Need money to build rental cabin

[BK911]

Bought a few building lots at the lake.
Now want to start developing one of them.
Have enough money to get started, but not enough to finish.
Probably need about another 100k.
I can think of 3 ways but am curious what you guys think.

1. Construction perm loan. Not sure how this works for investment property?

2. Refi my primary house. Really don't want to extend my payoff because timed to pay off when I retire. Plus don't want to link primary residence with rentals.

3. Borrow against my 401k. Any downside?

Any and all advice welcome!!

[unclebilly]

If it’s a rental dial back the level of finish (renters will ruin the fancy stuff anyway). Save $100k.

Sweat equity?

[Seahawk]

Agree with UBilly.

Also, expected revenue and costs are the key variables and you have to be honest and conservative in the revenue ledger and add margin in the cost accounting, including taxes, insurance, admin, etc..

Are there rental comps for the area? Long term rental or Air BnB type property? How close are you to the property?

Lastly and most importantly, exit strategy should things go south.

Lots to think about.

[wilnj]

Hard money loan is how many flippers finance but those lenders will look for experience.

[BK911]

I am 35 minutes away, one exit up the highway.
Sweat equity aint happening.
I am already building my retirement cabin across the street and don't have the time or back to build two at the same time.
Need something income producing quick so I can build on the other lots.
Yes everything will be rental grade-ish.
But this is a lake front community with $M+ homes.
Don't want to skimp too much.
These lots are across the street from the lake but do have lake access and lake view.
No direct comps, nothing developed on non-lake side yet.
With the awesome views and boat ramp really close a decent cabin should pull in some cash during the summer.
Also thousands of acres of ATV parks within minutes so year round rentals are possible.

Any issues with borrowing against my 401k?

[LWJ]

IMO, this is a classic borrow situation.

401(k) or HELOC sounds like the play.

If you refi, it will push out your home payoff.

My Grandfather was a very successful and brilliant banker. He told me if you can borrow at X and earn X++ you should consider doing so. (Controlling for risk, of course)

Question: if you borrow $100k, what is the payback for this?

[ckelly78z]

The repayment time on a 401K loan where I work is 5 years regardless of amount, so my $25,000 loan has cost me $167 a week for the last 3 years...that starts to hurt when closing in on retirement.

The 401K rules state that you can't take more than 50% of your vested amount, and I believe that $50,000 was the upper limit that anyone could take.

[KFC911]

Originally Posted by BK911

I am 35 minutes away, one exit up the highway.
Sweat equity aint happening.
I am already building my retirement cabin across the street and don't have the time or back to build two at the same time.
Need something income producing quick so I can build on the other lots.
Yes everything will be rental grade-ish.
But this is a lake front community with $M+ homes.
Don't want to skimp too much.
These lots are across the street from the lake but do have lake access and lake view.
No direct comps, nothing developed on non-lake side yet.
With the awesome views and boat ramp really close a decent cabin should pull in some cash during the summer.
Also thousands of acres of ATV parks within minutes so year round rentals are possible.

Any issues with borrowing against my 401k?

One of life's crappy decisions ya just gotta make .... I reckon . Sounds awesome... if you borrow against your 401k, you also reduce it's earnings & growth by such. Used to be, if you terminated with a 401k loan, the full amount might also be due or show as income... way back.... I think it was. With interest rates where they are ... get a HELOC, etc. and pay that sucker off asap.... leave yer 401k alone ... jmho. Have fun .... awesome!

[wilnj]

Originally Posted by BK911

I am 35 minutes away, one exit up the highway.
Sweat equity aint happening.
I am already building my retirement cabin across the street and don't have the time or back to build two at the same time.
Need something income producing quick so I can build on the other lots.
Yes everything will be rental grade-ish.
But this is a lake front community with $M+ homes.
Don't want to skimp too much.
These lots are across the street from the lake but do have lake access and lake view.
No direct comps, nothing developed on non-lake side yet.
With the awesome views and boat ramp really close a decent cabin should pull in some cash during the summer.
Also thousands of acres of ATV parks within minutes so year round rentals are possible.

Any issues with borrowing against my 401k?

I’ve been thinking of doing the same thing. Here’s the thoughts I’ve had.

I would consider durability in addition to first cost on finishes.

Countertops for example, low first cost won’t give you much wow factor and wouldn’t stand up to abuse. Granite or synthetic stone gives you wow but is easily damaged.

Soapstone is durable and abuse gives it character.

You can use it for countertops, backsplashes, sinks, floors, accent walls in a toilet room, etc.

