Build rental on my property, or buy a lot and build?

Question

Hi,

I am new to the bigger pockets forum and have a question for you all. I have a 14 acre property where my wife and I built a home a few years ago. We would like to invest into real estate but are trying to decide between two different options to get started:

1.) Build a 3/2 rental home on our property.

2.) Buy a lot in town and build a 3/2 rental home on it.

We are in the Bozeman Mt. area which is in the midst of a major boom, which makes buying any kind of rental home in town very expensive. The average 1500 SF 3/2 house in town sells for 350-400k and rents are $1,500 - $2,000 per month. Lots are 120k-150k for a 1/4 acre lot in town. I work for a construction manager and my background/degree is in architecture so I am able to design and build a home myself for alot cheaper than what it would cost me to buy, or pay a contractor to build.

Option one has us building a 1500 SF 3/2 home on our existing property for about 200k (180k for the house and another 20k for new driveway/septic/power). Option two would require us buy a lot in town for at least 120k and then spend another 180k (for a total of 300k) to build the same 1500 SF 3/2 house in town.

Option one allows us to get a rental up and running for much cheaper than what we can find anywhere in our area but we would not be able to sell it because our zoning does not allow our property to be subdivided, so we would end up with 14 acres with two houses on it. An upside to option one is that our property is in a beautiful area so we could air-bnb it for about $150 per night during the summer months. Option one would cashflow by $500-$600 per month assuming $1,750 per month rent. (more if we list it on air-bnb in the summer)

Option two is more expensive up front but it gives us the opportunity to sell the house for as much as 400k in the current market. Option two would also cashflow at $200-$300 per month asuming a higher $1850 per month rent due to being in town.

We have about 30k cash and another 200k in home equity to finance the work, so tell me, what would you do if you were in our shoes?

Jim Goebel · Answer

@D K.

Just another note.  North of Des Moines I looked at a 'Free House' which was a house on an acreage where the AHJ was making the owners tear down their 2nd house because of lack of zoning conformity.

At the time I didn't have a place to move the house to and that was another whole thing getting it moved.  But it kind of makes me wonder about the backstory and that you'd be getting into a risk area of similar variety as these folks.

They didn't seem too upset about it, as they had basically just built a much larger/nicer home adjacent to theirs but it still makes me wonder if you'd be exposed in a similar way.

Michael Rutkowski · Answer

Hi D K. I am pretty familiar with your situation, as I manage STR's in Bozeman and in Gallatin and Park Counties. I am also currently building a building I designed myself, with 2 STR specific suites. Any lot in town will be subject to the 2017 STR regulations, as well as any covenants or restrictions from the HOA or subdivision. Technically, to be in compliance with all the new laws, you will need to live at the property where your STR is, for 6 months out of the year, and pay the State taxes. AirBnB automatically takes them out once you hit $20k in income, so there are less and less ways to avoid that. And furthermore, the process to get the license from the city is a PITA. You need a site plan, building plan, parking space plan, and more. Before any of that you need to be registered with the County and have a functional license with them.

From what you described, your best bet would be to build on your land, but you will still have a major problem, which is labor. I don't know how much your employer charges per sq ft, but prices I've seen in the Valley are around $200-$250/sqft. That's if you can find someone to sub out. I am having the hardest time ever finding someone to work at a regular interval at my place. You will have these problems with either of your proposed options. As for occupancy, I do just as well, and sometimes better during slow times, outside of city limits also. It's all about amenities...

I have another option for you, which is to buy a lot outside of Bozeman's city limits, being careful to analyze the CCnR's, and build on that. All of your options are going to leave you tight on your budget. I'm the GC on my project, and I am around $$80-$100/sqft, just subcontracting everything out... Is it worth the savings? Yup! But you better have a good therapist. See if your employer can do the work would be my best advice, they may give you a screaming deal.

Good luck, let me know if you'd like to meet up for coffee and chat about all this sometime.

Jim Goebel · Answer

Well, a few things.

Firstly, those numbers aren't compelling purely from an ROI/ROE standpoint.  That's a lot to have into a project for either scenario.  I have a hard time believing you can't find cheaper land.  Is that just in the Bozeman proper area?  Have you considered getting land a little bit further out?

I'd encourage you to 'expand' your options.  Neither seems quite right, which for me, is often just an intuitive feeling, but it drives me to generate other options.

I know renting something is a long term passive income kind of goal - but are you even sure that you won't run into any regulatory headwinds in having the second house on your existing land?  IE: what makes you so sure you'd be able to operate the rental if you're not 'supposed' to have a second house from a zoning perspective.  Believe it or not most AHJ's when push comes to shove, have some 'teeth' and legally can compell/coerce you into quite a bit of things, when they want to.

Out of area investing probably is not appealing.

Moving is probably not appealing.

What's your land like?

Maybe a sweet tree house or shack style experiential STR... ?

How much are turnkey rental properties selling for in your area?

Why not buy a dumpy fixer upper at a discount and work on it?

Hopefully this is helpful - but in a nutshell I'd encourage you to think outside the box a bit.

Build rental on my property, or buy a lot and build?

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