Houston lots as an investment

[Begona Miron]

Is it possible as an investment, to buy a lot in Houston and build a house(or townhouse...)  by hiring a builder and still make decent profit or are prices already too tight? Any ideas, examples or references?

Thanks!

[Adam D Rinehart]

@Begona Miron I think this might be more of a mindset/strategy question rather than a feasibility question. Here’s what I mean.

Infill new construction in Houston is a very competitive market played by people who, by and large, have a lot of money and a successful business model. If your goal is to compete with them and build a single family home on a single lot and sell it for profit, then yes, it’s very possible the sale price gets eaten up by construction costs, debt service, realtor commission, and capital gains taxes putting it out of reach of many solo investors.

However, if you build a duplex/triplex using an FHA construction to permanent loan, you start playing a different version of the same game. You would have to live in it for a year to satisfy the owner occupancy FHA loan requirements but you essentially are doing a new build house hack and the benefits of that have been thoroughly documented here. This strategy sets you apart from the developers because you have the benefit of time where they have the benefit of large access to amounts of capital. FHA loans are cheap due to the 30 year amortization schedule back by the government whereas private money/hard money used to develop is expensive and on a much shorter (1-2 years max) amortization backed by other investors looking for a higher return.

So now if you take your advantage one step further and live there for 2 years while renting out the other unit(s) and then sell it for a healthy profit, guess what? Those taxable short term capital gains you would have paid selling the property once completed 2 years ago now become tax free profits off the sale of a primary residence.

That’s my view on the situation, so take it with a grain of salt, but try not to look at any opportunity in a binary (can/can’t work) framework but rather a “how can I make this work for me” framing.