Newer Homes smaller lots v/s Older homes with bigger lots

Austin, Texas
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Newer Homes smaller lots v/s Older homes with bigger lots

Arunesh Chandra
Member since 2020 · 1 post · 0 votes

I'm an Austin area newbie, looking to do a buy & hold kinda investment with positive cash flow. Trying to figure out if older communities with bigger lot sizes are better investment that newer homes with smaller lot sizes, from an appreciation perspective. 

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Alex G.
Investor · Austin, TX · Member since 2014 · 184 posts · 229 votes
5y

Any investor who doesn’t understand that Austin is going through a major construction boom will completely miss out on one of the most lucrative opportunities we have here.  There is a huge demand for infill lots for new construction within the city that will likely continue for years. 

Right now the demand is primarily in the more central areas.  However, due to rapidly escalating costs of buildable lots, the demand has been spreading outwards as small builders search for cheaper lots to build on.

In that regard, it’s not a matter of whether the house is old or new. It’s a matter of whether you’ve got a lot you can build more on than presently is built there. Or will be able to to build eventually, assuming CodeNext ever becomes a reality.

If you’ve got a lot like this, there is a chance you can carve out 1-2 extra lots in the back through subdividing. Or you may already have it through favorable current zoning or a future zoning proposed by CodeNext.




For example, current zoning of this 0.40ac lot allows only one dwelling per lot, that of course already sits there. If you subdivide this lot and get extra 2 lots out of it, you now got 2 new vacant infill lots for 2 more SFRs.

If CodeNext passes in its current version, you’ll have an opportunity to get up to 7 (yes, seven!) units on this lot, using a “preservation” provision of the new version to keep the old house on the front rather than tearing it down. What do you think this will do to the value of your property?? That’s a forced value creation that will far exceed any appreciation you can hope for or any cash flow you could potentially extract from just a a single family home.

Plenty of opportunities here: (1) sell the lots to raise cash and pay off your loans on your existing house to get free and clear property for a long term hold, (2) Sell the front house keep the lots for long term appreciation (they will appreciate at the same rate as houses nearby), (3) Trade a lot to a builder to get him to build a small home on the back lot for you at a very low cost, (4) Sell some of these lots with owner financing for cash flow... And so on.

You have to be patient with these opportunities as subdividing your lot takes time and capital, monetizing your lot(s) takes time while you’re paying taxes, maintaining it, etc. But the $$ payoff is certainly worth it.

Happy bargain hunting!

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  • Will Fraser
    Real Estate Broker · Salt Lake City & Oklahoma City · Member since 2018 · 3k+ posts · 2k+ votes
    5y

    Hi @Arunesh Chandra, welcome to the BiggerPockets forums!

    There is likely to be only a marginal difference in the appreciate you see between these two groups year over year.  In my opinion, though, a well renovated older home on a larger lot gives you more options in the long-run of property ownership, while newer construction gives you a simpler, lower-maintenance operation in the short term.

    If I'm buying and holding a property for the long run, I prefer well located homes on ideal lots, which tend to be older homes in my market. 

    0Reply
  • Alex G.
    Investor · Austin, TX · Member since 2014 · 184 posts · 229 votes
    5y

    Any investor who doesn’t understand that Austin is going through a major construction boom will completely miss out on one of the most lucrative opportunities we have here.  There is a huge demand for infill lots for new construction within the city that will likely continue for years. 

    Right now the demand is primarily in the more central areas.  However, due to rapidly escalating costs of buildable lots, the demand has been spreading outwards as small builders search for cheaper lots to build on.

    In that regard, it’s not a matter of whether the house is old or new. It’s a matter of whether you’ve got a lot you can build more on than presently is built there. Or will be able to to build eventually, assuming CodeNext ever becomes a reality.

    If you’ve got a lot like this, there is a chance you can carve out 1-2 extra lots in the back through subdividing. Or you may already have it through favorable current zoning or a future zoning proposed by CodeNext.




