Should I split the lot? Benefits for BRRR?

Question

Newer investor:

I own a renovated home in East Nashville on a very desirable corner lot. The large backyard can be divided and I can build another single family dwelling on it which is allowable by local zoning laws.

I owe approximately 210K on the property and believe market value is around 389-410K if I were to place it on the market today. I had a standing offer of 110K from a local builder if I wanted to sell him the backyard so that he could build another home in that space, while retaining the actual home and front yard for myself.

I'm wanting to stay here in this house as my primary residence and not build on the backyard right now.

However, I do want to BRRR the property and get some financing for another property...

Questions:

1).  Should I split the lot?   Even if I simply keep it as my own backyard for the time being?  That would give me two properties on paper for future financing.

2). Or, would the BRRR potential be limited if I moved the property from 1 large lot to 2 since the newly formed lot has no home/equity?

3). Should I just leave it alone?

Luka Milicevic · Answer

@Brad Wayne

This is just what I personally would do. Take it as you will.

I would absolutely not just leave it alone. It sounds like you are sitting on huge potential.

I would split the lot right now.

I would live in the existing house for 3 years at least to get the tax benefit of a primary residence. I would start to build the new house myself once I hit 2 years in the existing house as it would take about a year.

I would then sell the existing as a primary residence and get that nice tax benefit.

I would then live in the brand new house with all that wonderful equity for 3 years and then sell it as a primary residence as well.

Splitting lots is a very popular strategy and if I have the option I would always do it. Always!

Steve K. · Answer

@Brad Wayne

....looking for under-valued properties with extra vacant land can be a good strategy in and of itself, if there's a market to build on the vacant land. You seem to have found one.

Steve K. · Answer

Good point, Jay.....yes, the mortgage company has a say in whether you can sell off the vacant lot (i.e. part of their collateral disappeared.)

Jay Hinrichs · Answer

@Steve K. normally unsplit lot will have zero value to a refi appraiser lot needs to be split.

also he will need to see if the bank will release the lot with some sort of pay down.. most of the time they will.

but usually want all the money.

so the thought of building another primary on the property is a good one if he can figure out the financing.

Steve K. · Answer

@Brandt Miller @Brad Wayne

I recently had the experience of legally splitting a property into 2 deeds. The appraiser wouldn't use the comparable sales of other "split" properties (in my case a duplex, split into 2 townhomes).....until I completed the legal splitting work myself.

If your property will sell for $410,000 as is....and the rear lot is worth $110,000, would your house on the smaller lot sell for more than the $300,000 difference???? if so, add the value.

I believe you only need to live in the property 2 years for primary residence tax benefits.

Pam Holbrook · Answer

Hi Brad,

Thanks for posting!

I'm learning about HELOCs and also have a home-with 2 separate lots. I was told the land/lots weren't eligible for a HELOC. Maybe it's different state by state? I'm in Oregon.

Brandt Miller · Answer

1) I think you should read up a bit more on the BRRRR concept as I don't quite understand how you are trying to use it in this situation. In a nutshell, it states you buy a property, rehab it and then use the new equity created as the down payment when you refinance this have little to not money out of pocket in the deal.

2) I would speak with a lender as I am not sure about this but IMO if you go ahead and split the lot and it has an appraised value of around 100k, that gives you more "equity" if you were to get a HELOC on the combined property. For example, it would show you own your house valued around 400k with about 200k in equity as well as you own a lot valued around 100k that is free and clear giving you an additional 100k in equity. Whether lenders will loan against lot values I have no idea but to me it seems to make you look better on paper.

That said, it seems like you could leave everything alone currently and still have enough equity in your home to use as a down payment on a rental. So if you truly want to stay put and not build then that is the direction that I would go. Hope this helps.

Brad Wayne · Answer

@Matt Hudson. No I don't think that's the same couple!  Doesn't quite match the two I chatted with.

Matt Hudson · Answer

@Brad Wayne Hello fellow East Nashvillian! You have a good problem here. I know how valuable your backyard is. A couple years ago I built a 3 car garage (DADU) with a 850 sqft apartment above it in my back yard. We currently Airbnb the apartment and it cash-flows like crazy! I wish I could give you input on splitting the lot but I have no experience here. I am curious though if the couple was a dark haired woman with a skirt and a blond-ish man both casually dressed. I ask because I was out for a run and saw them scoping out houses. Ran back by them and the woman was on the phone in front of a house for sale. Didn't look like thieves so I assume they trying to buy houses.

Brad Wayne · Answer

Thanks for the feedback everyone  Something must be in the air.  A couple came by today as I was taking out the trash and mentioned they'd be interested in buying the house at around 425K in a private sale, without realtors.  If I can up that a tick I may have another option to consider.

Should I split the lot? Benefits for BRRR?

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