Build rental house in backyard or buy elsewhere?

[Fred Tracy]

I have been in contact with zoning in my city and have a decision to make: I can either split my property in half (zoned as duplex) and build a small house back there to rent out, or I can buy a foreclosed house elsewhere (closer to work) and fix that up to rent it out.

Here's some rough numbers.

For the house in my yard, I estimate it would take ~$20,000 to build. It would probably rent out at $400 once it was finished. Of course, I will be renting out the house on the other side of the property eventually, and I suspect I might lose $50 or $75 a month from that rent due to having a smaller yard. So let's assume I'll only get $300 a month in profit from the $20,000 house. That's still beating the 1% rule (1.5% to be exact).

OR...

I can buy a foreclosure around here for approximately $35,000. I can make maybe $10,000 in repairs and end up renting it for $700 a month or so. That's common. That is 1.5% again. Keep in mind if I did this I could live closer to work and save money that way.. but still, pretty similar.

So unless I am missing something terribly obvious, then the money situation looks similar for both. The problem is, I want to do most of the work myself and am not particularly handy (yet). So... does anyone have any experience building a ~400 sq ft structure with utilities? Is it significantly harder than fixing up various parts of a foreclosed house? All things being equal, I'd rather take the easier (read: less work for me) option, because both ideas are equally appealing to me.

Any input? Anything I haven't taken into consideration with building a living unit in my backyard? Seems like not a lot of people do it..

Thanks!

[Bearded Man]

I'd stick with foreclosures if you can really get them at that price and those rents. Where is this exactly?

[Hamster]

I can't imagine building a house for just $20,000, but I'm  sure it's possible given the right circumstances. Have you factored on the coat of permitting, utility hook ups, etc? Those items alone could easily cost $10k before you even start buying materials.

Does duplex zoning where you live mean you can have 2 detached structures on the same lot? Where we are, the two units must be attached to be considered a duplex.

You mention splitting your property in half. I assume you just mean having 2 units on the same lot? Or did you mean actually legally creating 2 separate parcels (short plat)? There is usually a fee associated with dividing the lot if that's what you were referring to.

If your return rates are equal, I'd much rather have a separate property than a second house on my own property. Easier to sell, less hassle of sharing the yard, etc.

[Fred Tracy]

It's in Oklahoma.. I actually just assumed I could do the numbers I gave based on limited knowledge - I am not really adept that this stuff yet. But I see some 40-45k houses around here already that could rent for 700+.. so I'm assuming a little poking could find a good deal.

We can actually have detached duplexes here, but I am not sure if the lot would actually be split. And you know, I already have a slab with an old shed that I tore down that has all the utility hookups, but I think I'd have to re-route some of it if it was on its own utility bill (not attached to the main house).

I'm thinking you are absolutely right in that I may as well purchase a new house if the rate of return is almost the same. When I factor in how many miles I am driving, if I consider vehicle cost plus time wasted then I'm losing 6 grand a year living where I am compared to living next to work.

I think buying a foreclosure near work is the obvious choice here, thanks guys.

[waltworks]

Building a house for $20k is going to be quite a trick, even if it's only 400 sq feet. *Especially* if you're not particularly handy. Where I live (admittedly a pretty expensive place) new construction costs run $200-250/sq foot if you want things done decently. Smaller houses are also inherently more expensive per square foot because there are some costs like pulling permits and hooking up utilities that generally are flat fees, and because contractors will want to make it worth their time/overhead to come to the site and do the work.

Just buy an existing house, sounds like there are some great deals out there for you to jump on and you won't have to deal with the (many) headaches associated with building a residential structure.

-W

[totoro]

Yep, building a house for $20,000 seems completely unrealistic to me. 

Our numbers where I live are at least $200-$250 a square foot, but that is mostly hiring out.  Still, if you are going to build a 1000 square foot place for $100 a square foot - you are still at $100 000.

Sometimes people sell existing houses for cheap that are trucked to a new location.  Not sure if that is an option given it would have to be set at the back of your lot.  And not sure of all the costs either.

In your shoes a cheap foreclosure might make more sense.

[arebelspy]

Yep, building a house for $20,000 seems completely unrealistic to me. 

Our numbers where I live are at least $200-$250 a square foot, but that is mostly hiring out.  Still, if you are going to build a 1000 square foot place for $100 a square foot - you are still at $100 000.

Average price per square foot for Oklahoma City is $82 currently.  I'd guess in more rural areas it's closer to $70-75. 

Building new obviously costs more, but if you do lots of the labor yourself you can make it cheaper.

It's probably closer to 40-50k than his estimate of 20k if you're handy, but I'd doubt it'd be 100k+ to build a small house in Oklahoma if you can do at least some of the work yourself.

[Fred Tracy]

I met with the zoning people yesterday and as it turns out I can't build the structure anyway, so that's down the drain. I wouldn't have done it anyway though so no big loss. They told me all about the utilities I'd have to run, and I couldn't use the existing utilities that were on the shed that I tore down, so it would be a huge pain. 40k does sound more realistic.

Looks like I need to learn about buying foreclosures now. :)