Author Topic: Buy a rental to build on land later?  (Read 3021 times)

Simple Abundant Living

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Buy a rental to build on land later?
« on: November 05, 2013, 09:26:32 PM »
So my hubby and I were talking about our desire to build a house someday that more reflects our priorities and style.  The area that we would like to consider has expensive lot prices. But a lot of older homes in that area sit on large (.5+ acre) lots. We talked about buying a lot we liked now and building in 5-10 years. But would it be nuts to buy an old house to rent until we are ready to build, using rental $ to offset the loan?  A .5 acre lot goes for about $225K and I can get a small house with that size lot for $225-275K.  Your thoughts?

dadof4

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Re: Buy a rental to build on land later?
« Reply #1 on: November 06, 2013, 12:43:00 AM »
So my hubby and I were talking about our desire to build a house someday that more reflects our priorities and style.  The area that we would like to consider has expensive lot prices. But a lot of older homes in that area sit on large (.5+ acre) lots. We talked about buying a lot we liked now and building in 5-10 years. But would it be nuts to buy an old house to rent until we are ready to build, using rental $ to offset the loan?  A .5 acre lot goes for about $225K and I can get a small house with that size lot for $225-275K.  Your thoughts?
It depends on a lot of factors that you didn't include.

Why the rush to buy now, and not in 5-10 years?  Is the area being aggressively developed?
How much rent would you expect to get?
How old are these little old houses, and how much money would you need to sink in them to have it viable for rent?
Do you know what your interest rate will look like (I'll assume with a 20% down payment)? Keep in mind that mortgage rates for investment properties aren't as good as for primary residences.

Villanelle

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Re: Buy a rental to build on land later?
« Reply #2 on: November 06, 2013, 02:26:05 AM »
If you can at least break even on the rent, I don't see a great reason not to do it.  But that might be tough because you won't be able to get an owner-occupied mortgage rate, so you can expect to pay several % more on your loan.

Do you live close to this area?  Would you manage the property yourself, and do you have the time and skill to do that?  Is it an area with a strong rental market (not just prices, but also occupancy rates and lots of desirable renters)?

KingCoin

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Re: Buy a rental to build on land later?
« Reply #3 on: November 06, 2013, 06:54:31 AM »
I think this is actually very similar to this ongoing thread:
http://www.mrmoneymustache.com/forum/real-estate-and-landlording/looking-to-invest-in-real-estate-as-a-hedge-against-rising-home-prices/

Both propose to buy another property now in order to hedge their real estate ambitions 5-10 years from now.

I think it's a very bad idea unless the property is a good investment in it's own right. If the property might fit your personal goals somewhere down the line, that should be considered a cherry on top, rather than the primary motivations for buying.

You left out what a property like that would rent for. If they rent for $2,750 it's probably not a bad purchase. You can even hire a property manager to deal with placing a tenant and ongoing issues and still come out ahead. If it rents for $1400, you will almost certainly bleed money on this property for 5-10 years, which could have a major negative impact on your net worth.

As someone else asked, what's your primary motivation for buying now instead of when you need it? We're in a period of rising real estate prices, so I feel like it's easy for people to linearly extrapolate the trend for the next 10 years and feel like they need to buy now or be priced out forever. That's dangerous thinking that has gotten a lot of people in trouble. 

BoulderTC

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Re: Buy a rental to build on land later?
« Reply #4 on: November 06, 2013, 09:40:33 AM »
Yes, this does remind me of what we are trying to do (in the link that KingCoin put above). A question for you guys ... how much different is the non-owner occupied interest rate than that of an owner-occupied, all else being equal? Thanks.

dadof4

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Re: Buy a rental to build on land later?
« Reply #5 on: November 06, 2013, 10:43:08 AM »
Yes, this does remind me of what we are trying to do (in the link that KingCoin put above). A question for you guys ... how much different is the non-owner occupied interest rate than that of an owner-occupied, all else being equal? Thanks.
I played around with the Amerisave quote machine, and it isn't too bad.

It looks like the rate is around 0.5% worse for investment properties than for primary residences. You have fewer options though (eg no ARMs or FHAs).

