Need New Construction Advice - Posted by MMD

Posted by MMD on February 10, 2009 at 09:21:57:

Great feedback. Thank you and you are right. I’m not saying this is what we’ll do, but it is an option and I shouldn’t close the door on it.

Need New Construction Advice - Posted by MMD

Posted by MMD on February 09, 2009 at 11:43:30:

Hubbie and I are experienced landlords with 8 total units (2 buildings). We have very modest positive cash flow on these.

Plus we are in the process of converting our house (which used to be a duplex) back to a duplex, so we’ll have 10 total units, though we’ll continue living in one of them. Once we complete the conversion and refi, the rent from the second unit will pay almost the entire mortgage.

We also have a large piece of vacant land that we purchased 2 years ago planning to build a new house (for us) by this spring. We currently have a mortgage on this that would have been wrapped into a construction loan. Unfortunately, for various reasons, it turns out we are not going to be able to move for at least the next 5-10 years. But, with the RE market like it is, it is unlikely we could sell the land now, and if we did it would be for loss of at least $20k. Also, this is a gorgeous piece of land and we would hate to lose it anyhow.

But, right now, the mortgage is just a drain on our wallets. Plus, we have about another 12 months before the rate becomes variable–and interest rates can’t stay this low forever. I have been unsuccessful trying to find a bank that would refi it with a fixed rate (banks don’t tend to like financing vacant land).

For all the above reasons, we are considering building a small single-family house on the land that we would turn around and immediately rent out.

The PITI on the new house/land would be approximately $1350/monthly. In the area where it is we would probably only get about $1250 in rent and maybe a little less since the rental market is really soft here right now. So that’s a $100/monthly “loss.” But, as things are right now, we are paying about $635 monthly on the mortgage and taxes. So, the actual net result would be a $535 monthly decrease in our current expenses.

Does anyone have any thoughts pro or con? Building this house really seems like the smart thing to do given the cards we’ve been dealt. After all, we’d be taking what is essentially a liability and turning it into an asset, right? But I’m feeling uncomfortable about it and I’m not quite sure why. Maybe it is the negative cash flow from it making me nervous (I’m used to carefully investing for positive cash flow), but of course we have even MORE negative cash flow as it stands now, so that reasoning doesn’t really make sense.

Money isn’t an issue right now, but with the economy like it is, we expect our income to decline pretty significantly over the next year or two. So, our priority right now is to reduce our personal living expenses as much as possible.

I’d really appreciate any thoughts or advice.

Re: Need New Construction Advice - Posted by HenryM

Posted by HenryM on February 10, 2009 at 22:48:01:

I think it’s great that you are exploring your options. However, at least based on your initial post, the benefit of building, while perhaps worthwhile, will be less than what you think.

You are basing your monthly savings based on PITI which, as an experienced landlord, you know is only part of the cost of ownership and operation of a rental even if you have lower maintenance costs because of new construction. Also, your example of $500+ per month savings by going this route requires 100% occupancy which is not likely. My guess is that you will probably save half or less of your estimate when the dust settles.

Mobile Home/Modualr an option - Posted by Kenneth Hocking

Posted by Kenneth Hocking on February 09, 2009 at 22:02:23:

If a Mobile is allowed you may find the you equity in the land might allow you to roll the Property into a Land home deal to hold the property as a Primary Res and rent out both side of your duplex for cashflow.

This way you could hold the land and keep in in position to build on later by selling off the Mobile.

Just my 2 cents

Re: Need New Construction Advice - Posted by Bill H

Posted by Bill H on February 09, 2009 at 21:40:56:

Welcome to the world of owing vacant land. The problem you are running into with no lenders is very typical.

Several things come to mind as to why they will not lend.

  1. It is not free and clear…so they have to up the ante to get into first position.

  2. You have no track record in building…so they will have substantially more risk.

  3. You probably have not done any sort of soils test… so you have no idea what the ground will hold up.

  4. You have not mentioned zoning…so you have no idea what you can really construct.

  5. You have no architecturally approved and plan checked plans for the proposed building…so you have to go through this process.

  6. Where are the closest utilities, ie., water, sewer, gas, electric, etc.

  7. If it is going to be on septic, will the land around it percolate the wasste water?

This list could go on. Now you can see why lenders are afraid of it.

Do not mean to be detrimental or derogatory, just trying to educate you to the reason that land is the highest risk and highest reward part of the real estate industry.

I’d probably, if the zoning and local jurisdiction would permit, just park a mob le home on it and rent it out or a manufactured home and rent it.

If, we can believe the speech on TV tonight, we should be starting to come out of this mess in another year. However; that speech incorretly referred to Japan’s “Lost Decade” when they tried to spend their way out of a similar economic mess.

You simply cannot spend or borrow your way out of debt.

Hang in there and see what happens.

Good Luck,
Bill H

Re: Need New Construction Advice - Posted by michaela-CA

Posted by michaela-CA on February 09, 2009 at 18:28:03:

What about doing a lease/option, instead of a rental? That might get you a higher monthly and cover your cost.

How is it zoned? Can you buy a mobile home cheaply and set it up and get enough to pay your current mortgage without having to wrap into a construction loan?

Can you design a house, that can be 2 units (if zoning permits), but which can easily be re-converted into a SFH years down the road when you’re ready to move? You know, just take out the 2nd kitchen and revert that back to a room? That way you’d have 2 units to rent.

