I am considering buying the house next door and remodeling it as a “spec” home.
I have recently completed a large renovation of my current home ~4000 sf, as the general contractor and got a big kick out of it. The location is first ring suburb of Minneapolis in Minnesota with heavy competition from the local builders, all of which are of really high quality.
Tell me if this is stupid or what. I am not in the trades or building industry as a profession, in fact far from it but have good organization skills, and a wife who has a knack for design.
I’m not looking to spend stupid money on what I might like and am very realistic about costs, time and work required. The house really needs updating, a tear off of the roof structure because of rot and moisture and needs redesign. I kind of want to have a say in the look of the design also of the house next door.
Any thoughts and advice appreciated. Thanks.
Replies
Here in California, that's called "flipping" a property and some folks do quite well at it - mostly because our housing market resembles a shark feeding frenzy. Most properties sell within a few days at prices well above the asking price.
If you know any real estate people or mortgage lenders, they can probably tell you who's doing this in your area - and how successful they are. One thing you have to avoid is putting more money into a property than you can reasonably expect to sell it for.
Good Luck
Welcome to BT, first off.
Your first hurdle will likely be financing the remo--this is much easier in your own home. It's not impossible, it just can get dicey (Ron would direct you to read the SpecHousefromhe11 thread--much hard-learned info there).
There are several financial considerations, not least of which is the capital gains position--hard to live next door for two years. Many of the financial arrangements are very local, and driven by local conditions.
It might be that your best bet might be to hold the nextdoor property as a rental; it might not, just the same.
Good thought on the rental. My parents are thinking of renting somewhere near, probably could get them to rent.
Thanks. I hadn't thought of the cap gains issue.
JB
Good thought on the rental
Yeah, it was very tempting when my neighbor moved, I jsut didn't think she'd let me get away with lowballing the sell price enough (that poor house needs some work).
Would have been nice for the part-time job to be walking distance from home, though.
Mind you, I actually went to the trouble of writing it up as a buisness case, just like any other project. Sure, I was going to be the customer, but I wanted to get ahold of all the numbers, so that I did not loose track of the real goal--to not be working part time at -$/hr (I can do that when ever I want, thank you very much <g>).
That put the kybosh on it, my in-good-terms neighbor was not going to tolerate my making the really cut-throat offer the project needed.Occupational hazard of my occupation not being around (sorry Bubba)
Go for it. It sounds like you have an idea worth pursuing. I like the part about having a say as to the neighbors design.
Maybe list both houses high and see which one sells
Sounds like a good idea to me ... probably because I'm doing something similar. Managing costs is the biggest challenge for me - when it's your own house, you can always convince yourself to buy top-of-the-line - even if you don't recover the expense on resale, you get to live with something nice. Working on a 'spec' house, you have to fight that urge, or you will quickly spend more than you could ever get back.
Re cap gains tax, remember that you get $500K in cap gains tax-free on your primary residence, defined by living in it for 2 of the last 5 years. Maybe you can make the spec house your primary while you renovate? Don't do anything illegal of course, but there might be a creative angle.
Have fun
"Re cap gains tax, remember that you get $500K in cap gains tax-free on your primary residence, defined by living in it for 2 of the last 5 years. Maybe you can make the spec house your primary while you renovate? Don't do anything illegal of course, but there might be a creative angle."It is a total of 2 years out of the last 5. It can be in multiple parts.And it is more than "living in it". It would include thems like address for voting, registering cars, and where you get bills.But there is no simple test or check list and I don't think that it has been significant court test on it either.In fact you can count time that you are not "living in it" if the you are only going on a tempoary basis and have not "changed addresses".
Bill,
Does that mean you can only qualify once every 5 years?
EricI Love A Hand That Meets My Own,
With A Hold That Causes Some Sensation.
[email protected]
No you can qualify every 2 years.Just that you do have a 5 year window to do it in.For example my friend had a house for maybe twenty years. And lived in other cities a couple of times for a year or so, but lived in the house for the last 10.Then she bought a new house August of 2002. And she just sold it and can take the exclusion.Although she has lived in the new home for over 2 years she could not sell it and take the exclusion, because you can only take it every 2 years.But she could have sold the old house when she moved out and taken the exclusion and sold this one now and again taken the exclusion.
