Author Topic: Buy a lot, build duplex and ADU?  (Read 663 times)

DirtDiva

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Buy a lot, build duplex and ADU?
« on: November 09, 2018, 08:20:44 PM »
Spouse and I have an opportunity to buy a lot from a private seller. The price is fair according to comps.  We own a condo on the other side of the same town, no plans to move.

The town is one of those Colorado mountain towns that is exploding with new folks like us moving in, tons of new construction, and affordable housing issues for moderate income people like teachers and hospital workers.  Not much buildable land left due to public lands hemming us in on all sides.  The location is great- bikeable to everything, near mountains and water.

We are mulling the idea of buying the lot and building a duplex and a garage with a smaller apartment over it.  We  have never been landlords.  We could pay about 50% of the price of the lot and use a HEL for the remaining 60k.  (Certain we can build a SFH and ADU/garage, have not confirmed whether a duplex conforms to neighborhood rules).  This would be long term rentals; there is no shortage of renters in the area.  2 bedrooms would bring 1500 and a 1 bedroom apt 800/month (could probably charge more, but we have an interest in providing affordable housing).

The price of the land would be around 8% of our net worth.   

Concerns:  property doesn't cash flow, market crashes, difficulty finding contractor with availability to build.  We have never been landlords.  We are also considering buying the lot and paying it off over the next few months, then holding it as an investment and possibly giving/selling it to our son to build a home in the future (5+ years out).

Comments, suggestions, criticisms?  Thanks in advance for sharing your thoughts.

lhamo

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Re: Buy a lot, build duplex and ADU?
« Reply #1 on: November 09, 2018, 08:33:06 PM »
Paging @waltworks who has experience with adding/renting and ADU in a mountain town.

Given what you describe, I would be more inclined to buy the property and hold it for your DS.  If he doesn't want/need it, you could resell eventually to a developer and let them have the headaches of permitting/development.  Developing property yourself as rentals has lots of risks, both short-and long-term.

kenmoremmm

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Re: Buy a lot, build duplex and ADU?
« Reply #2 on: November 10, 2018, 01:57:41 AM »
Rmarket crash? maybe. i think there are systemic slowdowns in the RE market heading your way and many others. denver is starting to see huge slowdowns. SF and seattle have already started a huge decline.

waltworks

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Re: Buy a lot, build duplex and ADU?
« Reply #3 on: November 10, 2018, 09:54:13 AM »
Well, the "property doesn't cash flow" problem is something you need to figure out. Are you planning this as a house hack (live in one unit and rent the other) or were you just going to build new construction to attempt to provide affordable housing?

We live in a ski town (in UT, not CO, but same basic situation) and converted our basement to an apartment a couple of years ago (I can dig up the thread if you're interested). It has worked out great (rented long term for a bit under market at $1300 a month to great tenants) but the key difference is that *all in* we spent $75k on it (and $5k of that was wasted on furnishings because we initially tried the nightly rental thing).

I would assume your cost to build is going to be $200-300+ per square foot in any mountain town, or maybe more. So if you're into it $120k for the land, and the duplex (call it 3000 square feet) is going to cost another $600k minimum (I'd guess you'd be at a cool million bucks once all is said and done), it makes zero sense as a rental at the rates you're talking about.

It could make sense as a house hack (sell your current place), though.

You really need to run some numbers to figure this out. The lot sounds pretty cheap for mountain town land (unless it's Leadville or somewhere weird) but new construction is always expensive as hell.

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DirtDiva

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Re: Buy a lot, build duplex and ADU?
« Reply #4 on: November 10, 2018, 11:26:29 AM »
Well, the "property doesn't cash flow" problem is something you need to figure out. Are you planning this as a house hack (live in one unit and rent the other) or were you just going to build new construction to attempt to provide affordable housing?

We live in a ski town (in UT, not CO, but same basic situation) and converted our basement to an apartment a couple of years ago (I can dig up the thread if you're interested). It has worked out great (rented long term for a bit under market at $1300 a month to great tenants) but the key difference is that *all in* we spent $75k on it (and $5k of that was wasted on furnishings because we initially tried the nightly rental thing).

I would assume your cost to build is going to be $200-300+ per square foot in any mountain town, or maybe more. So if you're into it $120k for the land, and the duplex (call it 3000 square feet) is going to cost another $600k minimum (I'd guess you'd be at a cool million bucks once all is said and done), it makes zero sense as a rental at the rates you're talking about.

It could make sense as a house hack (sell your current place), though.

You really need to run some numbers to figure this out. The lot sounds pretty cheap for mountain town land (unless it's Leadville or somewhere weird) but new construction is always expensive as hell.

-W

Thanks everyone for your advice.  Our current condo is really unique and we love the ‘hood, zero interest in moving.

It sounds like I need to do some more homework to figure out the cost of building.  That simplifies it to think of price per sq ft.

(WW, I read your basement reno thread 2 yrs ago- smart move and I’m jealous! We are on a crawl space or I would do eXactly  the same thing.)

waltworks

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Re: Buy a lot, build duplex and ADU?
« Reply #5 on: November 10, 2018, 02:22:03 PM »
Yeah, the bottom line is that it's hard to make rental RE work in mountain towns with inflated house prices. Price to rent is way out of whack. Here in PC, you can find places that rent for $2000 a month that would sell for $500k+.  Totally unreasonable to buy anything (or build anything, which will be even more expensive) for the purpose of renting it out.

Get a handle on construction costs and you'll have a better idea if this works but I'm 99% sure it won't pencil out.

-W

waltworks

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Re: Buy a lot, build duplex and ADU?
« Reply #6 on: November 10, 2018, 02:38:30 PM »
It's also worth mentioning that if you're not building a residence for yourself, it's probably going to be much harder to get the huge construction loan you'll need to build anything (and the rate will be higher). I suppose you could say you were going to occupy the place and then not move into it, if you're comfortable with that sort of thing.

Personally, I've witnessed the financial black hole that is building a house (if you're hiring a builder/contractor to do it, that is) as well as the personal/family/marriage stress and want nothing to do with it. But some people love that sort of project.

-W

DirtDiva

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Re: Buy a lot, build duplex and ADU?
« Reply #7 on: November 10, 2018, 05:52:57 PM »
I would never build a house with my dear, dear husband of 34 years.  I'm sure nothing good would come of it.  He's a bit of a dreamer...I can see us ending up with a $500,000 treehouse lined with bookshelves on every. single. wall.

However, a rental might be a different experience.  Not so much pressure to pay for fancy finishes or an enormous kitchen.  I think it would be easier to be rational and careful of expenses.

I have a couple of friends who own construction businesses here in town, and who have a strong interest in affordable housing.   I think I'm going to talk to them -- they will be a good resource for a ballpark estimate of expenses. 

And I obtained the subdivision rules, etc... going to do some reading tonight.  Hadn't thought about construction loan issue- haven't gotten that far!  I don't know much about that world, thanks for the additional food for thought.

I am taking your caution and experience to heart.    This project may not be for me, but it's interesting to consider and to learn something along the way.

waltworks

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Re: Buy a lot, build duplex and ADU?
« Reply #8 on: November 10, 2018, 06:39:34 PM »
Yeah, certainly talk to a GC. Even getting some sort of bro-deal and going pretty basic, I'd be shocked if you could pull off the whole thing for under $700k or so, though. High end finishes cost money, but the bulk of the cost is doing the basics - excavation, foundation, plumbing, electrical, etc. You can only skimp so much.

If you think you can get $5-7k/month for the place in rent, it's worth doing.

-W