BUILD TO SELL or TO RENT OUT

John and Marsha (not their real names) wrote me. They are in their mid 40s and have good jobs. In fact they have three lots in the mountains with a beautiful view. They have some loans but they want to pay them off so that they can build their retirement home in one of the lots. However, they are thinking of going into “build and sell” or “build and rent” for the other two lots to earn some money. They are asking my advice on what they should do first.

As you can see their concerns are complicated. I can only give some general ideas since I have no idea of their total assets and net worth. Therefore, my comments do not take the total picture into consideration.

I want to focus on two thoughts:

1) having a retirement house in the mountains

2) building to sell or rent out.

It is definitely great to have a retirement house provided their personal statement of assets and liabilities can support it. However, John and Marsha are in their 40s and far from retirement. Unless they are planning to rent it out, the retirement house will be a non-earning asset. In fact, they might even end up spending their retirement income just to maintain the house. They will retire in 20 years yet. The house might not even be desirable by then.

However, if they have made their personal financial plan and have more than enough funds for their retirement even at this point in time, they could build their retirement home even this early and enjoy it as a vacation house.

Building to either sell or rent out could be a good business. What is important to make a careful study of the costs and the expected selling price or rental income to make sure that the investment will provide attractive returns. Key issues in this type of business are:

1) Contacts with reputable and reasonable builders and suppliers to ensure that the building cost is low. In any kind of building, cost overruns are possible and could make the project lose money.

2) Proper administration. If the owner cannot do this, he must have a knowledgeable project manager to supervise the builders and trustworthy bodegero for inventory control. This is especially important since a house in the mountains will definitely be far from their place of work.

3) Proper marketing to ensure that the property will be sold or rented out quickly. Any delay will mean either additional interest for loans unpaid or lost opportunity for income.

4) Source of low interest long-term loan with affordable amortization.

While many readers may not have this kind of assets, you can use the same principles of you are thinking of building a house to either sell or rent out.

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