If you’re building slab on grade, a polished concrete floor with radiant heat is also durable. Performs well in the winter. Depending on the architecture (high ceilings) you might not need much in the way of AC. A mini-split with high performing ceiling fans might suffice.

[jhynesrockmtn]

So building for rent and not to sell it sounds like? Will this be a vacation type rental or full time tenants? VRBO type properties are more work, more damage and less net from my experience. Given it is a waterfront type property that may be your only viable tenant pool. Do you have the financials worked out on what you expect in terms of rent and what the servicing of a loan would look like? I would approach a local smaller bank who has more flexibility. I shopped my apartment commercial loan and the big guys wouldn't touch it, but a few smaller and local banks and CUs worked with me. I wouldn't touch the 401k, but if the financials pencil, do the HELOC and once finished and cash is flowing, you may get a bank to do a primary on it. I would sit down with your business plan, spreadsheets and a few bankers.

If you have several lots, what about building one to sell and then take that profit/cash and build your rentals?

[wildthing]

Your 100K (plus whatever you are investing) should earn at least 20% a year.

Have you looked into one of those more modern pre-fab homes, or is "cabin" the golden ticket?

[gregpark]

^ some of the pre builts are really good design and quality these days. Faster, cheaper and no surprises during construction. Many of these are offered by big lumber mills. They have their pick of the best sticks available and the material quality is excellent.

[rusnak]

Are you selling one or more of the lots, and is the profit from that sale factored into the financing of the construction? Construction, permits etc are stupid expensive right now, and forget about getting it done in any reasonable time frame. I would consider selling all of the lots and buying a rental that is already finished and producing a known yield. Conservative? Yes, but that is the tone of your comments so far.

[Seahawk]

Do you mind sharing what lake? 35 miles is doable. My Dad had a house next to Tellico River/Lake for three years and the area is spectacular.

I really enjoy doing the financial homework behind these type of projects and I bet I can find some comps. The one thing I don't do is offer financial advice other then the standard ROI versus risk.

I know, it is a bad habit!

[Crowbob]

My first question is, ‘How old are you?’

At some point, a passive income stream makes more sense than active capital accumulation, unless you are doing it for your heirs, which is completely reasonable.

[Alan A]

Originally Posted by ckelly78z

The repayment time on a 401K loan where I work is 5 years regardless of amount, so my $25,000 loan has cost me $167 a week for the last 3 years...that starts to hurt when closing in on retirement.

The 401K rules state that you can't take more than 50% of your vested amount, and I believe that $50,000 was the upper limit that anyone could take.

50k is the upper limit.
HELOC is probably better.

[fintstone]

If you are allowed to borrow against a 401K, that has worked well for me in the past as it is essentially a way to briefly diversify and allows you to put it back as you make the loan payments. There is no impact on taxes unless you fail to pay. If you take the money out (done that too), it is treated as regular income (unless a Roth) and drives your taxes way up (assuming you have a relatively high income). That drives up your Medicare costs too (if old enough for Medicare). Plus, you cannot put it back.

Another option is to find a partner/s. and build on more/all of your lots. You would share the return, but you would also share the risk. Often there is an economy of scale.

[BK911]

I am 53.
Plan to retire on my 62 b-day.
Hope to have 3 cabins built before I retire, then build the rest during retirement.
Want passive income for my heirs instead of a lump of cash.
I bought 10 lots so may build and sell one or so, but hopefully Wont need to.
Building permits are stupid cheap here in Hicksville tn!!

Lots are at Norris lake in jacksboro tn.

[fintstone]

While 62 is not old by any means, most folks are less able to invest/build after they retire and resort to safer returns. Plus, you pass up on 10 years of income/equity/paying down of principle if a loan. Interest rates will probably never be lower. We each know the level of risk we find acceptable, but I would personally try to find a way to do all 10 now if I was sure of rental viability. Personally, I would also try to do long term rentals to retirees (at least until you retire and have more time to manage them). Just much easier/less hands on...even though return might be lower. You are probably close enough to Knoxville to do either.

[3rd_gear_Ted]

Instead of cabins, consider a Pole Barn with a slab for RV's or 5th wheel trailers.
4 Telephone poles and a slab of concrete is the start.
I'm going to being developing a piece of property by a racetrack with a couple of Pole Barns and storage spaces.
Its more of a shared risk with the tenants having more invested than me, their rigs will cost more than my investment.

Infrastructure is the key to development, sewer, electric, water & gas
I'm installing a 600 amp electric service and a multi lot septic system. County water source being used, lucky the pipe is on my side of street.
Plan to have Wi-Fi and Sat TV too.