    For example, current zoning of this 0.40ac lot allows only one dwelling per lot, that of course already sits there. If you subdivide this lot and get extra 2 lots out of it, you now got 2 new vacant infill lots for 2 more SFRs.

    If CodeNext passes in its current version, you’ll have an opportunity to get up to 7 (yes, seven!) units on this lot, using a “preservation” provision of the new version to keep the old house on the front rather than tearing it down. What do you think this will do to the value of your property?? That’s a forced value creation that will far exceed any appreciation you can hope for or any cash flow you could potentially extract from just a a single family home.

    Plenty of opportunities here: (1) sell the lots to raise cash and pay off your loans on your existing house to get free and clear property for a long term hold, (2) Sell the front house keep the lots for long term appreciation (they will appreciate at the same rate as houses nearby), (3) Trade a lot to a builder to get him to build a small home on the back lot for you at a very low cost, (4) Sell some of these lots with owner financing for cash flow... And so on.

    You have to be patient with these opportunities as subdividing your lot takes time and capital, monetizing your lot(s) takes time while you’re paying taxes, maintaining it, etc. But the $$ payoff is certainly worth it.

    Happy bargain hunting!

    2Reply
  • Neil Narayan
    Real Estate Broker · Austin, TX · Member since 2015 · 715 posts · 527 votes
    5y

    @Arunesh Chandra IMO the location is more important than the lot size

    0Reply
  • Neil Narayan
    Real Estate Broker · Austin, TX · Member since 2015 · 715 posts · 527 votes
    5y

    @Chen Li good thread for you to follow as you were asking me this just yesterday. Would be good for you to see other folks perspective on it as well. 

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  • Aaron Gordy
    Real Estate Broker · Austin, TX · Member since 2012 · 1k+ posts · 1k+ votes
    5y

    Location location location. The lot sizes doesn't matter as much as the location. If you have a big lot where there isn't much demand for the space then it doesn't matter as much . And vice versa. For example, if you have a large lot in Barton Hills area and you are comparing it to new house with smaller lots in Manor suburb and you are considering appreciation only then Barton Hills is the best choice, easily. If you are searching for cash flow then it will be harder to cash flow in Barton HIlls with the typical down payments and the suburban new houses on smaller lots will be the better choice. 

    1Reply
  • Alex G.
    Investor · Austin, TX · Member since 2014 · 184 posts · 229 votes
    5y

    @Neil Narayan I agree with you that the location is important. There are multiple central Austin areas that are appreciating at a much higher rate than the same on the outskirts, and will probably continue to do so. That's been said again and again, no point in debating this.

    My point was, if the location is comparable a big lot is hands down a winner from the investment view point. You can add a large chunk to the value of the property IF your current or future zoning allows to build more, and/or if you subdivide and create extra lot(s) on your property.

    I just checked the MLS. There are a total of 225 single lot listings with Austin addresses of which 96 are under contract. Starting prices are about $100K. Again that's a "starting" price. A $100K potential value increment for an extra lot you can squeeze out of the property is nothing to ignore.

    If one manages to do this in a premium location the rewards could be much higher. I sold a vacant lot near downtown to a spec home builder a couple of months ago for $388K. I separated it from a larger property. This strategy can substantialle reduce your acquisition cost for a property that otherise may not be economically feasible.

    We had quite a number of discussions on this forum on how there is almost no cashflow in Austin. Chopping off a chunk of your land  and selling it, is one of the ways to turn negative cashflow into positive.

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  • Neil Narayan
    Real Estate Broker · Austin, TX · Member since 2015 · 715 posts · 527 votes
    5y

    @Alex G. agree with everything you said if the location is comparable same as what Aaron was saying as well. Good to hear we are all on the same page :)

    0Reply
  • Vishal Sood
    Rental Property Investor · Seattle, WA · Member since 2019 · 12 posts · 5 votes
    5y

    Really awesome thread

    @Alex G. - what areas comprise central Austin? 

    @Aaron Gordy /others - is there a handy reference to good neighborhoods that are appreciating in Austin?

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