs single-family homes and duplexes tailored for rental purposes across four Texas cities: Lubbock, Midland, Abilene, and Houston. Most properties are priced between $200,000 and $250,000, and Matt insists that his team won’t enter any market unless the properties achieve a cap rate of 6 to 9 percent and remain profitable after considering loans, taxes, and insurance.
• A $250,000 home with a 20 percent down payment results in a monthly cash flow of a few hundred dollars. Matt advises against purchasing rental properties merely for $200 monthly returns, emphasizing four contributing factors: about 4 percent cash flow, 4 percent principal reduction from tenant payments, 4 percent in depreciation, and appreciation based on the property’s entire value rather than just the down payment.
• New constructions simplify tax reporting. Since builders have invoices for every part, cost segregation studies eliminate the need for complicated calculations. SDIRA Wealth provides this report to investors at no additional charge.
• Matt mentions that his team manages hundreds of 1031 exchanges annually, with new inventory becoming available every one to two weeks. For instance, a retired pharmacist sold his pharmacy on a Wednesday, purchased a rental property by Friday, and had a tenant ready to move in that weekend.

Links and Resources

Why Construct a Brand New Home for Rental?

Most rental properties weren’t originally intended for that purpose. They started as primary residences, later purchased by investors who made some improvements before renting them out. Seth shares his experiences with such properties in this episode, noting that attempting to enhance something inherently flawed isn’t effective.

SDIRA Wealth alters that approach. The company first researches market conditions before constructing homes specifically for investment purposes, targeting B-class neighborhoods, areas with significant growth, and top-rated school districts. They prioritize durable materials over aesthetics, opting for all-brick exteriors, luxury vinyl flooring, custom cabinetry, upgraded HVAC systems, slab foundations, and xeriscape landscaping to ensure tenant sustainability.

By purchasing materials in bulk across entire developments, Matt argues that their homes are significantly cheaper than those built by conventional builders. Currently, they’re active in Lubbock, Midland, Abilene, and Houston, areas that saw an influx of around 120,000 new residents last year.

Analyzing the Numbers

Matt candidly discusses cash flow, asserting that his team will only enter markets where properties can maintain a 6 to 9 percent cap rate while remaining cash flow positive after all expenses. On average, a $250,000 home with a 20 percent down payment yields a few hundred dollars monthly, and he cautions against buying rental properties just for small cash returns—comparable to selling items on eBay.

The key is in the additional income streams, referred to by Matt as the “four streams of income”:

• Cash flow: at least 4 percent after all expenses
• Principal reduction: approximately 4 percent annually paid down by tenants on a 30-year fixed-rate mortgage
• Depreciation: around 4 percent in tax savings from standard straight-line depreciation over a period of 27.5 years
• Appreciation: for a $200,000 home appreciating at 3 percent, that translates to $6,000 gain based on your $50,000 down payment, as appreciation is calculated on the property’s full value, not just your investment.

When summed, Matt estimates a return of around 12 percent or higher, with most of this income not appearing in monthly statements. Whether one agrees with these calculations is worth exploring, and Seth delves into that further in the episode.

Tax Strategies: Cost Segregation and 1031 Exchanges

With the reintroduction of 100 percent bonus depreciation, Matt states that cost segregation keeps his team exceptionally busy. New construction is particularly suited for this approach because builders have detailed invoices for all components, eliminating the tedious reverse engineering typically required. SDIRA Wealth offers the resulting cost segregation report to investors free of charge.

The practical aspect of 1031 exchanges is outlined by Matt, illustrating how his team executes hundreds of these transactions annually. He recounts a retired pharmacist who sold his pharmacy on a Wednesday, purchased a replacement rental on Friday, and had a tenant moving in over the same weekend. For investors facing the 45-day identification window with available funds, collaborating with a builder releasing inventory regularly is a practical solution.

Who Should Avoid This Investment?

Seth posed this question directly to Matt, who provided an unexpectedly candid response for someone marketing this model. If you’re a DIY investor who enjoys finding undervalued properties and adding value through hard work, this approach may not be beneficial, as it involves paying full retail for newly constructed homes.

Additionally, this strategy is not suitable for those seeking immediate substantial income. It relies on appreciation, tenant paydown, and tax benefits rather than generating cash flow from the outset. Given that the person guiding you is also the one selling the properties, conducting appraisals, inspections, and thorough due diligence is crucial.

The Next Step for Active Investors?

The core of this conversation transcends merely home construction; it reflects on how active investors leverage the profits they earn. Matt’s clients range from crane operators in New York to developers managing over 800 properties, along with investors who continue to flip properties but allocate their profits into buy-and-hold rentals in more favorable markets. The episode explores how the Freedom Five formula functions, the financing available within self-directed retirement accounts, and how a few hundred dollars monthly can evolve into what Matt considers “real cash flow.” If you’ve ever contemplated what follows after your next investment deal, this discussion is certainly worth your time.

Episode Transcript

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