I second the idea of doing a bang-up job of remodeling it. Do everything to your own good taste, finish it all out in "presentation" fashion, then put both your own home and the one you've just finished on the market, at nice big price tags. Whichever one sells first, move into the other one.
The amount that is excluded from capital gains can be as much as 500K, if you're married, 250K if single. That's if you meet the 2 year residency requirement. If you reside there less than 2 years the maximum amount that can be excluded is reduced proportionally.
Ex. 1 year=250K or 125K
And if you have multiple owners of a house who aren't married can you take up to 250k for each? I assume so.
Regards,
Ken
"Do as you would be done by." C.S. Lewis
" 57466.13 in reply to 57466.12
And if you have multiple owners of a house who aren't married can you take up to 250k for each? I assume so."Yes, but each perons claiming it has to met the 2 out 5 years aS Principal Residence (and as owners).
"If you reside there less than 2 years the maximum amount that can be excluded is reduced proportionally. "Only if the sale was cause by "special circumstances" such health or out of town job.Otherwise it defaults to short term for less than a year or long term capital gains for more than a year.
Whether or not this ends up becoming a good deal for you depends on a variety of factors.
Foremost, what is the price of the house, how much would the rennovations cost, and then, what would the likely sale price be after the work is finished.
A good real estate agent could give you excellent guidance on many of the pertinent matters. This advice would encompass both financial counsel and suggestions regarding the level of renovation that would be most cost effective.
Even though you have good organizational skills, I think it might be prudent to talk to someone who could function as a general contractor -- and has good contacts among all the various trades that would have to be involved.
I have had a lot of experience down this line, and I live in St. Paul. If you want to discuss this more, send me an email.
"I would never die for my beliefs because I might be wrong."
-- Bertrand Russell
Jeff, try running the numbers to see if you could make money. Get an idea of what the house would sell for (from seeing others sell or from realtor) and then deduct repairs and purchase cost (plus a safety margin).
Just as an idea to throw up, and a couple people have already danced around it, but... You start renovating house #2. It becomes a nice place to live, so you move into it and sell house #1. Assuming you've lived in house #1 for 2 years, you've got you cap gains taken care of.
Oh, and welcome to Breaktime.
jt8
Twenty years from now you will be more disappointed by the things that you didn't do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.
-- Mark Twain
Edited 5/3/2005 12:44 pm ET by JohnT8
THanks. I am in process of getting my GC license and talking to the bank.
We'll see what pans out. I learned so much from my first remodel, I'd like to try again
and then move into the better house.
See ya.
Jeff
So if you cap gains $20k free & clear on the old house (after paying off the mortgage, repairs, realtor, etc), that would be the equivalent of $25-30k in salary?
Then if you sat down and figured how much you'd spend to pay down your mortgage by $20k, you'd have the initial $25-30k gross salary, PLUS another $5-10k interest? So that $20k you made on house #1 could be the equivalent to $40k gross salary. Or $20k gross salary per year. Repeat the process 2 years later.
That is how some folks make $$. But it certainly is a minefield! Real easy to blow the budget.jt8
Twenty years from now you will be more disappointed by the things that you didn't do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.-- Mark Twain
"So if you cap gains $20k free & clear on the old house (after paying off the mortgage, repairs, realtor, etc), that would be the equivalent of $25-30k in salary?"Cap gains have nothing to do with the mortage.If you bought it at $100k and sold for $120k (after repairs and expenses) you have a capital of $20k.It does not matter if you paid cash, an 80% mortage, or even a 125% mortgage and add to pay boot at the end.The capital gains are still $20k.Nowever, in the overall figuring you do need to cover the cost of renting the money or if you used your own what else you could have done with it.
Cap gains have nothing to do with the mortage.
No sh!t. The point was if he had $20k via the cap gains tax exemption after paying off the mortgage, the realtor, and the repair bill. As opposed to $20k leftover that was taxable.
I had mentioned 'mortgage' as simply one of the variables that gets lumped into the numbers crunching. And then you mentioned the interest on the new loan, which is a good point, could be a fair chunk of $$ and should rightly be included in the tally.
jt8
Twenty years from now you will be more disappointed by the things that you didn't do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.-- Mark Twain
Edited 5/3/2005 4:09 pm ET by JohnT8