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 :)
Seems as if you've got it all figured out. Go for it!
Hi Peter! I don't have much to contribute as I'm new to this and haven't even done a deal myself...You should listen to the last podcast (ep. 265) with Andrew Propst if you haven't yet...He talked about building to rent which was really interesting. Would love to hear if you do decide to do this and your success story! :)
I dont know enough about RE yet to analyse,but I see you thought it out really well.And that is something I know is very important in RE!
Hi Peter, land development and building is not for the faint of heart. That said if this is something you are really interested in doing I would suggest to go find the land first. Once you know where you want to build you can start ensuring the rest of your plans will fall into place.
In Seattle and the surrounding area I would be really surprised if anyone is selling developable land for just the value of the house. Based on the price you listed you will need to look in areas quite a way from Seattle. In those areas zoning requirements can vary greatly.
I wish you good fortune as you move forward with your plan. In the right market this can be a really successful strategy.
Do the math. It is almost always cheaper to rehab an existing property than to build one for rental purposes. Materials and labor are at record levels, so building will cost more, not to mention buying the land, getting power, water, sewer run to the property, etc. This may not be true in your area, but it is usually the case.
@Peter Babiy Are these hard numbers you’re dealing with or just estimates? I wouldn’t think there’s developable land in Seattle at $60K per acre. If there was buildable and zoneable wouldn’t a developer have popped in a road, utilities, and put some 3,500 sq ft homes on 10,000 sq ft lots? I’d have to think that would be a no-brained for a Seattle developer. But what do I know?
When I was younger I also viewed custom home design as the most desirable end state. Now, I realize that your custom dream home, unless you plan to live in this for the rest of your life, may not be the dream home for others. Please consider your exit strategy in every scenario. Even your life long dreams can be short lived. I have moved for work about every two years for the last 10 years. I have lived in three countries, a few different states, single family homes in the suburbs, countryside, in the hills of small village in Northern Italy to a large city in Germany to high rise apartments in the Atlanta. Every one had some great advantages and redeeming value, but NONE of them was ideal. I cherish my experiences and I would encourage others to do the same. For this and more, I can't see living anywhere for extended periods of time, would not spend hundreds of thousands of dollars on the 'ultimate dream home' of which you would most likely not be able to recoup your loses, all for the sake of some ideological neverland. Your paradise could be your prison if you can't exit when you need to.
as an architect who works primarily with homeowners, i will echo some of the others - that construction is not for the faint of heart, but if you make up your mind to do it, you can. you should start by finding out REAL numbers. for 3 individually built houses, construction costs in Florida start at $150 PSF (per square foot). Seattle construction costs are probably much higher. and REAL timelines for design & permitting & building in your specific area. permitting can be a few days or a few months. a new house can easily take 8-12 months to build, more depending on weather, etc. new construction include costs for installing utilities, etc. an option that some people find in high-cost-of-living areas is to purchase a modular home or look at shipping containers or tiny homes. sometimes these specialty designers/builders can really help you find out if the properties you are looking at purchasing would be a good fit for their house types. Good Luck!
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