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By Grant in Blacksburg, VA on 11/8/2009

Well... We've been crunching through the numbers and with the current market conditions, we see no way of building everything we want into our final dream house for at least another two or three years.  But we are not willing to stay in this small, uncomfortable house for that long.  We want closet space, storage space, and a decent master bathroom.  If it weren't for those limitations we could handle living here a while longer, but we've suffered with these issues for too long already. We had planned on starting building no later than next spring/summer, and we feel like we are missing out on an excellent market for building cheaply.

Despite our prior plans to sell so that we could build, we don't really want to sell our investment properties in today's real estate market.  We "think" we can get approval for a construction loan of about $200,000 to $250,000 while still owning our existing investment properties (including our current house, which will likely be turned back into a rental property) and without accessing the equity in them. [For our dream home, we will need a $417,000 loan PLUS all of our expected equity... I can't swing that while still owning all of my rental properties and not having their equity available to contribute.  And my rental properties have good equity but are not all cash-flow positive from a bookkeeping standpoint (banks only count revenue from no more than 3/4ths of the rent where reliable long-term leases are in place, and won't give cash-flow credit for rent received from relatives or without a long-term lease agreement in force.)  Essentially, in today's tightened credit markets, my bookkeeping-revenue cash flow versus debt-payment cash flow won't qualify me for such a large loan with such a large mortgage payment, until I sell off at least some of my investment properties and lower my monthly cash flow commitments.] 

Some of the above feels like VERY personal financial information, BUT I'm hoping that sharing will help other people think and plan as well...

Around here, we should be able to build the highest-end construction for between $75 and $100 per sq ft.  (I'll do it cheaper if I can.)  A net-zero energy high-end home is currently being constructed in Birmingham, Alabama for $125 per sq ft...  So we will likely look at building a 2,500 sq ft house with an unfinished walkout basement.  This will comply with the neighborhood covenants' minimum size requirement, and we can finish the basement over time into an apartment to add significant additional sweat equity prior to selling.  (In fact, if we don't finish it beforehand, we could always have our subs finish out the basement of our step-up house while they are working "next door" building our dream house !)

We outright own two side-by-side lots that we intended to be one piece of property for our dream house that we had hoped to start construction on by now.  We are now debating "sacrificing" the lesser of the two lots to build a "step-up house" that we can sell after living in it for two years.  This will allow us to "cash out" the ~$50,000 of equity in the second lot (that the banks will otherwise give us zero financial credit for), AND develop additional O-B equity in the construction of the step-up home.  This will also let us live next door to our major "dream house" construction project as soon as it happens.  Additionally, such a smaller-scale project will give us some owner-building experience, help us determine who the good subs are in the area (while fewer dollars are at risk), and help us try out some of my "green building" ideas and see just how comfortable they are to live with... 

I will still build the step-up house "top-quality" to differentiate it and to make it easier to sell.  I'll also build it to exceed Energy-Star efficiency standards, and to have as many "green building" credentials as I can afford to include.  I will have solar hot water heaters and a passive solar design.  I'll open the house up for the solar home tour, and from the first tour, I'll let everyone who tours it know that this energy-efficient, well-built green home will be for sale as soon as we can build our dream house next door!  With "green construction" so rare around where I live, hopefully having everyone  who would be interested in such things aware of the house and its benefits, will make it an easy and quick sale when the time comes.

I'm thinking the sale of the step-up home could give us an additional $100K to $150K in equity to apply to our dream home (perhaps enough to finish the pool and landscaping we planned on adding later), and hopefully the "delay" will put us in a better position to cash-out the true equity value in our rental properties to "invest" into our dream home. 


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