Hi there, Qaz,
Since you already purchased, but now have qualms, I’m not sure if you want a second opinion or not. Just in case you do, here’s my 2 cents’ worth.
In my slave (working) days, I owned a small construction corporation specializing in new homes on acreages. We became rather successful but hit wall after wall while growing until I met a wall I chose not to breach (and I think most successful builders do.) You said you have qualms about the debt for LGIH. Good call. The wall I hit was due to the huge necessity of always borrowing while growing. Even with most of our buyers owning their own land, just keeping projects running and payrolls met, the demand for cash was incredible. While banks considered us as conservative and “well run” we always had millions of dollars of debt burden. Too much for my little 20-30 employee operation. I can’t imagine the pressure on a larger corporate builder. My gorgeous family home and everything I owned was always seen as collateral to lenders of course, and growing the “next step”, whatever that might be, was tempting, but always required even more leverage to move up to larger crews, more equipment, more marketing and especially more land. When I sold out, people could not believe I would so such a thing just when we were hitting stride. But I have seldom had any serious regret and any I had were certainly not due to my decisions regarding increasing to the next level of growth and debt.
It seems to be almost impossible for a builder to plow enough profits back into the business to be able to leverage land purchases on a sizeable scale on very favorable terms. There just isn’t enough profit in construction to do this very often, and exceptions to the rule are few and far between, and usually occur with very small conservative long-time builders who have resisted temptation to grow, grow, grow have plowed most all profits back in the company. Most have to live off the enterprise while growing. And it’s not like banking where growth just brings in more money to make more money, almost automatically, as close to a sure thing as there can be. There are no set rates of return on land, and how many times have we seen a builder’s land purchases worth “a fortune” turn out to be worth pennies on the dollar when met by unforeseen circumstances (“surprise” recessions, demand unexpectedly dropping off a cliff, cheaper competition, etc.?)
Debt and to a lesser extent financial transparency, were my concerns with LGIH, and I later kicked myself for ever considering it - who should know better than I? - but I bought some, sold it weeks later, and have been happy with the decision since.
Apparently LGIH is experiencing huge demand, so maybe they will profit tremendously as a result. But there are few trends more cyclical or more volatile than housing demand. Maybe their little corner of Texas may prove the exception to the debt equation. (Huge growth demands huge debt.)
With mortgage interest supposedly on the way up (haven’t really seen it yet, in spite of the forecasts for 2-3 years now) I think there are many and better industries to profit from than new home construction, now perhaps more than ever. I know you will make the best decision for your needs, so feel free to ignore my biased opinion. After all it’s just a small data point at best.
It seems you always seem to take the hardest-to-measure cases you can find to invest in. I’m not sure what to think of that, but I know your are one brave investor and I wish you the best.