Building new primary residence as investment strategy?

Question

Hey ya'll! First time poster.

My wife and I are trying to decide the best way to get started building our portfolio. We've been looking out of state a lot as the market here in Utah is crazy but haven't pulled the trigger on anything yet.

I recently heard of someone who has been extremely successful in their real estate career who built a new primary residence every 2 years which came with certain tax benefits and profit in an appreciating market.

So I thought maybe instead of finding a rental property to buy we could build a new primary residence and rent out our current home which has appreciated about 60% in the 5 years we've owned it. And if possible also build an accessory apartment on our new home and rent that out.

What say ye BP? Does that seem like a reasonable way to get started?

Grant Rothenburger · Answer

I could say some things, but I've never done development or learned a lot about it, so I'm not comfortable offering advice there. @Jay Hinrichs has though, he might be able to point some things out.

Jeff Mills · Answer

@Becca Summers @Blair Poelman Thanks for your responses. Those are good points I hadn't thought of. It's nice to be able to get such thorough answers to my newb questions.

I'm trying to think of the most effective ways of taking advantage of my equity and very low mortgage and interest rates of my current home to help get started investing.

Brian Rosher · Answer

Can you really build a new construction home for cheaper than an existing home in your market?  Usually it is the other way around.

If you can "house hack" a 2-4 unit home and move every few years, that is the way to go.  You will benefit from buying properties with less money down and at owner occupied rates.  Just make sure they cash flow after you move out.

There are also programs like 203k and Fannie Mae "First Look" which are only available to owner occupants that you could take advantage of.

Blair Poelman · Answer

I believe we have a pretty complicated situation going on in UT county right now with pricing and appreciation.  I think some of the challenges you're going to have speculating appreciation with a new build in UT county are (and this is my skeptic side, so take this with a bit of a sarcastic tone - and sorry, I just re-read this and it's long... ):

• Lot sizes are ridiculously tiny - you're not going to find a lot of availability of a spacious lots (or any size lot) for a reasonable price.  Most of the new builds are going in on tiny lots in packed-in neighborhoods.
• If you can find a decent size lot (my idea of decent of .4 - .7) that is reasonably priced, and remotely close to anything, and would accommodate a custom home, custom homes are not cheap right now - they really never have been "cheap". Beyond that, builders are stacked up and months out from even breaking ground.
• New construction is crazy expensive for what you get. We're seeing new 3700ft builds out in the the south end of UT county on .2 acres, 1850 ft finished for a base price of 375k - that's before you upgrade to an ounce of tile or granite.  Luckily the yard is tiny so it will only cost you 20k to do it up right.  Tack on another 50k to finish your basement the right way... (I built that house in 2000, fully finished on .3 acres for 220k right smack in the middle of Orem.)   Is this house going to be worth 500k in 5 years without upgrades, finished basement, fence, full landscaping?  Who knows... Maybe if you finish everything, but by that time you're all in somewhere in the mid to high 400's, and remember the 5 years worth of payments at $1600 / mo.
• Lack of future appreciation - I can't imagine you're going to get another 60% appreciation over the next 5 years with a new build. Maybe my imagination isn't big enough, but I just don't see how all these smart folk here will continue to pay these prices. This market is going to break at some point. And if it doesn't break, in 2 years our same 3700ft build will base price at 425? 450? 
• A lot of new construction is going on where Geneva Steel was (Vineyard).  I was around when that place was a toxic waste site.  Now it's a breeding ground for the next decade's elementary kids...  last time I checked, arsenic-tainted soil doesn't make for an enticing organic garden. 
• Probably the biggest deterrent I see is the experience of building a new home kinda sucks.  I've built several homes.  I have yet to have a new build ever be done on time (which leads to problems moving out / renters moving in, and expensive interest rate locks extensions), 7 times out of 8 it ends up costing a couple points more than expected, so yeah, building a house isn't the coolest way I would try house hacking.

As a side note, I've had an accessory apartment.  It sounded like a great idea until I had a renter that could come and go as they please while my kids played in the backyard.  Not as cool as I thought it would be.  There was also zero added resale value due to the inclusion of an accessory apartments.  Keep in mind there's residency restrictions on accessories - so if you house hack with an accessory, when you move out of that place and move to the next one, you won't be able rent as a duplex.  Has to be owner occupied to rent both sides.

Again - sorry for the long post here.

Becca Summers · Answer

@Jeff Mills yes our market is hot. I wouldn't build a strategy around moving every two years. Yes, our market has gone up 52% in the last five years but I wouldn't bank fully on appreciation. That is where people lose their shorts. Now if you can make sure it would cash flow from the first day with the down payment you put into the home then yes. That is how we did our first two rentals.

Accessory apartments are great if you live in the home if you live in the right city. Spanish Fork is great for them Lehi at the moment doesn't allow it or Saratoga Springs. The problem I would see if you moved every two years like your friend you couldn't rent the new home as two units. It would have to be one. You might be able to attract a multigenerational family but that's a small renter pool.

Michael Lee · Answer

Hello Jeff!  I hope you get several answers on this that will help you make your decision.  My first thought was to treat a new home as an investment.  That is the smart way to go.  Secondly I am concerned about your existing home being rented since you probably get it as a place to live and not make it an investment.  That part could hurt you how the demand for rent homes in that area is.

Is your home's layout good for the prospects to see?  I would try to look at it through a renter's eye?  Does it need any repairs that have been overlooked?  Will there be any capital expenses for or requested by a new tenant?  Do not forget any ongoing expenses you'll have like possibly insurance, property taxes, or anything else?

How's the location of your existing home?  Is it near a highway?  What kind of traffic is there?  Is the economy and job growth any good?  You might just borrow against your equity  to make any repairs or help you in a new investment.

Good luck to you!

Jeff Mills · Answer

I guess that's part of what I'm trying to discover. What challenges should I expect going this route? What would some pros and cons be?

Grant Rothenburger · Answer

@Jeff Mills I think it will come with its own set of challenges, but sure! Everything will have challenges, which challenges do you want?