Author Topic: Good Idea?  (Read 734 times)

joenorm

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Good Idea?
« on: November 08, 2020, 07:50:01 AM »
Hi all,

I am contemplating putting a house on a property I recently purchases for $130K

Regardless of putting a house here, I want to own the land either way, so no questions there.

With some creativity, I think I could put a 2-3 bedroom place here, ready to rent for $100K(no need for input here, I am confident of this)

The house would easily rent for $1500 per month, maybe more, while adding TONS of value to property(HCOL area with high demand)

Vacation rental would also be a good option here but I am not sure I am interested in that.

My question is whether this makes sense as an investment? How would you calculate ROI for this?

Thanks!
« Last Edit: November 08, 2020, 07:51:36 AM by joenorm »

waltworks

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Re: Good Idea?
« Reply #1 on: November 08, 2020, 09:59:52 AM »
Well, you're going to be $250k into it, give or take, right? Are you building the house yourself and spending $100k on materials/permits/etc, or are you hiring out the job to a GC?

So using the 50% rule, you'll get $750/mo from the rental. Bump up to $10k a year to make the math easy. That's a 4% return, which is not amazing, but also not nothing - and you're already committed to buying/have bought the land, which is otherwise not going to return any monthly cash flow.

You could also finance the construction (maybe) and leverage things a bit if you wanted to, of course. Or build the house and then finance (probably easier).

Depends on your goals, really. This is not a situation where you can easily calculate a return, because too many of the numbers (ie future value of the property, sunk cost of buying the land, whether you're DIYing the construction and how much value you should assign your labor, etc) are a bit hard to define.

TL;DR - I'd go for it, since you already have the land.

-W

joenorm

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Re: Good Idea?
« Reply #2 on: November 08, 2020, 10:40:37 AM »
Thanks.

Is the 50% rule used to factor in all the expenses? I know its more complicated than that but I have never heard of this rule.

A lot will be DIY. I can have a finished house ready to rent for $100K, give or take(probably give).

Once the house was there the property and house together would be worth $400-500K in todays market.

 

waltworks

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Re: Good Idea?
« Reply #3 on: November 08, 2020, 03:36:51 PM »
If it's the case that building a $100k house will result in a $250k+ return instantly, then of course you should do it.

I'm dubious about that, since if land costs $X and building a house costs $Y, then I'd expect a new prebuilt house already on some land to cost roughly $X+Y (plus a little for builder profits), not $X+Y x 2.

That said, I don't know your market.

50% rule says half of your gross rents will go to non-mortgage overhead. It breaks down badly for very cheap or very expensive properties and it's only a rule of thumb, though.

-W

waltworks

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Re: Good Idea?
« Reply #4 on: November 08, 2020, 03:44:31 PM »
To clarify, too - would you basically make this a full time job for the next year (ie, you're going to work ~2000 hours or more on it)?

Because there's no way I'd spend the rough equivalent of $250,000 of my labor (roughly what I'd earn if I worked full time at my existing business) to get myself $750/mo from a rental - that's $130k of land, $100k of construction costs, and $250k of work. Awful return as a rental at that point.

If you could actually sell the place for $500k at the end, then you're earning a good salary by just building and selling, though.

-W

joenorm

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Re: Good Idea?
« Reply #5 on: November 08, 2020, 09:23:49 PM »
No I am not planning on building from scratch. I have done that recently and don't need to do it again for awhile.

There is a company in my area that relocates houses from neighborhoods that have high property demand. Some of them are quite nice. Some not.

The idea would be to get one of these. There is a lot to do once the house is placed, but nothing compared to building from scratch.

thanks   

sammybiker

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Re: Good Idea?
« Reply #6 on: November 09, 2020, 05:11:43 AM »
there is a company in my area that relocates houses from neighborhoods that have high property demand.

I've wanted to do this.  Would appreciate if you could expand more on it/your experience with it @joenorm

Otherwise, sounds like you should pull the trigger.  Meh rental but for equity capture alone and turning that raw piece of land into something you can toss a 30year fixed rate mortgage to.

Paper Chaser

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Re: Good Idea?
« Reply #7 on: November 09, 2020, 06:46:54 AM »
Any idea what happens to your property taxes with a house on the property? HCOL usually has similarly high taxes, but there can be big differences between taxes on bare land and taxes on developed land.
If you're paying low taxes now because it's undeveloped land, but would pay pretty high property taxes with a home there, it might alter the return.

PMJL34

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Re: Good Idea?
« Reply #8 on: November 09, 2020, 12:11:59 PM »
Joenorm,

Your post is a bit confusing to me. What I understand is that you want to purchase raw land for 130k and then spend 100k to have an existing house delivered there. that's already 230k minimum. Are you going to DIY pour the foundation, do the plumbing, electrical, etc. for this delivered house? That's a lot of time and money.  I would say you are looking at minimum of 300k spend just to get a renter in (most likely way more).

If so, my question is...are you going to sell this new land with a house on it or do you want to rent it? It sounds like you are interested in renting it. Obviously spending 300k+ plus DIY time for a return of $1500/month is pretty terrible. Now if you can turn around and sell this for 500K and you can do this in less than a year, then that might be more profitable.

We all need a lot more info. What state are you in? What is the size of this land/lot? What size home does a 100k get you delivered?


joenorm

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Re: Good Idea?
« Reply #9 on: November 10, 2020, 07:08:10 AM »
The new property adjoins the property where my primary residence is, so essentially I got a bigger back yard.

Hence the original interest in the land. Like I said, the land itself is not in question, the space is nice and worth the minimal payment.

I don't really want to build and sell, I'd rather figure something out that can bring in some income while still holding the land. One nice thing about adding a structure is the further leverage it would provide for future investments.

Thanks for all the feedback!

waltworks

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Re: Good Idea?
« Reply #10 on: November 10, 2020, 08:38:15 AM »
Well, if you assume:
1: Land is a sunk cost/worth owning anyway, so discount the cost of the land.
2: You want to have neighbors/renters on that land.
3: You can actually put a livable/decent structure on the land for $100k and minimal work and rent it for $1500.

...then that's not a bad deal at all. The description of the situation makes me very dubious about flipping for massive profits, though.

-W

Car Jack

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Re: Good Idea?
« Reply #11 on: November 10, 2020, 12:15:56 PM »
Is the land well situated to become a solar farm?  I was approached by a company to lease my land for that purpose.  Minimum of 1 acre and they pay $4k a year and all costs to set up and take down after 20 years.  They mapped out about 4 or 5 acres of my property for this.  Sounds a hell of a lot more passive than dealing with a house and renters.