Add on to existing home or rent out and build new?

Question

We have lived on a 7.6 acre lot in rural Eastern Iowa for 5 and half years now.  We bought the property with the intention of adding on to the existing home.  My wife took a few years off to raise our children to school age and is now back to work part time.  So our plans have been delayed a few years.

The home was built in 1957, 1040 sq ft, 2 bedroom, single car garage.  There are 3 other out buildings on the property.  It was a farm in the past.  We love the property, and location but the home leaves much to be desired.

I have been a member of bigger pockets for around 10 months with intentions of buying a single family home in the spring of 2020.  However, I was recently given the opportunity to buy stock in the company that I work for and will now use my down payment that I just finally saved up to purchase this stock in the fall of 2020.  The stock has had excellent returns in the past and is what I believe to be a solid investment.  Better than what I could do with my plans for real estate.

Back to our home plans.  For about the same amount of money(about 275k) we could add onto our current home or leave it as is and rent it out and build a new home on the same property.  We are torn between the two choices and see the pros and cons to both choices.  We have been stuck on what to do for several years but are nearing a time when we should act.  We are in a good spot financially with the acreage with about 60% equity.

Our main holdup to building the new home is that we would then share the property with tenants.  We like having it to ourselves.  And our holdup to adding on is that even after spending the price of a new home there would still be things about the home that we would consider inadequate.

Has anyone been in a similar situation?  Any thoughts please.

Daniel B. · Answer

@Austin Bauer

In dealing with personal home choices the best answer isn’t always the one that makes the most financial sense.  I was going to say build new, but I wouldn’t want to live next door to tenants.  It sounds like no matter what you spend you won’t gain any equity, or get your money back, so the answer is to spend the least amount of money you can on your home so that you still enjoy your house.  Don’t you your situation, but don’t make decisions you work great later...either because you spent too much, hate maintaining two homes/living next to tenants, or because you didn’t give yourself enough room with addition.

If you go with 2 home’s consider at least putting them farther apart with separate driveways etc.

Have you considered essentially taking it down to the studs and adding a second story to save on foundation etc?  Taking it down to the studs would allow you to move walls, make it flow better like a newer home and still be cheaper than new construction.

Cody Kauzlarich · Answer

@Austin Bauer I invest in stocks, but I would be hard pressed to invest in the company I work for. Not much diversity if I'm banking on the future performance of that company for both my investments and my paycheck. And why do you have to wait until this fall to buy the stock?

Nicholas Wallraff · Answer

@Austin Bauer

As far as resale value is concerned here is what I've heard from local builders in eastern Iowa and also seen as an agent.

1. If you build a custom house you will typically spend more than the property will resell for, especially if you're outside of commuting distance for major cities.  The more you make the house just right for you the less it will be right for others.

2. Trying to resell a home with major renovations can be difficult, no matter how well they're done something usually seems off about the floorplan, layout, etc.  Also people in higher price points in Iowa typically want newer houses.

If you're going to keep this house forever then this likely doesn't matter much to you.

As far as rent vs. renovate it's really up to you.  If your current house is nice and can demand top of the market rents then you shouldn't have trouble filling it with a good tenant who will provide minimal headaches.

That being said I completely understand not wanting someone living next door out in the country.  Could you test the waters for awhile and try it out as short term rental or Airbnb before deciding to commit to a long term tenant?

Austin Bauer · Answer

@Sue K. I would not need the rental income for a new build but sure would be nice.  I figure about 2-3 hundred per month cash flow after all expenses paid.  Mortgage, repairs, cap ex and insurance.  So really, a pretty good rental.

Account Closed · Answer

Would you need the rental income if you build new?

Maybe you could use it as a guest house with the option of renting it out if need be?

I personally don't like investing in stocks at all.  But, I won't lecture you on that.  However, my thinking is that you may be trying to have your cake and eat it too (I know, really dumb saying).  So, maybe the sacrifice, for now, would be to rent out your house and live with having tenants on the property, and build your nicer home.  I think you're right to question adding on, if you already hate the idea or the restrictions, etc.

If you end up rich from your stocks, you can kick out your tenants and then just use it as a guest house.

You might be able to put up fences or figure out a separate driveway, etc., that might give you more separation from the tenant, and if you didn't want to deal with them, you could hire a property manager of sorts, so you can let them be the go-between.

Your property sounds really lovely, by the way.

Austin Bauer · Answer

@Daniel B.  Taking it down to the studs is something to consider.  A more intense home renovation would give us more options to customize but meanwhile raising the cost.  But as time moves on we will need to act in some way since it is going to need a new roof in the next 2 years.  I don’t want to pay to replace it then remove it 2 years later to add on an addition or a 2nd story.  Other than the roof we could live in it for a while as is.

Thanks for your reply!

Austin Bauer · Answer

@Aaron Gordy hopefully my post made sense to you, but just to be clear I am not necessarily looking at this from a revenue/equity producing stance, since I plan to live in this home for the foreseeable future and most likely beyond.  It’s in my hometown.  But a nice big instant equity % would definitely be icing on the cake, but is not a requirement for me.  Are you saying it would be for you? Or did you maybe misread?  The instant equity would give me a safe net if I would ever need to exit.  But I feel I am currently in a comfortable financial position to weather a financial storm down the road.

Aaron Gordy · Answer

@Austin Bauer For me the starting point is, can I build for less than the market price per sq ft? If I can get it built for $120 per sq ft and the current market price per sq ft is $150 then I stand to gain a $30 sq. ft equity. One should also factor in opportunity cost. For example, using the above scenario for a small 1000 sq ft home. The profit potential will be $30k. If that $30k will cost me 6 months and require all my time then that is $5k per month. And if I could have made more money doing something else then I would lose out by building it. That is the starting point for me. There are many other factors as well but if those basic numbers don't pencil out then its a non starter for me in regards to should I build or not build.

Austin Bauer · Answer

Thanks for the replies everyone!  Keep them coming!

Austin Bauer · Answer

@Cody Kauzlarich I’m not a big stock guy either, but it’s private stock and really a great opportunity for me, so I can’t pass it up.  You can only buy once a year and it’s in the fall sometime.

Add on to existing home or rent out and build new?

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