So you bought your Mountain Lot....Now what?
This particular topic interests me for a few reasons:
The obvious one is because I'm in the business and I get bombarded by questions on this particular issue quite often.
Another reason is because the solutions can only be addressed individually and circumstantially, which is how I think most investment opportunities should be approached.
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THE CHOICES….. facing someone who has just purchased a mountain lot are simple:
* Hold on to the lot for at least a year or more if you wish, sell it and capitalize on the difference between today’s and yesterdays’ equity value.
* Build a log cabin or a log home. When you’re finished sell it at a profit.
* Same as above except instead of selling it, you can rent it profitably.
* Same as above except you are not interested in either selling it or renting it. You just want to enjoy it as a second home away from home with your family. Just you guys and the Mountains.
Any other option that you can think of is acceptable, because owning land regardless of what some circles in the Industry tell us, is one of the most flexible forms of investments there are.The problem is that we tend to confuse Liquidity with how Flexible a particular investment asset is. But that topic is for a future post....!
…….LET’S BREAK IT DOWN….
Lets’ talk a little bit about some of the bullet points above, for example: many people worry about having to assume mortgage payments on a property that does not rent well or is not rented ALL of the time. Well, remember that even though it may sound strange to you, a vacation home in the right location such ex: in the mountains in Western North Carolina, Key Largo Florida, La Jolla, Aspen....... is probably as or more marketable and rentable than a residential home or condominium anywhere else. There are a few reasons for this:
* Generally, people that can afford to go on vacation usually can afford to rent a vacation home if they don’t own one already, meaning they have the means to do so. ......Better to market to someone that can afford a luxury rather than to someone who can not. The location should be one that makes it attractive to rent in the area while vacationing as well, as in the examples above...... .
* Traditional rental markets go up and down, but people, regardless of the economy or any other event occurring in the world, will always go on vacation with their families for at least a long weekend.
………THE BACK BREAKER…….!
As a rule of thumb always do your math conservatively and I’ll show you what I mean by that………Lets say that you bought a 2 acre lot for about $115,000, just under 60K an acre, could me more, could be less depending on the location. You want to build a modest cabin in the woods, you figure that the right size for you, your wife and 2 kids is about 1,400 sq-ft, not including basement. At a modest $135-140 / sq-ft of cost to build you are looking at $189,000 – $196,000 (135sq-ft x 1400sq-ft home). If you include the land, now you are in it for $304,000 (115 + 189), if you want a finished basement add another 30K……Remember, if you want finishes that belong in the Trump Plaza your cost will always go up…..! You can play with the numbers depending on the size of the home you want.The cost of construction you could also manage if you had the time to dedicate to it…..
......The topic of how to deal with builders, developers and trades people will be addressed on another post!
…….DON’T AIM TO JUMP HIGH WITH WEAK LEGS……!
So now, let’s figure out how much you have to rent this baby for in order to make some money or perhaps to just breakeven. Let’s assume you were able to finance 90% of construction which is not at all uncommon, sometimes you can get away with 95% or even better.......so 7%...(also conservative these days)... on (273,600) which is 90% of your total cost ($304,000) is $19,152 of interest only payments annually, which is how I would structure my financing, which translates to roughly $1,596 / month of payments that you are responsible for. Don’t forget taxes and insurance which are usually specific to the location and the type of home built, but let’s stick with just the main numbers for now….
As I mentioned at the beginning, let’s treat this particular scenario conservatively,….. Let’s not go crazy here!!…..So, we only rent it only for 15 days out of the month, at a rate of $170/night. That equates to 2,550 / month, roughly a difference of about $954 / month or $11,448 / year of positive cash-flow. Even if subtracting taxes and insurance you are still in the black.
.........Feel free to check my math, I've been known to rely on my calculator too much.....!!!
Remember not to overextend yourself….use common sense when working your numbers….Play with the numbers, include taxes and insurance as a final and include payments to principal if you dont want to go with interest only payments.....Also a cleaning service if you are renting the place to vacationers....Think of other costs that you haven't thought of.....Trust there are always some unforseen costs.....But at the end of the day no one should know better than you what you can or can’t afford!!
An absolute and utter disaster would be to break even or perhaps having to dish out a couple of hundred dollars a month to cover expenses, but even if that were to be the case you still have an asset that continues to appreciate year after year in hopefully a beautiful location, with an audience ready to listen to what you have to offer, in a market that can only get stronger as time passes, and as a proud owner of a vacation home that you and your family and friends can use at any time; in other words, a quality product.
Take Care.....
C. J Alegre
=== I'll be uploading an xcell spreadsheet template soon on my website in reference to this article ====
The obvious one is because I'm in the business and I get bombarded by questions on this particular issue quite often.
