Construction of Additional Dwellings - Running the numbers
I'm in a situation that can be a potential BRRRR but with a large gap between the B and the first R but the first R is also a B :)
My wife and I bought and house-hacked a duplex at the end of 2015. We're finally able to purchase a place of our own and get the duplex up and running independently. So 2015 till now was the gap between B and R. But instead of Rehab, we may look to Build some time in the next few years. When we purchased, one of the attractive features was (and still is) the zoning. We can build up to 4 more dwellings if we meet some requirements on size and foundation footprint type things.
So in terms of financing this, where do we start? We have a line of credit against the duplex. Other sources of cash would be loans against my 401k and cash value life insurance policy. That could materialize into a down payment on a construction loan but I'm certain won't cover everything. Then, after it's built and rented, I'll want to be sure we can refinance the whole thing and pay back the HELOC/401k/Insurance loans in full.
I'd love to hear from anyone that is or has been in a similar situation. How did it go? Learn anything unexpected? I'm mostly interested in the financial structure of the project.
I envision this:
B. Buy... then live your life for 8 years which includes buying a primary residence so after that the rest of this plan may just take a back seat for a while...
B. Build... and borrow 100-200 thousand dollars (maybe more idk) from yourself and others to construct another 1-4 units
R. Rent the new unit(s)
R. Refinance, at least cash out enough to cover the money borrowed from yourself. Anything extra is icing on the cake as long as the property cash-flows enough.
R. Repeat? TBD...
Thanks for your input BP friends!
It is difficult to make the numbers work when building (which is why we do not build affordable housing in CT or anywhere in the country). Until either the rents come up to justify the building costs, cost of material, energy and labor go down or cost restrictive codes are changed, it will be hard to make quick money on building brand new houses (even small).
Brand new housing behaves like brand new cars. They go down by 30% after you take them off the lot. Developers make money by selling that brand new house to a person that wants to be the first owner or owner's that want to build their forever home.
If you can build super high density, you might be able to make it work but that does not seem like the plan you are going for.
@Michael Fundaro I love where your mind is at. I'm in a similar process with one of my properties right now too.
There are some things you'll want to figure out.
1. What size (bed/bath,sqft) you'll want to build
2. What local contractors are building price per sq ft
3. That will give you ROUGH building costs.
4. Wouldn't hurt to also be looking for comps so you can get it appraised higher after built.
5. Talk to your lender or a few lenders do understand their construction loan offers.
I'd love to help out, feel free to bounce any more questions or ideas ff me.
Dave
@Dave Meyers based on 1 & 2 in your list I roughly estimate 250K for a 2bd 1ba "Carriage house." A brand new apartment of that size in my area could bring in 2k/month. Don't really want to pursue that right now.
Though I am curious about something on the refinance in general... Right now I have a duplex on the property that I refinanced in 2021 for 2.875%. If I build a carriage house and refinance, is it possible to do it with a second mortgage only for the new unit? Since rates are higher now I'd like to keep the one I got a couple years ago.
@Michael Fundaro Talk to a lender for that. My initial thought is that if it is the same property/lot/parcel than it would be one mortgage.