Help a Reader: Building a Home

Here's an email I recently received from a reader:

My wife and I just purchased and moved into a property that we have been looking for for years. We bought 7 acres hidden by trees with complete privacy and not too far from both of our jobs/her schooling. We were searching for a home to fix up or land cheap enough to build on. What we found instead was land with a home/apartment/shop with a partially built new home. The previous owners lived in the 'home' that is a little over 800 sqft that is on the second floor of a 900 sqft shop. The 'home' was pretty dated and needed a bit of work, but we ripped out the floors and redid them, redid the whole bathroom, and we plan to redo the kitchen on the ikea budget. The son started building a home next to the existing 'home' and got the foundation, plumbing, walls, trusses, roof, and electric pole done. It needs wire, windows, drywall, and all other interior finishing done, as well as insulating, painting, and the works.

Our plan is to live in the smaller home while finishing the partially built new home (around 2500 sqft). We live off of my income and have a little left over to do a few things at a time. My wife is in grad school and will be graduating this December and should be getting a job bringing in around $2500 a month after taxes. The plan was to use this income to finish building the home. I still really like this idea, but I'm starting to rethink the timing and budget we originally came up with.

Here are the basic numbers:

• Current home/land value: $115000
• Current Loan amount: $80000 (purchased for $100000 and put 20% down, only been in the place for a month)
• Timeline to build: No longer than 2 years.
• Amount of money from second income in 2 years: $60000
• What we thought it would cost to finish: $60-75000.
• What I honestly think it will cost to finish: $100-120000.

So now onto my question (sorry for the length). Do you think our plan is a good idea? Should we use income as generated to build this house? We currently fully fund Roth IRA for me, 10k (including company match) into 401k for me, 3500 in Roth IRA for my wife, so I think the retirement is doing ok.

Or, do you think that I should get a construction loan for $100k, finish the house, and have a $600 a month more mortgage payment?

I'm thinking if we do that, we could use her income to pay down the mortgage quickly and fully fund the retirements, and have extra cushion. Oh, and to throw a curve ball, we want to have children in the next year or so....

What are your thoughts for him?

Comments

[JS]

I'm in favor of finishing the home and taking out the loan assuming that the extra $600 fits into your budget as is, meaning if your wife doesn't actually get a job just in case. I'm also assuming a $200000 loan is not out of line for your income.

Just curious are you going to turn the "shop" apartment into a rental when you move in?

[Mc]

Its hard to tell from the little information you included. There's a lot of things you left out that would make a big difference in my opinion: is the land zoned commercial, farmland, homestead, or what? Is there likely to be a sewer or road assessment on the land in the future? You sound unsure about the actual expected costs of finishing the house and you cite a large range, which sounds a big warning bell for me.
The land sounds like a commercial zone with the shop and apartment, which could mean high taxes either now or later, and which would also limit the resale value of the nice family home you are planning to build. Alternatively, perhaps it is zoned farmland and the apartment and shop was illegal, which would limit your ability to get money from a later business use of the land?

Also, Finishing the home yourself does not automatically make it a good investment. Your costs need still need to be in line with the resale value of the home you end up with, which will depend heavily on the local market and on whether the quality of your finished home including the lot and location is attractive to local buyers in the future. Commercial home builders typically have pretty thin profit margins and know exactly whether they can "get back" at the sale every upgrade $ they put into the home---you need this information before you can decide how to proceed.

I think you should get the advice of a good local real estate agent or real estate lawyer, and also you should find a good builder/contractor to partner with if you plan to finish the home. Even if you plan to live there for the next 10-20 years, investing >$100k in a home without knowing or investigating its future resale value is foolish.

[No Waste]

My experience with these things is that they ALWAYS cost more than you think they will.

It's a law of nature.

That said, I'm in favor of finishing the home, as long as it doesn't squeeze your budget too much.

[Mrs PoP @ Planting Our Pennies]

Are you planning on doing most of the work yourselves if you go for the longer timeline and lower cost option? If this is the case, don't forget to ask yourself how much DIY you enjoy, since there will be a lot, and how high your tolerance for living in a construction zone would be.

Mr PoP's dad built their family home (also on acreage in the country) when Mr PoP was a baby, so they were insanely crowded in a small trailer on the land and a decent number of pictures show Mr PoP as a baby on a construction site. It worked for them, but if that's not what you and your wife feel comfortable with, you might try and get the house done sooner rather than later as long as you can comfortably cover the extra costs even after baby comes and your wife stops working.