Simple Abundant Living

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Re: Buy a rental to build on land later?
« Reply #6 on: November 06, 2013, 12:33:57 PM »

It depends on a lot of factors that you didn't include.

Why the rush to buy now, and not in 5-10 years?  Is the area being aggressively developed?
How much rent would you expect to get?
How old are these little old houses, and how much money would you need to sink in them to have it viable for rent?
Do you know what your interest rate will look like (I'll assume with a 20% down payment)? Keep in mind that mortgage rates for investment properties aren't as good as for primary residences.

1) There's no real rush to buy now.  My reasons to think about it are that interest rates are low and the area in question took barely a dip in the latest recession and it is being aggressively developed.  The area is limited (land is edged by mountains, water rights are limited) and new construction in this town are mostly 800K + homes.  The reason we like it is access to mountains, trails, views, parks, and it maintains a small town feel while having great access to the surrounding cities.  I will be (hopefully) done with grad school in 5 years and I hope to be working in the area as well (healthcare).  It is an equal commute for my DH to his work (assuming he's still with the same employer).  However, this area will be a farther commute to grocery/retail stores than our current area.  But with grocery trip planning, this can be overcome.

2)The houses are 1930's to 1980's.  Not a lot available- If this is something we decide to do, I'm going to have to watch for the right property.  The example house I found was built in 1972 but had been completely renovated including appliances, flooring, cabinets, HVAC, etc.  The house in question looks ready for a renter now, although I haven't looked at it in person.  I have the time to manage a rental now, but won't when I am in my graduate program.  So at that point management would be an expense. 

I am unsure on rental potential, as I haven't been a landlord before.  I have a good friend who does this, so I need to ask her.  I think I would be lucky to get the minimum 1% of purchase price in rent. 

Thanks for all the food for thought.  It is a common practice in this area to buy a lot for a dream house years down the road.  I was just wondering if this would be the smarter, more mustachian way to get to the same place.

Simple Abundant Living

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Re: Buy a rental to build on land later?
« Reply #7 on: November 06, 2013, 12:40:41 PM »
If you can at least break even on the rent, I don't see a great reason not to do it.  But that might be tough because you won't be able to get an owner-occupied mortgage rate, so you can expect to pay several % more on your loan.

Do you live close to this area?  Would you manage the property yourself, and do you have the time and skill to do that?  Is it an area with a strong rental market (not just prices, but also occupancy rates and lots of desirable renters)?

I live a 15 minute drive away from the area.  I would manage the property until I am in grad school and then need someone else to do it for 27 months.  The rental market (desire) in the area is strong, but I am not aware of prices.  I need to do more homework.  I understand a lot of people want to be in this town for the reasons I listed above and great schools.

Villanelle

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Re: Buy a rental to build on land later?
« Reply #8 on: November 07, 2013, 02:08:07 AM »
If you can at least break even on the rent, I don't see a great reason not to do it.  But that might be tough because you won't be able to get an owner-occupied mortgage rate, so you can expect to pay several % more on your loan.

Do you live close to this area?  Would you manage the property yourself, and do you have the time and skill to do that?  Is it an area with a strong rental market (not just prices, but also occupancy rates and lots of desirable renters)?

I live a 15 minute drive away from the area.  I would manage the property until I am in grad school and then need someone else to do it for 27 months.  The rental market (desire) in the area is strong, but I am not aware of prices.  I need to do more homework.  I understand a lot of people want to be in this town for the reasons I listed above and great schools.

Paying a manager is expensive.  It is usually a % of the rent, so it is far more expensive in areas with crazy housing markets, but it is expensive.  When I was researching (in an expensive SoCal market), it seemed that 7-10% was average.  I was thrilled to find a guy to do it for 5%.  He does a solid job, though to an extent, I am getting what I paid for.  I have to stay on top of him about a lot of things, which is fine as I have plenty of time to do so, and  his communications are sometimes not the height of professionalism.

If you have a friend in the area, you might be able to ask them to do most of the managing for you for a small monthly stipend.

Check out Craiglist for the area.  That should quickly give you a rough idea of area rents.