Should I split the lot? Benefits for BRRR?

11 Replies

Newer investor:

I own a renovated home in East Nashville on a very desirable corner lot. The large backyard can be divided and I can build another single family dwelling on it which is allowable by local zoning laws.  

I owe approximately 210K on the property and believe market value is around 389-410K if I were to place it on the market today.  I had a standing offer of 110K from a local builder if I wanted to sell him the backyard so that he could build another home in that space, while retaining the actual home and front yard for myself. 

I'm wanting to stay here in this house as my primary residence and not build on the backyard right now.

However, I do want to BRRR the property and get some financing for another property...

Questions:

1).  Should I split the lot?   Even if I simply keep it as my own backyard for the time being?  That would give me two properties on paper for future financing. 

2). Or, would the BRRR potential be limited if I moved the property from 1 large lot to 2 since the newly formed lot has no home/equity?

3). Should I just leave it alone?

1) I think you should read up a bit more on the BRRRR concept as I don't quite understand how you are trying to use it in this situation. In a nutshell, it states you buy a property, rehab it and then use the new equity created as the down payment when you refinance this have little to not money out of pocket in the deal.

2) I would speak with a lender as I am not sure about this but IMO if you go ahead and split the lot and it has an appraised value of around 100k, that gives you more "equity" if you were to get a HELOC on the combined property. For example, it would show you own your house valued around 400k with about 200k in equity as well as you own a lot valued around 100k that is free and clear giving you an additional 100k in equity. Whether lenders will loan against lot values I have no idea but to me it seems to make you look better on paper.

That said, it seems like you could leave everything alone currently and still have enough equity in your home to use as a down payment on a rental. So if you truly want to stay put and not build then that is the direction that I would go. Hope this helps. 

Thanks!  I was gearing my question towards the appraisal process, which I suppose I did a poor job communicating.  I was unsure if the lender would appraise as high with the split lot/decreased acreage.  Hence, we both came to the conclusion that speaking to a lender may be the best bet for clarity here.  There are, of course, some costs involved in splitting the lot but it may not be worth it in my particular circumstance.  

Trying to determine which avenue would provide the most equity for other deals I'm considering.  

Promotion
BiggerPockets
The one-stop-shop for REI
Find Local Home Improvement Pros!
Check out our network of trusted, local contractors for all of your home improvement projects.
Find a Contractor

Hi Brad, 

Thanks for posting!

I'm learning about HELOCs and also have a home-with 2 separate lots. I was told the land/lots weren't eligible for a HELOC. Maybe it's different state by state? I'm in Oregon.

@Brad Wayne

This is just what I personally would do. Take it as you will. 

I would absolutely not just leave it alone. It sounds like you are sitting on huge potential.

I would split the lot right now.

I would live in the existing house for 3 years at least to get the tax benefit of a primary residence. I would start to build the new house myself once I hit 2 years in the existing house as it would take about a year. 

I would then sell the existing as a primary residence and get that nice tax benefit.

I would then live in the brand new house with all that wonderful equity for 3 years and then sell it as a primary residence as well.

Splitting lots is a very popular strategy and if I have the option I would always do it. Always! 

@Brandt Miller

@Brandt Miller

I recently had the experience of legally splitting a property into 2 deeds. The appraiser wouldn't use the comparable sales of other "split" properties (in my case a duplex, split into 2 townhomes).....until I completed the legal splitting work myself.

If your property will sell for $410,000 as is....and the rear lot is worth $110,000, would your house on the smaller lot sell for more than the $300,000 difference???? if so, add the value.

I believe you only need to live in the property 2 years for primary residence tax benefits.

@Steve K. normally unsplit lot will have zero value to a refi appraiser lot needs to be split.

also he will need to see if the bank will release the lot with some sort of pay down.. most of the time they will.

but usually want all the money.

so the thought of building another primary on the property is a good one if he can figure out the financing. 

Originally posted by @Jay Hinrichs:

@Steve K. normally unsplit lot will have zero value to a refi appraiser lot needs to be split.

also he will need to see if the bank will release the lot with some sort of pay down.. most of the time they will.

but usually want all the money.

so the thought of building another primary on the property is a good one if he can figure out the financing. 

Good point, Jay.....yes, the mortgage company has a say in whether you can sell off the vacant lot (i.e. part of their collateral disappeared.)

Thanks for the feedback everyone  Something must be in the air.  A couple came by today as I was taking out the trash and mentioned they'd be interested in buying the house at around 425K in a private sale, without realtors.  If I can up that a tick I may have another option to consider.  

@Brad Wayne Hello fellow East Nashvillian! You have a good problem here. I know how valuable your backyard is. A couple years ago I built a 3 car garage (DADU) with a 850 sqft apartment above it in my back yard. We currently Airbnb the apartment and it cash-flows like crazy! I wish I could give you input on splitting the lot but I have no experience here. I am curious though if the couple was a dark haired woman with a skirt and a blond-ish man both casually dressed. I ask because I was out for a run and saw them scoping out houses. Ran back by them and the woman was on the phone in front of a house for sale. Didn't look like thieves so I assume they trying to buy houses.  

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you