Building; sell or rent?

Question

Hello, first post here. Thanks to all who have contributed and made this such a valuable resource.

Situation:

Property is not in US, am building a SFR, 85% complete.

Land is a rental lot (owned by city), 65 year lease, 3200 per year, indexed to inflation (slow rate of increase), these are quite common here. Comp land value is 120-140k if buying similar sized lots instead of renting. Not a problem with selling house on rental lot, city transfers lease to new owner, it is common here and does not seem strange to these folks.

Building cost: ~150-160K (doing it all myself, so lots of sweat equity), market value around 350-400k.

This is intended for primary residence.

Rents for similar units are around 2000/month.

Looking at a return on cash invested if I rent it this looks good, however there is a ton of equity locked up doing nothing...

Now have option to do this again. Same numbers. Have option to build. Running numbers and planning to make a quasi-duplex, like a house with mother-in-law apartment.

Similar numbers, lot is about 3600 yearly rent, comp land price is 120-140k. House value is around 350-400k when finished, rent will be around 2000/month.

Taxes on gains 28% with exemption if living as primary residence for more than two years.

Thoughts: Live in the first, build the second, sell both to release the equity  (around 300-400k after taxes if values do not slump) and put that to work on multiple properties at higher LTVs.

Thoughts, advice, etc please.

Jon Holdman · Answer

If you can build something for $160K that you can turn around and sell for $350K I'd be building and selling these as fast as I could.  Even if you pay more for labor I'd be doing that and just paying the taxes. If you take your slow, low tax, low cost strategy, you're assuming nothing changes anytime soon.  Yet you admit it seems like there's a bubble in progress.  I'd be taking advantage of that bubble as fast as I could.

You don't want to caught with a bunch of inventory when it pops, so I think I'd do one at a time.  Build it fast, sell it fast and start the next.  When the bubble pops, and you're stuck with one you can sell, move in.

If the property is worth $350K and will only get $2,000 in rent, its a very crummy rental.

Anthony Halstead · Answer

Jon, you have good words there. I understand the logic.
My thinking is to sell both (well, neither is done yet, but very soon) and keep burning the bubble while it lasts. In a bubble such as this I would prefer to keep some powder dry to for a rainy day and so I am not too exposed for the downside.

Our compromise is to keep the first one because of the location, close to transportation, close to main roads, close to downtown, yet in a country-like, park-like setting. Kinda hard to find it's like around here, in fact almost impossible to find this kind of peace and view this close to everything.

So for that reason we may live in this one and sell the next... after all you gotta live somewhere.

Some facts about the market here: over 92% of the loans issued here are on Euribor plus margin, so averaging around 1.5% recently. They are commonly on a 1 or 3 month variable rate, so highly sensitive to changes in rates. This has, IMO, allowed prices to float higher than 8 times pretax average income, and taxes here are no joke with average of 30-35%, plus 23% VAT, plus gas is 7$ a gallon plus, etc... So I think that there is a bubble and when rates go up again (the ECB is trying to keep them as low as possible to induce "growth", same as the Fed) then there will be a corresponding negative price move.

One last question Jon: I feel that our home, our primary residence should be low LTV, and rental homes should be whatever makes the most sense from a business point of view. With rates so low, it makes sense to have higher LTV in some situations, while when rates go up (and prices correspondingly go down???) then it is better to pay cash. Your thoughts?

Thanks again for all the great advice and posts on this site.

Tony.

Jon Holdman · Answer

Seems to me like you're getting your personal needs for a place to live mixed up with your business of building houses.  You should, IMHO, keep these 100% separate.

If your wife loves the area and really likes these houses and you can afford it, build or buy one for your personal residence.  Move in now and stay there.

A residence, i.e., a property you live in, is nothing more than an expensive doo-dad, like a car or boat.  Its not an investment, and if you look at the true, total cost, a residence is rarely profitable.  At best, its a forced savings plan.  For many people, that ends up being a big chuck of their savings.  That just means is savings, not an investment.

Who cares about "having equity locked up in a potential bubble"?  If you love the place, or even just like the place your wife really loves, and its fits in your budget, buy it!  We all buy cars that are worth less after we hand over the money than before.  We buy them because we need transportation and we like the specific one.  A residence is no different.

Totally separately, there seems to be an excellent opportunity to make some quick money by taking advantage of this bubble.  From what you describe, I'd stand by the advice to be building and selling as quickly as possible.

It you can only afford to either buy a residence in this place or to run this development business, then you have a hard choice to make.  If running the development business provide a good income but only for a limited time, and you and your wife are willing to forego the residence, I'd be turning that crank as fast as possible.  If you get stuck with a house when the bubble pops, hurrah, you have the house you wanted all along.  OTOH, if you wife is going to be sorely disappointed without the house, and you're willing to fore go this income, then buy the residence.

Anthony Halstead · Answer

Thanks Jon,

Next one we are planning to minimize our time, hire out labor where the cost vs time differential is beneficial for us, and we will do the high cost items. And we plan to sell it. Fast.

Just wondered if anyone had a good example / lesson for making it black and white for my wife (and some others in the same situation) that having that much equity locked up in a potential bubble market does not make sense.

I guess that I have the basics to make the argument, and will see how it plays out...

Thanks.

Anthony Halstead · Answer

Ok, some background. I watch my parents go through the housing bubble. My dad wanted to sell, my mom liked where they are. Now the kids are gone, and they have a big house, and would like to sell, but...

My wife is falling in love with the house we are building. I have explained to her the history of housing, and that we are likely in a bubble here as well. I have explained that if it does not make sense to buy a house to rent, then prices are likely too high, we can sell and buy a cheaper house somewhere.

So just trying to be proactive and look ahead.