Just some thoughts

Michaela

Re: Mobile Home/Modualr an option - Posted by MMD

Posted by MMD on February 10, 2009 at 07:32:45:

Mobiles are allowed but this is on a quiet, dead-end country street and when we were buying the property two of the neighbors made it clear they would not be happy if we put a mobile there. At some time in the future we do want to live there so making enemies of the neighbors probably isn’t a good thing.

We are considering a modular. In fact, that is what the numbers I posted are based on.

Re: Need New Construction Advice - Posted by MMD

Posted by MMD on February 10, 2009 at 07:42:09:

“2. You have no track record in building…so they will have substantially more risk.”

But we do have pristine credit in the high 700s. No, we’ve never constructed a new house but we have a long history as rental property owners and managers.

“3. You probably have not done any sort of soils test… so you have no idea what the ground will hold up.”

Of course we have. We did this when we bought the land.

“4. You have not mentioned zoning…so you have no idea what you can really construct.”

Of course we’ve checked into this. Do you really think we would have purchased 10 acres without knowledge of whether it is buildable? In fact, it is subdividable into 3 lots (but, we don’t want to do that). If we build this house it will be on the far end, and then in the future we’ll build our house on the other end of the property and continue to rent the small house.

“5. You have no architecturally approved and plan checked plans for the proposed building…so you have to go through this process.”

No, but I’m not sure why this would be an issue. We’ve already spoken to the building inspector at the town hall, started to establish a relationship, and know what needs to be done.

“6. Where are the closest utilities, ie., water, sewer, gas, electric, etc.”

This is a rural area and requires it’s own well and septic. But, there is over 1000’ of frontage on a maintained road with electric right there.

“7. If it is going to be on septic, will the land around it percolate the wasste water?”

Yes, as I said, we had it tested before we purchased.

Re: Need New Construction Advice - Posted by MMD

Posted by MMD on February 10, 2009 at 07:45:20:

Lease/option is a good suggestion, but we’d rather not sell the house unless we had to. If we move there in the future we’d rather have “control” over the section of the proprty with the little house on it (we’d build our house on the other end of the property – it is 10 acres).

I already mentioned the mobile home in my other post. It is allowed, but wouldn’t make us too popular with the neighbors.

Unfortunately 2 units aren’t allowed here.

Thanks for the thoughts!

Re: Mobile Home/Modualr an option - Posted by Sailor

Posted by Sailor on February 10, 2009 at 09:52:30:

There are modular duplexes available, though if the neighbors want to control the property they should buy it.

If you are going to definitely build later, you could put in a garage w/an apt on the 2nd floor. The garage could be rented separately. Later you could live on-site during construction & store materials below. After that you could re-rent or use for boomerang kids (though I don’t recommend making them too comfortable)

Tye

Re: Need New Construction Advice - Posted by Sailor

Posted by Sailor on February 10, 2009 at 10:10:12:

I agree about subdividing. That would give you more financial options. Note that the land requirements for duplexes are not usually the same as for 2 separate units.

I’d max out the ca$hflow potential of this property, even if some structures would not be permanent. Make this alligator into a profitable enterprise. I’ve built a rental before & no matter what you do, some neighbor is going to be disgruntled. Mine is a showplace, a real asset to the neighborhood, but one neighbor still hated the nice tenant vehicles enough to write nasty letters to the newspaper. The neighbor died, eventually I sold the property for a hefty profit, so it all worked out in the end. You can still be a good neighbor by setting your MHs back, making them attractive & installing good tenants.

Tye

Re: Need New Construction Advice - Posted by Bill H

Posted by Bill H on February 10, 2009 at 08:51:15:

Good!, got your attention. Is the land free and clear? All I am telling you is things that the LENDER, not the local building inspector, will require BEFORE they will make you a loan on vacant land.

If Iwere you, I would subdivide it first. However; that brings with it the problems of the remaing lots after you decide where to build. Youmay be required by your local jurisdiction to put in the utilities and street(s) before they will approve.

The main thing I am trying to convey to you is that there are lots of things that go into new construction that have absolutely no bearing on being a landlord.

You wil find that the lender is not really interested in how well you manage rentals…they will be interested in how well you manage their $$$ during the construction. AND; if they are not going to be the take out lender…who is?

I’m trying to get yo to think outside the box…Murphy’s law says if it can go wrong…it probably will and in new construction…that is a fact of the business.

Good Luck,

Bill H

Re: Need New Construction Advice - Posted by michaela-CA

Posted by michaela-CA on February 10, 2009 at 08:57:51:

SO, if it can be sub-divided into 3 lots, then you could build 3 small homes and rent them out, provided they each have road frontage and you wouldn’t have to build roads etc.

Yes, you said that you didn’t want to do this. But maybe it would be to your advantage to look at all the options and compromise somewhere instead of saying flat out that you don’t want to do this and this and this. At least that’s what I keep reading.

ALso, most lease-option tenant never purchase.

Michaela

Re: Mobile Home/Modualr an option - Posted by MMD

Posted by MMD on February 10, 2009 at 12:56:19:

"The garage could be rented separately. "

That’s an EXCELLENT idea. Thank you!

Re: Need New Construction Advice - Posted by MMD

Posted by MMD on February 10, 2009 at 12:59:54:

Following this mobile idea a little further…

This is a rural area so I would still have to have a pad poured and have a septic and well put in. Would a mobile still make sense with those extra costs?