Buying to Rent vs. Building to Rent

[Peter Babiy]

Hello everyone!

First and foremost I'd like to introduce myself. My name is Peter, I'm 27 years old, and my wife and I reside in Seattle, WA. As far as real estate goes, our short term goal is to own at least 3 rental properties, then, our long term goal is to build our custom dream home. 

In short, my question is this: 

Does it make sense to buy land and build a new single-family home we can rent out vs. buying a fixer-upper and renting it out? 

The long version:

Seattle is a tough market, even in the suburbs it's extremely competitive. We've been looking for a decent fixer-upper for quite some time now, but options are limited, even at the auctions. After months of relentless searching, I had a different idea... Why not buy 1.5-2 acres of flat land, build a small rambler and move in. Since we're currently living in an apartment, this seems like a good logical first step. Then, sub-divide the land and build 2 more ramblers and rent them out. 

According to my math, not only would we save a substantial amount in acquisitions, our maintenance costs would be considerably lower. In addition, this approach would in a way hit two birds with one stone: it would allow us to enter the renters market, AND live essentially rent-free while we're building our dream home. Once we're ready to move into our new home, we'd rent out our 3rd rambler. Now we're living in a new home AND we own 3 rental properties...all for a MUCH lower price tag with minimal maintenance costs (vs. buying 3 fixer-uppers). 

Of course, the trade off is time and the hassle of building, but quite honestly I think I would enjoy the process. The idea that I could look at these properties one day and say "hey, I built this" really excites me.

Here's my math:

• Land: 130k
• Permits, road, utilities: 120k
• Small rambler x3: 120k each
• Misc: 30%

TOTAL COST: 793k

For land, permits, road, and utilities I'd pay with cash. Then I'd take out a construction loan on the remaining 500k'ish (with 20% down). 

At the end of the day, not only would I be saving at least 50k (vs. buying 3 fixer-uppers), I'd own 3 beautiful and brand new properties. The rent from the first 2 ramblers would cover the cost of my entire loan (and some), giving us time and allowing us to live rent-free while we build our dream home.

With that said, am I missing something? Any major drawbacks? Would you recommend for or against it? Because in my mind, it seems like THE way to go...but then again, what do I know :/

A little about me:

• My background is in design, although I've spent the last decade or so running a tech company (software, design, digital marketing, etc)
• We're currently renting an apartment, have some cash saved up and would like to diversify into real estate
• No kids, no dept
• I've never built a house, but the process doesn't intimidate me (besides, I'd be working with a builder)

Thank you so much for your time! Any advice is greatly appreciated :)

Peter

[Cathy Svercl]

as an architect who works primarily with homeowners, i will echo some of the others - that construction is not for the faint of heart, but if you make up your mind to do it, you can.  you should start by finding out REAL numbers.  for 3 individually built houses, construction costs in Florida start at $150 PSF (per square foot).  Seattle construction costs are probably much higher.  and REAL timelines for design & permitting & building in your specific area.  permitting can be a few days or a few months.  a new house can easily take 8-12 months to build, more depending on weather, etc.  new construction include costs for installing utilities, etc.  an option that some people find in high-cost-of-living areas is to purchase a modular home or look at shipping containers or tiny homes.  sometimes these specialty designers/builders can really help you find out if the properties you are looking at purchasing would be a good fit for their house types.  Good Luck!