[jim]

If you want to keep working on a home for an extended period of 2 years then that seems like a good plan financially to build and pay as you go.

Do not have a baby in the middle of building a home. That is just too much to have going on at once. Plan to start kids after the house is built or if you just don't want to wait for kids that long then get the construction loan and do the building first so its done and out of the way before the baby comes.

Now that you've estimated it to cost $100-120k then expect it to actually cost $200-240k.

[Darin]

Whatever way you go, wait to have kids until it is done. So if you do want to have kids in the next year, take the loan out, get it all done.

[Paul]

You wife plans to start work and then have a baby a few months later? That's dicey timing, no?

Agree with Jim and Darin. If you're going to have a baby soon, then build the house now and increase the mortgage. If you're not, then you can wait it out. And heed MC's zoning advice.

[DJ]

My advice - don't increase your debt for any reason.

[Kenny]

Pretty complex scenario, but I will hit it with macro level points:

1. Plan out the Kids first since projects will come in the way of having kids.
2. Prioritize on Family "needs" and adjust the plan accordingly, and since I do not know your family needs or priorities, I am making sure I put this at number 2.
3. Now, ensure that you have the shop leased out to make some income since you said you have a home above the shop. This needs to be renovated first and an income stream coming from it.
4. Loan or self-funding......I guess, this is a critical question although if you have or can take care item 1, 2 and 3 above, then your scenario would be to take a loan and get things done quickly, and then pay off the loan with the wife's income. Pros and cons with taxes, and outlay from current cash flow.
5. More important question you want to ask is Insource vs. Outsource. Why not get this job done by playing 'general contractor' and have it done sooner so that you can get to the ultimate life project (number 1 and 2 above, and possibly 3 also).

I am no authority in any of the above, but I am a firm believer in taking care of life (purpose of living) and then the means to living a life (money, projects etc).

I do play general contractor for my side real estate projects quite a bit, so I know that I can accomplish things faster by doing so, and getting to my rental income, instead of struggling through life to get to that, and then it becomes almost equal (income vs. expense of doing it myself vs. contracting it out and renting it out sooner).

Hope this helps.

Kenny

[Building a Home Reader]

I figured I probably left out a few details in the original question, so I'll try to fill in the blanks.

My wife actually already got a job (before finishing grad school) with a pay bringing in around $2300 a month after taxes. She has been told the amount will go up once she finishes in December with her masters. The income will start at the beginning of next month.

The apartment/shop is not what a lot of you are thinking. The shop is more like a garage that has enough room to fit 3 cars in. I call it a shop because I went from a very small, impossible 2 car to this and I plan to turn it into my 'future' shop for woodworking, etc. The apartment is 800sqft and is honestly plenty for my wife and I to live in for the next few years. We have remodeled a lot of it and actually really enjoy it now. We have both agreed that if we have to stay in the apartment for 3+ years, that would be fine.

The predicted cost of the house is coming from our previously built house and the fact that we live in a very low cost part of the south where 3400sqft homes are built for around $175k. I do plan to be the 'general contractor' and contract out specific items I know I don't want to do (drywall, service panel, roofing, and a few other things). My wife's family knows everyone in our town and there is a member of her family in every trade, so I plan to be taught some things.

My wife and I are very into DIY. The only thing I haven't done myself so far is my driveway, only because I don't have any heavy machinery.....yet.

The land/home is homestead. I don’t plan to rent the apartment out to unknown people. A brother in law (there are 3) might rent it in the future, but it will most likely turn into a guest house. I would rent it, but it is right next to the new house and my wife is against the idea. The taxes are very low in county and area we have land. The plan, rental income wise, is to own duplexes in the future near the center of town, but that will be another few years.

Our plans of having kids vary every month ranging from having them next month, to having them in 5 years. Neither my wife nor I know when exactly we want to have kids; we just know that we want to have them. I’m pushing for waiting until we see the end of the light for the new home before trying, and my wife is still deciding. We are doing our best to be on the same page.

We also plan to live here as long as possible. We live close to my wife’s entire family, my sister, and many close friends. We have no intention of moving and we have the exact land we wanted.

I hope I’ve answered a few of the questions. Let me know otherwise.

As of right now, I’m leaning towards doing a lot of the grunt work with income, and then when it is time for the kitchen, flooring, etc I will take out a small construction loan to finish it out quick. Thoughts on this idea?

[AZ Joe]

My do-it-yourself rule is: Twice as long and three times as expensive as you expect! It can save money and (with the proper skill set) give a great product, but plan, plan, plan. Good luck