Author Topic: What to do with subdivided property - sell, build, hold?  (Read 799 times)

Luap595

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What to do with subdivided property - sell, build, hold?
« on: January 24, 2020, 10:39:39 AM »
We're almost through the 1 1/2 year process of subdividing the property our house is on. When it's (finally) done, we'll have our home (which will still have a mortgage), and another vacant piece of property alongside it that we'll own outright.

Our next step is figuring out what to do with this piece of property. It seems like we've got a lot of options, but we can't decide which one is best financially. Hoping y'all can help!

Background:
We live in a resort town that has seen a lot of growth in property prices.
There is a massive amount of investment ongoing in the town.
A piece of property exactly the same size as the new one we're creating sold for about $145k on the same block this past summer.
We owe about $275k on the house.
We've got a car loan that's kind of high interest (7%) but it's only 2 months from being paid off.
We've got other debt, including student loans, that are low interest (3-5%).
SO and I are still working full time, plus 2 children.
We've got a small emergency savings (about $15k).
We've got no retirement savings.
We're in our early 40s.
We earn high 5 figures, nearly 6, annually.
The property is zoned so that there could be 2 single family homes/units on each.
Our current home needs a little work - at least a new roof.

Options:

1. Sell the property now, use some of the profit to replace roof, put the rest in Vanguard fund.
2. Hold the property as an investment.
3. Build a brand new home on the property, sell current home (we'd profit about $50k on sale). New home would cost about $300k here.
4. Sell property, use profit to fix roof and build a garage with a rentable 2-bed apt. on top. (Local rents would give me about $2k monthly).
5. Try to build townhomes on the new property (not sure I can get the loan, because of debt to income ratio) rent them for a while, then eventually sell them.
6. Some other idea I haven't thought of.

One concern of mine here is taxes. I'm not sure if any of these options, or some other option, is going to save me the most there.

Let me know if you need any more details. Thanks!

rws

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Re: What to do with subdivided property - sell, build, hold?
« Reply #1 on: January 24, 2020, 12:21:38 PM »
#4 sounds the most appealing to me. Sell the spare land, then build the rental apartment because it will provide cash flow.

Use the remaining money and rental cash flow to fix your roof then pay off all of your student loans and all other debt as quickly as possible.


Another option - Is there anyone you would want to partner with on building those townhouses next door? You could use the cashflow from that to do all of the above, and then you'd have even more income producing rentals to fund your retirement.




Luap595

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Re: What to do with subdivided property - sell, build, hold?
« Reply #2 on: January 24, 2020, 12:29:33 PM »
#4 sounds the most appealing to me. Sell the spare land, then build the rental apartment because it will provide cash flow.

Use the remaining money and rental cash flow to fix your roof then pay off all of your student loans and all other debt as quickly as possible.


Another option - Is there anyone you would want to partner with on building those townhouses next door? You could use the cashflow from that to do all of the above, and then you'd have even more income producing rentals to fund your retirement.

Thanks! I hadn't thought of the possibility of partnering with someone. My debt to income would be way to high, but maybe with a partner we can pull it off - plus I can look for someone with experience in this... Definitely something I'll be considering.

robartsd

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Re: What to do with subdivided property - sell, build, hold?
« Reply #3 on: January 24, 2020, 01:00:13 PM »
Options:

1. Sell the property now, use some of the profit to replace roof, put the rest in Vanguard fund.
2. Hold the property as an investment.
3. Build a brand new home on the property, sell current home (we'd profit about $50k on sale). New home would cost about $300k here.
4. Sell property, use profit to fix roof and build a garage with a rentable 2-bed apt. on top. (Local rents would give me about $2k monthly).
5. Try to build townhomes on the new property (not sure I can get the loan, because of debt to income ratio) rent them for a while, then eventually sell them.
6. Some other idea I haven't thought of.

