Buying to Rent vs. Building to Rent
Hello everyone!
First and foremost I'd like to introduce myself. My name is Peter, I'm 27 years old, and my wife and I reside in Seattle, WA. As far as real estate goes, our short term goal is to own at least 3 rental properties, then, our long term goal is to build our custom dream home.
In short, my question is this:
Does it make sense to buy land and build a new single-family home we can rent out vs. buying a fixer-upper and renting it out?
The long version:
Seattle is a tough market, even in the suburbs it's extremely competitive. We've been looking for a decent fixer-upper for quite some time now, but options are limited, even at the auctions. After months of relentless searching, I had a different idea... Why not buy 1.5-2 acres of flat land, build a small rambler and move in. Since we're currently living in an apartment, this seems like a good logical first step. Then, sub-divide the land and build 2 more ramblers and rent them out.
According to my math, not only would we save a substantial amount in acquisitions, our maintenance costs would be considerably lower. In addition, this approach would in a way hit two birds with one stone: it would allow us to enter the renters market, AND live essentially rent-free while we're building our dream home. Once we're ready to move into our new home, we'd rent out our 3rd rambler. Now we're living in a new home AND we own 3 rental properties...all for a MUCH lower price tag with minimal maintenance costs (vs. buying 3 fixer-uppers).
Of course, the trade off is time and the hassle of building, but quite honestly I think I would enjoy the process. The idea that I could look at these properties one day and say "hey, I built this" really excites me.
Here's my math:
- Land: 130k
- Permits, road, utilities: 120k
- Small rambler x3: 120k each
- Misc: 30%
TOTAL COST: 793k
For land, permits, road, and utilities I'd pay with cash. Then I'd take out a construction loan on the remaining 500k'ish (with 20% down).
At the end of the day, not only would I be saving at least 50k (vs. buying 3 fixer-uppers), I'd own 3 beautiful and brand new properties. The rent from the first 2 ramblers would cover the cost of my entire loan (and some), giving us time and allowing us to live rent-free while we build our dream home.
With that said, am I missing something? Any major drawbacks? Would you recommend for or against it? Because in my mind, it seems like THE way to go...but then again, what do I know :/
A little about me:
- My background is in design, although I've spent the last decade or so running a tech company (software, design, digital marketing, etc)
- We're currently renting an apartment, have some cash saved up and would like to diversify into real estate
- No kids, no dept
- I've never built a house, but the process doesn't intimidate me (besides, I'd be working with a builder)
Thank you so much for your time! Any advice is greatly appreciated :)
Peter