Author Topic: I want to build a house to make more money? Do I need face-punching?  (Read 1336 times)

ItalianGirl

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Hello dear Friends,

Looking for holes in this logic:

Quick current status: Sitting at 1.5M in net worth with 4 years to go (Should be at 1M in taxable+retirement and 1M in net real estate).

I own a beautiful piece of riverfront property in a booming colorado mtn town. My plan is to build a 3K sq ft custom home, live in it for 2 years and sell it for 200-300K profit. (build for 600 sell for 800+)

I was going to consolidate some real estate holdings to get mortgage payment down to the same as what I'm paying now but my financial advisor says to just take out full mortgage (only 20% down or around $120K) because the cost of that money is only 4% and he's been making me between 15-25% in this bull market.

(Yes, you don't need to point out that a financial advisor is face-punch worthy.... and Yes, I know the Big Bear is coming....let's just skip that for now)

I calculated that the DP would be worth $160K or so if I earned 10% for 3 years (building year+2) so with that math, building/selling will earn me more than investing. Taxes are ridiculously low here-- I'll only be paying around $4K per year. I'll have a well/ solar/propane so not a TON of maintenance fees.

I just see so many posts about how stupid it is to live in a big house and I'm starting to doubt my logic.

Confession: If hubby and I get to FIRE in 4 years and have more money than we need, (we live on 60K with an expensive teenager who will be out of the nest) I may entertain the idea of staying in this beautiful house? Is that so horrible to enjoy FIRE and something extravagant?

matchewed

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Re: I want to build a house to make more money? Do I need face-punching?
« Reply #1 on: October 24, 2017, 11:58:29 AM »
I fail to see how the spending more money on the home = making more money. To me it seems it is spending more money.

ItalianGirl

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Re: I want to build a house to make more money? Do I need face-punching?
« Reply #2 on: October 24, 2017, 06:48:55 PM »
Because you make money on leveraged capital??

ixtap

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Re: I want to build a house to make more money? Do I need face-punching?
« Reply #3 on: October 24, 2017, 07:06:09 PM »
In your "profits" are you considering the land value itself? Transaction fees? Additional property tax?

matchewed

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Re: I want to build a house to make more money? Do I need face-punching?
« Reply #4 on: October 24, 2017, 07:31:22 PM »
So maybe I just don't understand your particular scenario. You seem light on the details and assume an appreciation that I don't think you can guarantee.

You are currently living in some place and you'll have to live in some place tomorrow. Then you're going to pull 160k out of some source, I assume investments, in order to get a mortgage and purchase a new home claim that you're leveraging capital for profit? So you'll have X invested if you don't buy and you'll have X-160k if you do buy. I'm not sure I buy the logic.

tralfamadorian

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Re: I want to build a house to make more money? Do I need face-punching?
« Reply #5 on: October 24, 2017, 07:53:43 PM »
Holes:

1) Have you verified that $200/sqft building cost? That seems low for a custom built home in Colorado. 

2) What is the value of the land? What are the holding costs of keeping the value tied up in that property vs. gains in the stock market?

3) Where does the $800k figure come from?  Is ($800k*90% - $600k - $land value) > $40k?


There is absolutely nothing wrong with building and living in this home after FIRE.  However, I believe it is important to calculate the actual costs so you can make a fully informed, educated decision. 
« Last Edit: October 25, 2017, 09:17:39 AM by tralfamadorian »

SwordGuy

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Re: I want to build a house to make more money? Do I need face-punching?
« Reply #6 on: October 24, 2017, 07:58:45 PM »
In theory, it's a good plan.   

You invest money making a product, hold onto it for 2 years to minimize taxes, then sell at a hefty profit of 25%.  Did I get that right?

If so, here's where it could go wrong.   I'm not going to list these issues to discourage you.  Instead, I want to give you food for thought.  That way, you can make plans to mitigate the issues (or decide the risk is higher than your tolerance for it).  Either way, it's a win.

1) The house doesn't cost $600,000 to build.  It costs $750,000 to build.   Cost overruns are endemic to the home construction industry.   Do you know how to manage such a large project to keep costs and timelines to the plan?   

2) If the costs go too high, can you handle it?   P&I for $600,000 loan, 5% down, 4% rate, will run you ~$2722 a month.  Plus taxes and insurance and utilities.  Can you handle that burn rate on your cash for an additional 12 months if the project timeline runs over?   

3) How about if the housing market tumbles when you want to sell?  Can you handle the monthly costs for an extra year or five?

4) Do you already have a list of quality construction teams (framers, roofers, hvac, plumbers, electricians, etc.) or are you just hoping they will all do a quality, on-time job.  Remember, the construction flaws that a $120,000 home buyer will ignore may mean the difference between getting the price you want or even selling at all.   You may have to pay to have something done twice - actually once, removed, then done again, which is even more expensive.  (Yes, the contractor *should* fix it at their cost.   What happens if they won't or can't?

5) Do you know the exact rules for getting the owner-occupied tax break on selling?  (I don't.)  Does the timeline include construction time or just time living in the house?  It could mean the difference between carrying the costs of the house for 2 years versus 3.

6) Will you be doing a FSBO (For Sale By Owner)?  If so, do you know how?   How to stage a house to get a better price?  If not, do you already have a realtor you know is good at selling homes?  In most sales professions, 80% of the sales are done by 20% of the sales people, so the right agent can really make a difference.

7) Do you know that the features and style of the home you will be building are popular enough to get a large number of potential buyers who are both willing and able to pay for it?   What some folks think is great can be really quirky to others.

Hope that will give you some ideas to work out.




YttriumNitrate

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Re: I want to build a house to make more money? Do I need face-punching?
« Reply #7 on: October 25, 2017, 08:51:38 AM »
It sounds like you want to build your dream house and are justifying it as an investment opportunity. Rather than trying to build a house for later resale, my recommendation would be to evaluate if you are willing to work a year or two longer to live in your dream house. If you are willing to delay retirement a bit, just build the house exactly how you want it without consideration of resale value.

Car Jack

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Re: I want to build a house to make more money? Do I need face-punching?
« Reply #8 on: October 27, 2017, 06:27:01 AM »
Some things to consider:

1) Building budgets are often off by 50%.  Now your $600k house costs $900k to build.

2) Real estate fees.  Even if you bargain someone down to 4%, you're paying them $32k on an $800k sale.

3) Pete (MMM) built houses for his first year of FIRE.  He made nothing. 

I have an easier way to do this.  Contact a real estate agent.  Sell the property.  Result: you don't put out a bunch of money, have a bunch of headaches to simply lose money.

ItalianGirl

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Re: I want to build a house to make more money? Do I need face-punching?
« Reply #9 on: November 04, 2017, 10:04:50 AM »
Thanks everybody for these insightful responses. As always, they are well thought-out and generous.

I have a lot to think about. Mainly I think YttriumNitrate is accurate in calling me out on wanting to build a dream house and justifying it as an investment. (it's really more the property I want... I could stick a tent out there if it weren't for stupid HOA covenants). Much of it is emotional for sure... GAH, need to fight those demons of desire!

I also think I do gloss over the details sometimes so I appreciate all the questions about assumptions that could go wrong. 

Colorado is a super hot market right now and especially my town in particular. I'm sure if Amazon comes to Denver, that will chase a lot of folks into the mountains and my holdings will only increase in value... so there's nothing wrong with just sitting on those investments for now.