I'm hoping that my wife and I can buy a house or build one soon and people have recommended that we buy the land first. I see this scenario come up every now and then and I don't understand it.
Why would one buy land, pay it down and then put a house on later?
The best buildable lot in my area is $115,000. What would be the advantage of getting a mortgage for that land paying it, as well as my current rent, and then trying to get the other $100,000 to build a house in a couple of years?
I just don't understand how this would work or what I would gain. Any experiences or thoughts?
2007-09-18 03:24:15 · 6 answers · asked by Ben 2 in Business & Finance ➔ Renting & Real Estate
Pros of buying the land now:
the value of the land may appreciate. If it goes up by 5% a year, and you build in 5 years, it will be worth around $150,000 then. That's equity that you bring into the deal when you build.
You may decide to sell the land and build somewhere else. The increase in value gives you extra money for the new project, assuming that the appreciation covers the costs of selling it.
The fact that you can carry both the land and the rent payments will boost your credit rating, making it more likely that you'll get approved for a mortgage.
cons:
the land will cost you money to keep and maintain. You'll pay interest on it, but not be able to deduct it on your taxes (assuming you're in the US). You'll also have to insure it. If it's in an area of other houses, you may need to keep it mowed at least once in awhile.
Some banks won't loan money for vacant land. They want you to build on it now.
If the value doesn't appreciate, you still have to make the payments, or else sell it and take the loss.
If the local zoning authority changes the rules, you may not be able to build on it, or the cost of building may go up. I know of an area where this happened. Many people bought land to build vacation or retirement homes, and the county changed the rules regarding septic system drain/leach fields. This changed the requirements for many of these properties. Suddenly they needed engineered systems, or else needed to connect to a municipal sewer system that didn't exist yet.
2007-09-18 03:38:56 · answer #1 · answered by Ralfcoder 7 · 1⤊ 0⤋
Many people buy the land first because they either can't afford to build the house now, or they want to reserve that land for their house. Lots tend to disappear over time and go up in price. Some want to build their dream home, but can't chance that the land will be gone.
The advantage to buying the land now of course is that it will be cheaper than in the future. If you can afford to build your house now, that's the best since building costs will also go up in the future.
The nice thing about having a lot free and clear is that it can be used as the down payment portion of a loan against the home you are building. In other words you will have no trouble getting a loan to build the house.
2007-09-18 03:32:58 · answer #2 · answered by tommyfourth 3 · 0⤊ 0⤋
I think one of the advantages of doing so will allow you to dedicate less amount of capital on a property before dedicating more to build a house on a land that may or may not worth the same amount of money that you have paid for the property. In addition,have you checked out the differences of the amount of tax that you will need to pay when you are buying a land or a house? This may be part of the reason why your friend gave you this advice to first purchase the land before building an ideal house on that land itself for another one or two years.
2007-09-18 03:33:47 · answer #3 · answered by Ksee 2 · 0⤊ 0⤋
If land prices are increasing quickly then this makes the case for doing just that. If you a pretty sure you will be able to pay in the meantime and then raise the rest of the money in 2 years that would be the best move.
2007-09-18 03:35:08 · answer #4 · answered by Anonymous · 0⤊ 0⤋
if you put off buying the land, chances are the property value will increase and you will pay more for it later on.
Another positive side of buying land now, is that you can use it for collateral for loans, and if you decide not to build in the future you can always sell it and probably make a profit off of it.
The housing market is crap right now, but investing in land is still a good solid investment.
2007-09-18 03:35:34 · answer #5 · answered by Ricky H 4 · 0⤊ 0⤋
if land prices are increasing faster than housing prices - that's when you buy land first. once land is paid off - that's you're down payment/equity which would help in qualifying for construction loan/mortgage
2007-09-18 03:29:37 · answer #6 · answered by Anonymous · 1⤊ 0⤋