2-Unit New Construction Condo House Hack?

Question

My wife and I are under contract on an urban residential lot, and we're trying to figure out the best way to utilize it. The lot has a small cottage in the back, and plenty of room for a duplex in the front. Our initial idea was to build a duplex, live in one unit, and rent out the other and the cottage in the back.

However, I had the idea of possibly turning the newly constructed duplex into a condo, selling one unit, "buying" our unit, and still renting out the back cottage. On paper, this seems like the best deal for us to make money now and also make money later. Has anyone done something similar? I'm sure there could be some costly tax consequences to this as well, but I'm not finding much information online.

Thanks!

Cassi Justiz · Answer

Half duplexes typically have less of a market full duplexes. Before you commit to the condo/duplex idea I would have your agent dig into the neighborhood comparables a little more and see if half duplexes are selling for what you want.

Duplexes will rent all day long, but selling half of a duplex is a different game.

Ray Johnson · Answer

@Ryan Kennedy Good to hear on the re-zoning of the property, Some municipalities make it very difficult to rezone lots so you're off to a good start.

Wayne Brooks · Answer

@Ryan Kennedy Yeah, to me the townhouse “separate fee simple parcels” would be an easier sell.

Ryan Kennedy · Answer

@Wayne Brooks appreciate the knowledge! Both of these facts do not go in my favor, which is a bummer. Is it reasonable to set it up as 2 town-homes with 1 shared wall and no association? These are still very rare in OKC but I've seen them in larger metros.

Wayne Brooks · Answer

Couple of thoughts:

Profit from selling one of the two condos won’t be cap gains, it will be ordinary income and not eligible for a 1031.

A two unit “condo association” will turn off many buyers.....no professional management and it turns out like a “marriage” with the adjoining unit owner, potential for a lot of disagreement.

Ryan Kennedy · Answer

@Ray Johnson thanks so much for this input! Yes, I don't have any experience with forming an HOA, and I noticed most developments like this are 6+ units, so I'm sure that's going to be very costly per unit. The lot is currently zoned R-3. I met with a developer last week that recommended re-zoning for the most flexible future-use of the property, so we have flexibility down the line. My understanding is re-zoning will be a 3-month and $1500 process, and our area typically doesn't have problems getting reasonable developments rezoned. We'll be meeting with them very soon to get more information. Either way, we don't want to execute our plan immediately. My wife is an architect, and we plan to take at least 3-months of schematic drawing as well as finding the right bankers/builders to do the job right.

Ray Johnson · Answer

@Ryan Kennedy The downside to going the Condo/Townhouse route is the additional cost. As the developer of your lot, you will have to form the HOA for a condo or townhouse, This cost is typically spread out when developing many Condo/Townhouse units and isn't as big of a hit to your Soft Cost budget, When you are creating an HOA for one Dwelling consisting of Two units, the cost is higher per unit. You will also have to address the probability of having to re-parcel the property since the Cottage will not be a part of the HOA and new construction property.

What is the current Zoning for this lot? Can you execute your plan immediately or do you have to get the lot Rezoned and breakup the parcel?

Current zoning and potential new zoning will most likely guide you into the cheapest and most profitable plan.

Ryan Kennedy · Answer

@Andrew Angerer @Aaron K. thanks for the replies guys, I'll keep you in the loop. I think there are a couple of benefits to going the condo/townhouse route in this situation -

1 - Sell 1 unit, and IF there is profit (once we buy our unit and make our down payment), reinvest all of it in a bigger project.

2 - "Buy" and move into the 2nd unit. Depending on our equity position, we could put down anywhere from 3.5% to 20% down, which is nice. I also believe selling the 1st unit will help get us the best possible appraisal on our unit. My understanding is that appraisers are typically very conservative on new construction duplexes, so I'm hoping I can get a better appraisal/more equity if I sell the first unit at current market prices.

3 - We will still own the 500 SQFT cottage on the back portion of the lot. Rents on that unit will cover around 50% of our mortgage.

If I go the traditional duplex route, we'll hopefully be able to get 1% of rents for the cost to build, which is fine over the course of 30 years, but not amazing. It's also very unlikely I'll be able to pull any cash out from the deal, if anything I could have quite a bit stuck in the home. I think we'd much prefer to sell part of the deal, live in our unit with a good equity position, and reinvest profits into the next deal.

Andrew Angerer · Answer

I haven't done much research into new constructions, you will have to fill me in on how it goes!

Best of luck

Aaron K. · Answer

A lot of capital gains tax IF you make a profit, and unless you have something you want to spend the money on now why would you give up the potential rents and appreciation.

2-Unit New Construction Condo House Hack?

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