One concern of mine here is taxes. I'm not sure if any of these options, or some other option, is going to save me the most there.
#1 Returns would primarily be capital gains. Not sure if you can exclude any capital gains on the vacant lot due to it having previously been part of your primary residence. This would be the option that I use to measure the other options by in terms of effort required, returns expected, and risks involved.
#2 Don't realize any gain right now, so no income to tax; but this is really just a bet on further appreciation. I'd eliminate it as an option.
#3 Sale of home would certainly meet capital gains exemption requirement. Making the new house your primary residence when complete would mean it too would be fully eligible for capital gains exemption two years later.
#4 Rental income on same property as your primary residence would complicate tax accounting for the property.

#3's value to me would be largely based on how much I wanted to design and build my own home. Similarly, #4's value would be largely based on how much value the garage would add to me.

Luap595

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Re: What to do with subdivided property - sell, build, hold?
« Reply #4 on: February 11, 2020, 11:53:29 AM »
It's funny, I felt a little embarrassed to post #3, as it seemed the most indulgent, least mustacian option. It is also, though, the one I'd liek to do the most. I'm going to check on the tax situation with #1 and go from there. I'll report back when I've learned more.

Villanelle

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Re: What to do with subdivided property - sell, build, hold?
« Reply #5 on: February 11, 2020, 12:59:57 PM »
You have no retirement savings.  You don't get to build and move into a larger house.  (Now, if you wanted to build a house that is smaller and cheaper than your current home, that might be a viable option.)

How much has your current house appreciated?  Before making a decision based on cap gains, we need to know what that even looks like, but to me, #3 is a no because you can't afford a nicer house when you are in your 40s and have nothing saved for retirement. 

I'd likely go for 4, assuming I was prepared to be a landlord and your numbers are close to accurate. 

Luap595

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Re: What to do with subdivided property - sell, build, hold?
« Reply #6 on: February 11, 2020, 02:36:22 PM »
You have no retirement savings.  You don't get to build and move into a larger house.  (Now, if you wanted to build a house that is smaller and cheaper than your current home, that might be a viable option.)

How much has your current house appreciated?  Before making a decision based on cap gains, we need to know what that even looks like, but to me, #3 is a no because you can't afford a nicer house when you are in your 40s and have nothing saved for retirement. 

I'd likely go for 4, assuming I was prepared to be a landlord and your numbers are close to accurate.

Thanks for responding! Current home by itself was purchased in 2015 for $280,000 and is currently valued at $360,000 (after property is subdivided off). Similar homes have been selling in the area for $350k. Similar pieces of property (same size, shape, orientation) to the one we subdivided off have sold for $145,000 in the neighborhood.

GoCubsGo

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Re: What to do with subdivided property - sell, build, hold?
« Reply #7 on: February 13, 2020, 12:34:38 PM »
Yeah, I'm with Villanelle.  Your in your 40's with not a ton of net worth and 2 kids to pay for.  Put option #3 completely out of your mind so you're not tempted by it.  You are nowhere near justifying that luxury item.  I also don't think you can risk holding onto the property and risk the market dropping.

I'd get with a contractor ASAP to cost out what option #4 would cost (garage with 2 bedroom apartment $60K-ish?, roof $10K?) and make sure it's fully legal (not allowed where I live).  If you put the remainder into a retirement account, you will at least be on the right path towards retirement (although probably not early retirement if you have other loans).

Sounds like a fun project!

Luap595

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Re: What to do with subdivided property - sell, build, hold?
« Reply #8 on: February 14, 2020, 10:06:22 AM »
I'd get with a contractor ASAP to cost out what option #4 would cost (garage with 2 bedroom apartment $60K-ish?, roof $10K?) and make sure it's fully legal (not allowed where I live).  If you put the remainder into a retirement account, you will at least be on the right path towards retirement (although probably not early retirement if you have other loans).

Sounds like a fun project!

Thanks for replying. I've already done some checking into this. My property is zoned for this type of development, and there are examples of it in the neighborhood on similar pieces of property. So that's the good news. Bad news is that quotes for a 2-bed apartment above a garage are more than I expected - $125,000 to $150,000.