Best way to finance land + construction

[DirtyBrad]

Hi, been reading MMM since the beginning, but this is my first forum post.

My wife and I are moving from MD to NH this spring. Our goal is to buy land and build our own small house and smaller guest house (plus shop, barn, garage, but we can ignore those for now). While we are searching for the right property, we will be renting. We recognize the search might take a couple/three years.

I plan on retiring at the end of 2027. My wife will be working for at least several years after that.  If we find property before then, we will buy it and do what we can to it on the weekends.  Once I retire, I'll switch to full time house building.  We will likely pay pros for road, driveway, septic, well, foundation, but will be doing the rest of the building ourselves, with the help of friends.

When we move this spring, we should net $200k from the sale of our current house.  We expect the land purchase to be about that much. We expect another $400k in construction costs.  Once I retire, I have $200k budgeted to pay off half the remaining mortgage/whatever, leaving us owing $200k.

If we were buying a regular home for $600k, I think we'd just get a traditional 30-year mortgage in the neighborhood of 6% without much trouble. While I'm still working, our income is high, we both have excellent credit, no debt, and could put down well over 20%.

But from my reading, it looks like both a loan to buy land and a construction loan typically have higher interest and shorter terms, plus might require a few hoops to jump through. With the $200k profit from our current house, we could buy the land outright, so we'd just have to worry about the construction loan. Or we could finance the land and pay for the main house construction with that $200k, and then the remaining stuff with the $200k I have budgeted for when I retire.  Or some combination. Or something else we haven't thought of. Last thing is I have the ability to join the NIH Federal Credit Union. I thought that was going to be the silver bullet for helping buy property reasonably, but evidently they won't do a land loan in NH.

Happy to hear any and all suggestions from those who have done similar or know the subject. Thanks very much for taking the time to read all this.

[DirtyBrad]

I think I have this figured out, actually. We'll have $200k when we move, we won't start building until I'm retired, we're building a small house and a smaller guest house, and I'll have $200k ready when I retire.

We buy the land in cash using our profit from this house. So no land loan. There will probably be months or years between buying it and me retiring. In that time we do weekend projects like clearing.

Once I retire, we use my $200k to build the house. So no construction loan. That should take around a year. Once that's done, we'll still need something like $200k to build the guest house and garage. But at that point we'll have a house on land, all owned outright, so should be able to get a conventional home loan no problem. I won't have a job, but my wife will still have a six figure job and we'll be borrowing half the value of the property at most.

I like this plan. What am I missing?

[Sanitary Stache]

I don't know for sure, but I am told that new construction on a SFH is $450/sf.  That seems totally wacky to me, but it might include the roads and septic and electricity that you are thinking you'll need.  And it has been true for some new construction in the area (on the Vermont side of Vermont-shire).

I do know for sure that I would budget $20,000 for a septic system in northern NH.

$200,000 will be very tight.

[DirtyBrad]

That is good to hear, thank you. $450 does indeed sound insane. We are planning on doing the bulk of the work ourselves, and have modest tastes, which will hopefully help.

On the electric side, we definitely want to be totally solar powered. Whether that's on grid (might have to pay to have lines run) or off ($$$ for batteries) is up in the air. We are also looking to build very efficient, and the winters there are challenging.

If things do turn out much more expensive than expected, I can extend my working career as needed.

[rothwem]

Obviously, everywhere is different, but I've gotten quotes in Raleigh, NC ranging from ~$250 to $300/square foot for the actual construction.  Finishes effect the price and so does the size of the house and bedrooms/bathrooms per square foot.  Well, and location too.  Crazy that NH is doing $450/square foot, that's what most houses are going for with land underneath them in the fancy part of downtown Raleigh. 

As for construction loans, my coworker just built his house.  He did it with a construction loan that was interest only during the construction period, and it converted to a normal mortgage after the certification of occupancy was obtained. 

I'm not sure what program he went through, but it was really really stressful doing it the way he did it.  The bank gave him guidelines on when things had to get done, and he wasn't given a lump sum at the start to use, rather, they released it in bits and pieces according to the estimates he made at the beginning of the project.  So, for example, he'd get the money for the site prep and foundation, and once that was inspected, he got the chunk of money for the framing, then got the money for rough ins, etc etc.  He has a GC license, so he might've been a bit more involved than the typical new build customer, but he was massively relieved once he was done with the whole process.   

After seeing his experience, I think it might be better to do the opposite of what you're planning--buy the land with a loan and then use the cash for the construction, then refi the whole thing at the end to get a regular mortgage. 

[sonofsven]

Obviously, everywhere is different, but I've gotten quotes in Raleigh, NC ranging from ~$250 to $300/square foot for the actual construction.  Obviously, finishes effect the price and so does the size of the house and bedrooms/bathrooms per square foot.  Well, and location too.  Crazy that NH is doing $450/square foot, that's what most houses are going for with land underneath them in the fancy part of downtown Raleigh. 

As for construction loans, my coworker just built his house.  He did it with a construction loan that was interest only during the construction period, and it converted to a normal mortgage after the certification of occupancy was obtained. 

I'm not sure what program he went through, but it was really really stressful doing it the way he did it.  The bank gave him guidelines on when things had to get done, and he wasn't given a lump sum at the start to use, rather, they released it in bits and pieces according to the estimates he made at the beginning of the project.  So, for example, he'd get the money for the site prep and foundation, and once that was inspected, he got the chunk of money for the framing, then got the money for rough ins, etc etc.  He has a GC license, so he might've been a bit more involved than the typical new build customer, but he was massively relieved once he was done with the whole process.   

After seeing his experience, I think it might be better to do the opposite of what you're planning--buy the land with a loan and then use the cash for the construction, then refi the whole thing at the end to get a regular mortgage.

I think it's pretty tough to get loans on bare land, though. But  I'm not really current on loan products currently.
I agree that working with the bank payment process in a construction r rehab loan can be a PITA.

Yes, prices can be as high as $450/sqft, but obviously it can be done for a lot less, especially if you're doing a lot yourselves.

This isn't really about how to pay for your property and construction, but one strategy I've used is to buy a nice piece of land with an old mobile home on it.
You could live in the MH while you build. In my case I sold it for cash, then built a home where it had stood.
Electrical, plumbing, and sewage were right there, driveway was in, mature landscaping, etc.
Obviously it has to be a piece of land you like.

[DirtyBrad]

I think I'm good with my strategy of paying for the land in cash, then paying for the construction of the house in cash, then getting a conventional mortgage to build the other buildings. That answers my concerns and removes the headache of either a land or construction loan. Doing the first two things in cash really simplifies the process and avoids all the bank's rules and timelines.

The plan for the structures is necessarily up on the air until we find and buy land. Once we do, we can drill down better on the construction costs and update plans accordingly.

[slappy]

My brother is doing this in NH as we speak. As you say, it sounds like your plan is solid. Doing the construction loan would likely require licensed contractors, so probably not ideal if you plan to do work yourself. If I recall correctly, I think he bought the land for about $180k and is spending about $450 on the house, so similar to your numbers. He's building a pretty "normal", not mcmansion, three bedroom house.

[Canadian Helmet]

We had a similar plan when we were ready to flee the city.  My wife pointed out after looking at 5 or so properties and a few houses that if you buy a house with many acres then the land is free compared to buying many acres and building a house.  The most economical way to build a house these days is building a "barndominium."  I have never heard of it until my employee told me about it a month or to into our looking for land.  That sent me down another rabbit hole.  We ended up buying a house with many acres.  I will scratch my building itch with building a workshop / oversized garage in the future.