[Outback Inc]

I would like to hear from some of you guys; experienced and successful GCs and anyone else who has any thoughts on this..

If you wanted to build a new home with the plan of living in it for one year and then selling, and you had enough money to cover either buying a lot outright or paying for all the construction costs which way would you go and why? Would it be better to buy the lot and then talk loans on the build out or get a loan on the lot and cash out the build? Assuming that much of the work is done by yourself/crew/partner, etc, meaning the build out costs would be lower than typical.

How many of you think it is better to use the banks money as much as possible versus investing yourself or with family/friends (assuming no future disputes, problems, etc) and the thousands saved in interest, closing costs, etc, by doing so..?

I greatly appreciate any and all thoughts and opinions and your time in providing them.

 

[Mike Finley]

Traditionally you want to have the land purchased and finance the construction through the bank.

How many of you think it is better to use the banks money as much as possible versus investing yourself or with family/friends (assuming no future disputes, problems, etc) and the thousands saved in interest, closing costs, etc, by doing so..?

This is a loaded question. On the one hand a really smart investor wants to leverage his cash by using only as much as he needs and finacing the rest. BUT - that would also mean that you are actually leveraging your cash, meaning it's actually leveraged! Not sitting in a bank. It has to be actually leveraged in other things, other projects, other investments.

Then there is the trade off of the interest incured by not paying cash and leveraging your money. That's another difficult part of the equation. Are you really leveraging your cash in other projects or things that is going to pay off bigger then the debt burden incured by financing?

Then there is the big bad reality check that people finally got over the last two years. The highly leveraged without any cash on the sidelines lost everything during this recession. So how would you be better off? How better off are those highly leveraged spec builders who lost their houses and are bk now?

The easiest answer is to have so much cash that it doesn't matter. Pay cash for the lot, pay cash for the construction and have a whole lot of cash free incase something goes wrong.

Reality is you probably aren't in this situation. So buy the land, finance the construction live in the house and sell it and see if you actually make any money and don't worry about all the rest of this stuff.

 

[Kgmz]

First most banks will not finance just the land, you have to buy the land and then get a loan for the house.

Now whatever way you do this, live in the house for 2 years and a day minimum. This way all the profit is 100% tax free.

I have done this and know quite a few contractors that do this all the time and move from house to house. The current law states that you have to live in the house as your primary residence at least 2 out of the last 5 years to get the tax free status.

http://www.irs.gov/newsroom/article/0,,id=105042,00.html

 

[atrawlings]

versus investing yourself or with family/friends (assuming no future disputes, problems, etc) :shutup:


Wow...now that's a hell of an assumption! Buy the land. Finance the house. Stay for two years....like ^^^^they said. The bank will consider the land purchase as down payment for the house loan as they will only finance 75% to 90% of the appraisal of the planned home.

 

[Outback Inc]

Hey guys... Thanks for the input so far. I agree that having enough cash for everything would be the best of all worlds but my situation is far from that being an option. Even now it involves a couple family members at the least. I agree also that this sort of thing involving family members can be a mine field. My thought was why not help out family by paying them something for their investment rather than a bank. They help me to some extent and I help them.

Now is not necessarily the best time to risk in this way I suppose, but I've been wanting to build for myself for over ten years.. A worse time would have been two or three years ago probably. I would be upside down now even with building most of it myself I'm sure. I think now there should be enough margin between what I can build for and what the appraised value would come in at to make the risk negligent (hopefully worst case being just working for wages and selling at cost). In the meantime, it's work in a time that is difficult for most of us. I have always erred on the side of caution and that has over the years probably cost me a lot of opportunity. Only as mentioned above, in the past two or three years, it has proven fortunate that I was still too cautious. I've been in construction for 20 years, on the contractor side of it for nearly 15 now and I'll say with honesty that I am getting tired of some of the frustrations we all deal with. Getting older is not easy in the construction trades either.. :blink:. Unless you transition gradually out of so much of the field work I suppose. Which is hard when you're perfectionistic in nature. I know many of you must be the same way.

I do appreciate your insight. Education is the key and I'm thankful that you guys are willing to share your knowledge.

Mike you are unbelievable, over 11000 posts in five and a half years! that's an average of over five to six per day... That is truly impressive. That is a huge contribution of your time and speaking for myself and probably everyone else; thank you for your contribution.

