Looking for advice

[joenorm]

I bought a home about five years ago for 100K

Since then I have renovated it and it was recently assessed by the bank to be worth 430K

I took advantage of this and refinanced to be able to purchase an empty lot next door to me for 110K with the idea of building another a house on it. I have house building skills and can do much of this work myself.

So along with buying the property I borrowed an additional $70K to be able to start a project on the property.

So right now I am paying $1725 per month for my house I live in, the property next door, and the $70K I have borrowed.

My question is about formulating a plan to best take advantage of the situation.

I could build a house and move into it, and rent the house I currently live in for around $1,500 per month
Or I could build, and then sell the property I am in currently in and potentially own a newly built home outright.

All I know is I need to come up with a plan to reduce my mortgage ASAP because as it is a pretty big monthly expense.

I appreciate bouncing the ideas around. Thanks

[salmp01]

If it’s worth 430k and you’d only get 1500/month this doesn’t make sense to rent.  I’d sell it and take the tax-free gains from your home after you sell it. 

[joenorm]

How do you come to that conclusion so quickly? What metrics are used?

It is hard to get passed the emotional side of selling a house you've built by hand, at least for me.

thanks for the reply

[Jon Bon]

The 1% rule is the metric that is commonly used.  It says that 1 months rent/FMV = 1%

So your house should be rented out at $4,300 a month.

Congratulations you made a TON tax free money on appreciation, time to sell and move onto the next project.

Think of your house like a stock. In 5 years it has quadrupled in value. It is time to sell it. Oh and the kicker it is not taxed.  OR you can continue to hold the stock for the tiny dividend that it pays out ever month.... Your call

A home is just a collection of construction materials,  2x4.'s and nails. Sell yesterday.

[joenorm]

Well it was appraised at $430K, doesn't mean that is what I'd actually get for it, and the market is cooling off slightly around here(Seattle area).

Can you elaborate on the 1% rule please, or are there some blog posts on it maybe?

I think I could almost guarantee getting $375K for it, I guess it still makes sense to sell?

Seems like the 1% rule would tell me to sell all the way down to 150K, which doesn't make alt of sense.

thanks

[sammybiker]

What @Jon Bon said.

From a rental/cash flow perspective, it doesn't make sense to keep the home.  As it's your personal home and you enjoy staying in it, that's another discussion and review that I think only you can do (re: emotional attachment).

If I had the skills, time and capital to build a new home in Seattle on a lot I already own and come out way ahead, I would do so.  I'd then sell your current home, realizing incredible tax free profits (good job!), move into the new build and sell again in a few years...barring a large correction of PNW RE, you would also realize a reasonable tax free profit.

[joenorm]

I'm not in Seattle. But I am in a getaway/vacation area popular to Seattleites, so the market tends to fluctuate with Seattle. The properties vary form insanely extravagant to run down, hence land for 100K.

So to clarify some things. I bought my house for 100K, but have sunk many dollars(cash) and countless hours into it, hence the rise in value.

It is pretty small and not really my ideal house, so selling would have have some practical benefits.

Like I said, I have refinanced (cash out). So I went from a mortgage of 100K @ 5% 30 year fixed for my house to a 280K mortgage @4.75%.

I now own my home, the property next door, and 70K in cash to get a build started on the property.

If I sell my place, do I pay off my loans and use the remainder to complete the build? Is there anything I am overlooking here?

[joenorm]

And yes, zoning actually allows for two dwellings, but I cannot really afford to build two houses.

[Dicey]

And yes, zoning actually allows for two dwellings, but I cannot really afford to build two houses.

Go read about this cool cat for inspiration:

https://www.huffpost.com/entry/johnny-sanphillippo-tiny-home_n_2782947

They wouldn't let him build a tiny house, so he drew up plans for a bigger house. He built the garage first and then didn't build the house.

He writes an interesting blog called Granola Shotgun. I won't give away any spoilers unless you ask. He also happens to be @joonifloofeefloo's imaginary boyfriend.

[marty998]

The 1% rule is the metric that is commonly used.  It says that 1 months rent/FMV = 1%

So your house should be rented out at $4,300 a month.

Congratulations you made a TON tax free money on appreciation, time to sell and move onto the next project.

Think of your house like a stock. In 5 years it has quadrupled in value. It is time to sell it. Oh and the kicker it is not taxed.  OR you can continue to hold the stock for the tiny dividend that it pays out ever month.... Your call

A home is just a collection of construction materials,  2x4.'s and nails. Sell yesterday.

The 1% rule doesn't really work in any property market where prices are more than about $300k. Rents are just never going to be high enough. It also doesn't work in any market where the majority of your returns come from appreciation, not from rent.

And yet, our OP friend has done quite well in a market like this.

There is never only one way to skin a cat, which is what you 1% followers seem to be blinkered into thinking when it comes to real estate.

And to think of it as a stock that you should sell just because it has gone up in value a lot - that's even more bizarre.

Do I dare mention Amazon? A stock that makes up 5% of VTSAX and pays no dividends? It's like telling OP to sell it when it quadrupled in 1998 to $6 a share.

Time after time we see corporate executives and directors feel the need to "do something" and they screw up their company by engaging in mergers, acquisitions, divestments, restructures.... sometimes it's best to do nothing for a while.

[Jon Bon]

The 1% rule is the metric that is commonly used.  It says that 1 months rent/FMV = 1%

So your house should be rented out at $4,300 a month.

Congratulations you made a TON tax free money on appreciation, time to sell and move onto the next project.

Think of your house like a stock. In 5 years it has quadrupled in value. It is time to sell it. Oh and the kicker it is not taxed.  OR you can continue to hold the stock for the tiny dividend that it pays out ever month.... Your call

A home is just a collection of construction materials,  2x4.'s and nails. Sell yesterday.

The 1% rule doesn't really work in any property market where prices are more than about $300k. Rents are just never going to be high enough. It also doesn't work in any market where the majority of your returns come from appreciation, not from rent.

And yet, our OP friend has done quite well in a market like this.

There is never only one way to skin a cat, which is what you 1% followers seem to be blinkered into thinking when it comes to real estate.

And to think of it as a stock that you should sell just because it has gone up in value a lot - that's even more bizarre.

Do I dare mention Amazon? A stock that makes up 5% of VTSAX and pays no dividends? It's like telling OP to sell it when it quadrupled in 1998 to $6 a share.

Time after time we see corporate executives and directors feel the need to "do something" and they screw up their company by engaging in mergers, acquisitions, divestments, restructures.... sometimes it's best to do nothing for a while.

I was trying to put it in different terms that might help the OP make a decision. However  house that has gone up 4x in 5 years is pretty amazing and unlikely to happen again. Perhaps it would be like owning a growth stock that you catch a perfect five year run. Be it 400% or 40,000% it is unlikely to happen again is it not? Amazon is not going to go up another 10,000% nor is his house going to go up another 400%.

The 1% rule has been around for a long time and for good reason. Sure it does not always hold true. But here it shows why it could be a good reason to sell.

The OP pulled some money out to put into the next project, which is good. However his return is downright terrible.

Holy crap, just did the math, the payment on this place just principal and interest is $1461, and you are considering renting it out at $1500 a month? This would be an epic money pit. Taxes alone put it in the red and that is before any maintenance, vacancy, management etc. 

The money has been made in appreciation, absolutely no money to be made as a rental. If I'm missing any facts or maths please let me know!