Another reason is because the solutions can only be addressed individually and circumstantially, which is how I think most investment opportunities should be approached.
=========XX============
THE CHOICES….. facing someone who has just purchased a mountain lot are simple:
* Hold on to the lot for at least a year or more if you wish, sell it and capitalize on the difference between today’s and yesterdays’ equity value.
* Build a log cabin or a log home. When you’re finished sell it at a profit.
* Same as above except instead of selling it, you can rent it profitably.
* Same as above except you are not interested in either selling it or renting it. You just want to enjoy it as a second home away from home with your family. Just you guys and the Mountains.
Any other option that you can think of is acceptable, because owning land regardless of what some circles in the Industry tell us, is one of the most flexible forms of investments there are.The problem is that we tend to confuse Liquidity with how Flexible a particular investment asset is. But that topic is for a future post....!
…….LET’S BREAK IT DOWN….
Lets’ talk a little bit about some of the bullet points above, for example: many people worry about having to assume mortgage payments on a property that does not rent well or is not rented ALL of the time. Well, remember that even though it may sound strange to you, a vacation home in the right location such ex: in the mountains in Western North Carolina, Key Largo Florida, La Jolla, Aspen....... is probably as or more marketable and rentable than a residential home or condominium anywhere else. There are a few reasons for this:
* Generally, people that can afford to go on vacation usually can afford to rent a vacation home if they don’t own one already, meaning they have the means to do so. ......Better to market to someone that can afford a luxury rather than to someone who can not. The location should be one that makes it attractive to rent in the area while vacationing as well, as in the examples above...... .
* Traditional rental markets go up and down, but people, regardless of the economy or any other event occurring in the world, will always go on vacation with their families for at least a long weekend.
………THE BACK BREAKER…….!
As a rule of thumb always do your math conservatively and I’ll show you what I mean by that………Lets say that you bought a 2 acre lot for about $115,000, just under 60K an acre, could me more, could be less depending on the location. You want to build a modest cabin in the woods, you figure that the right size for you, your wife and 2 kids is about 1,400 sq-ft, not including basement. At a modest $135-140 / sq-ft of cost to build you are looking at $189,000 – $196,000 (135sq-ft x 1400sq-ft home). If you include the land, now you are in it for $304,000 (115 + 189), if you want a finished basement add another 30K……Remember, if you want finishes that belong in the Trump Plaza your cost will always go up…..! You can play with the numbers depending on the size of the home you want.The cost of construction you could also manage if you had the time to dedicate to it…..
......The topic of how to deal with builders, developers and trades people will be addressed on another post!
…….DON’T AIM TO JUMP HIGH WITH WEAK LEGS……!
So now, let’s figure out how much you have to rent this baby for in order to make some money or perhaps to just breakeven. Let’s assume you were able to finance 90% of construction which is not at all uncommon, sometimes you can get away with 95% or even better.......so 7%...(also conservative these days)... on (273,600) which is 90% of your total cost ($304,000) is $19,152 of interest only payments annually, which is how I would structure my financing, which translates to roughly $1,596 / month of payments that you are responsible for. Don’t forget taxes and insurance which are usually specific to the location and the type of home built, but let’s stick with just the main numbers for now….
As I mentioned at the beginning, let’s treat this particular scenario conservatively,….. Let’s not go crazy here!!…..So, we only rent it only for 15 days out of the month, at a rate of $170/night. That equates to 2,550 / month, roughly a difference of about $954 / month or $11,448 / year of positive cash-flow. Even if subtracting taxes and insurance you are still in the black.
.........Feel free to check my math, I've been known to rely on my calculator too much.....!!!
Remember not to overextend yourself….use common sense when working your numbers….Play with the numbers, include taxes and insurance as a final and include payments to principal if you dont want to go with interest only payments.....Also a cleaning service if you are renting the place to vacationers....Think of other costs that you haven't thought of.....Trust there are always some unforseen costs.....But at the end of the day no one should know better than you what you can or can’t afford!!
An absolute and utter disaster would be to break even or perhaps having to dish out a couple of hundred dollars a month to cover expenses, but even if that were to be the case you still have an asset that continues to appreciate year after year in hopefully a beautiful location, with an audience ready to listen to what you have to offer, in a market that can only get stronger as time passes, and as a proud owner of a vacation home that you and your family and friends can use at any time; in other words, a quality product.
Take Care.....
C. J Alegre
=== I'll be uploading an xcell spreadsheet template soon on my website in reference to this article ====
Comments (2)
Glad you liked it George.... raven
Claudio Alegre, over 15 years ago
Good message about estimates of costs. <a href="http://www.landincorporated.com">Land For Sale</a>
George Farmer, over 15 years ago