 

[wheeler]

If you wanted to build a new home with the plan of living in it for one year and then selling, and you had enough money to cover either buying a lot outright or paying for all the construction costs which way would you go and why? Would it be better to buy the lot and then talk loans on the build out or get a loan on the lot and cash out the build?
How many of you think it is better to use the banks money as much as possible versus investing yourself or with family/friends (assuming no future disputes, problems, etc) and the thousands saved in interest, closing costs, etc, by doing so..?

i've done it with and without bank money and under the scenarios you ask questions about and with scars and a trunk load of t-shirts.

the best tax scenario is buy the lot outright, borrow construction and supplement as necessary, self-perform as much as possible, live in the house for 2-years not 1, sell in an up-market, and parle the net proceeds into the next deal. you can retire nicely in this manner. you can also get greedy and go broke. conservatively managed its a long-term investment strategy that has payed for itself many times over.

the least hassle and most fun is to borrow on the land and buy construction outright. not tax-smart unless you have off-sets elsewhere, and involves some upfront discussions with the mortgage company. aside from that it takes the paperwork out of the equation and makes accounting simple.

don't get into the biz with investors that don't get it. real estate is not a liquid investment, you can't just get to your money when you want or need it. i do not involve family and friends in my business, and for this reason i still have a seat at the thanksgiving table.

 

[Mike Finley]

Now is not necessarily the best time to risk in this way I suppose, but I've been wanting to build for myself for over ten years..

This is without a doubt the very best time in the last 50 years to do what you are considering doing ! :thumbsup:

You'll buy your land at a discount, you'll finance the construction at the lowest interest rates ever seen in the last 30 years. You'll have access to labor and subs at historically lower costs and have much easier scheduling issues due to them not being busy.

In 2 years you will have timed this perfectly, the economy will be humming and all the idiots again will think now is the time to buy your house from you, at higher interest rates and at higher prices then they could have before.

Think about the mentality of the 'herd' that a business man makes money off of.

3 years ago the herd thought there was no better time to buy a house - just when interest rates were higher and home prices were extremely high. Everybody looked around and said NOW is the time to buy! Let's do it! Lets fight over houses!

Now look at the conditions - lowest interest rates, lower costs for homes, a ton of product to choose from and what is the 'herds' mentality. Not a good time to buy right now. :laughing:

This is the best time in your lifetime you will have have to do what you are thinking about doing.

 

[Outback Inc]

the least hassle and most fun is to borrow on the land and buy construction outright. not tax-smart unless you have off-sets elsewhere, and involves some upfront discussions with the mortgage company. aside from that it takes the paperwork out of the equation and makes accounting simple.

Hi Wheeler, could you elaborate on this scenario a bit more? I really like the idea of avoiding the bank on the construction end and having a more hassle free process on that side of things. Is it less tax smart because of the construction cost interest being deductible while the interest paid on the land loan is not? Are there other factors?

 

[Outback Inc]

This is without a doubt the very best time in the last 50 years to do what you are considering doing ! :thumbsup:

You'll buy your land at a discount, you'll finance the construction at the lowest interest rates ever seen in the last 30 years. You'll have access to labor and subs at historically lower costs and have much easier scheduling issues due to them not being busy.

In 2 years you will have timed this perfectly, the economy will be humming and all the idiots again will think now is the time to buy your house from you, at higher interest rates and at higher prices then they could have before.

This is the best time in your lifetime you will have have to do what you are thinking about doing.

This is a very encouraging post for me. Which is good in my case. I'm analytical to the point of detriment at times. Or better quoted, I often suffer to some degree from "paralysis by analysis".

To add interest to this scenario, I'm considering doing this in an isolated vacation/retirement type location. However there are also locals that require housing, so building a small less custom home is a possibility. The location is Kauai, HI. So one additional concern is at what level to build. There are few areas of development on Kauai that are "new" with all underground utilities and sewer. Most of the island is overhead and septic. The nicer areas of the island would require a minimum home value of about $800,000. This is also why self performing most of the work is that much more alluring. As you can imagine in a place as isolated as Hawaii, any help is expensive and good help/subs even more so. One bit of a dilemma resides in the fact that there are opportunities to buy right now in nice area's at prices that would be tough to build at. Perhaps even with my advantage. However I suppose worst case is selling at cost although hopefully without carrying the home for too long beforehand.

In the end, the decisions are complicated by the factors of this being a vacation/retirement type place and because of it's isolation from mainstream life.. Demand is unpredictable in short term lengths of time. Long term is inevitably good and more so with the location being an island (limited space to develop) and more and more baby boomers retiring.

Some of these thoughts are moving away from the real substance of the original questions, but I thought I would throw them out anyway as these are factors that also have a good deal of bearing on the issue.

 

[wheeler]

Hi Wheeler, could you elaborate on this scenario a bit more? I really like the idea of avoiding the bank on the construction end and having a more hassle free process on that side of things. Is it less tax smart because of the construction cost interest being deductible while the interest paid on the land loan is not? Are there other factors?

set yourself up through a qualified attorney and accountant before you do anything else, get your ducks in a row.

we're a business, our circumstances are different than yours. we form llc's for each residential development and there are many factors and subtleties to the tax implications such as form of entity, timing of cash flows, etc. looking back, long-term when we compare the incremental net present value of cash flows from one financial strategy to another we find that our having borrowed against the land typically offers higher returns. its not a perfect world and we're not a one-trick pony, there are scenarios where the opposite is true and where one scenario compared to the other is the same.

get an attorney and accountant to work your circumstances with you.

hassle is subjective. less is more when it comes to banks.