I just closed on a property in a growing Central Kansas town. It has an old 4 square house about 100 years old that hasn’t been updated in 40 years, a smaller rent house on an adjoining lot, and 4 more vacant lots, 3 of them the last lots on one of the nicer streets in town, $200,000 homes on up. Selling the house we’re living in now that I built 8 years ago will cover the new property, the mortgage, and put $25000 in the bank. The plan is to redo the old house while living in it, (very understanding wife), then start a new home on the nice street. After 2 years in the old house, we’ll sell for hopefully a $50,000 profit, tax free due to new capital gain laws, live in the next house for 2 years and so on until we can own the last new house free and clear with $200,000 in the bank. I will build a nice garage/shop on the lot we will live in last, and look forward to walking out the back door to go to work for the next 8 years or so. Any advice from anyone attempting this before?
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Lots of talk around here about building spec houses. Try searching the forums on the word "spec" and see what you come up with.
Making a $50k profit on a house sounds like a pipe dream to me.
Give me ambiguity or give me whatever.......
You should make sure that you have a thorough understanding of the local market conditions before you spec build anything. Dig deeper than just a gut feeling that the neighborhood is improving or that it's a nice area.
Consider who would be buying these houses. If it's a nicer part of town, is there a lot of growth in that sector? Is it people with "new" money (vs. inherited), which indicates economic growth? What are the demographic trends of surrounding neighborhoods? What is the source of income for many people in the area? What is the local economy based on? You need to assure yourself that some catastrophe to an economic provider in town won't wipe out your plan, i.e. a plant closing or severe drought, etc. If this is an issue then you need to consider this risk in deciding what to build on the property and what return would be acceptible... the higher the risk, the higher the potential return should be.
Conversations or a market analysis (probably for a fee) from a local realtor might be very beneficial in this area. Sometimes the local building dept. or zoning dept. has helpful information as well. If you do the appropriate due diligence, spec homes can be a great opportunity.
Good luck!
Andy
This doesn't sound like spec building to me, it sounds like building a house for yourself to live in. Then after 2 years, put a sign out in your yard and continue to live in it until it sells. Lots less risk than a spec. You got to live somewhere, right? Why not live in a house that you built. As long as you can afford the initial house payment and you don't NEED to sell the house.
As far as $50,000/house, I guess it could be done. Builders, I hope, try to make at least a 10% profit. On a house that is worth $200,000 at the end, that would be $20,000 that would be saved by being your own contractor. No realtor involved, so that's 6%, rounded to $10,000. So that's $170,000 of hard costs in a $200,000 house. The lot is worth at least $20,000 (probably $40,000, as 20% of the total value of the house is reasonable) and it is free and clear as I understand it, so there's your $50,000.
However, I think that remodeling a house and selling it, and building 4 and selling 3 houses, and having the 4th one paid for and $200K in the bank is a little ambitious.
I'm a lender and we typically want the customer to have 20% in the project, which is typically the land value, so assume an 80% loan of $160,000 on a $200,000 house. On a typical homeowner construction loan, the G.C. fees are built into the 80% loan, which you will not have to borrow, so lets use the same $20,000 as above. You started with $25,000 in the bank, sold the remodeled house for a $50,000 profit, so that should net you $75,000 in the bank. Get a loan for $65,000 ($160,000 - $20,000 - $75,000) and build the first house. Sell for $200,000 assuming no realtor and you then have $135,000 to put towards the next house. No loan on the next house. Sell for $200,000 and you have $200,000 in the bank. No loan for the next house and $60,000 in the bank. Sell for $200,000 and you have $260,000 to build your last house. Use $140,000 of it, and you have $120,000 in the bank with no mortgage.
What the above doesn't take into consideration is how much, if any, of the actual work you will do yourself, (besides being the contractor) what material and interest costs will be at the time of building, and property appreciation. Also, it assumes no realtor commission, and that the $20,000 for a G.C. fee doesn't get wasted on mistakes, higher material prices, and interest expense due to taking a longer amount of time.
Hope this wasn't too long.