Our 2019 Investing Experiment: Building a Vacation Rental
It’s official: our list of funtivities for 2019 will include building an investment property from the ground up!!
Well, okay… let’s say it’s as official as it can be without actually being done. I suppose there’s always a chance of things getting derailed anywhere in the process.
We’ve never done anything like this before.
Why I’m Sharing This
First, so I actually keep track of the whole thing – including the little numbers like the ones you’ll see below. Keeping close track of it will help us decide if it was worth it and if we want to do something similar again.
Second, because I’m always wondering how my peers are investing their money and what that looks like. I get that it’s probably really intimidating for a lot of people to share this kind of stuff, but it doesn’t bug me. So I’m putting this information out there in case other people are wondering the same thing.
Why Now?
We are getting our student debt and business debt well under control, so we decided it was time to hunt around for another way to invest and grow our net worth. Traditional investment/retirement accounts bore us, and we have no interest in owning more offices (which seems to be a frequent next step of ortho docs in my position).
We like real estate, but aren’t super experienced with it. We own (or, more accurately, have mortgages on) our primary home and one long-term rental in another state which mostly takes care of itself. So we decided we wanted to try something new. We settled on building a vacation rental property.
The Location
We bought a little chunk of land in the gorgeous town of Sedona, AZ (where the banner photo was taken) in early 2017. The lot is a little over 10,000 square feet and is just a short walk from Uptown Sedona (the main tourist-trap part of this very touristy area). It’s a perfect location for a vacation rental and not a half-bad place to retire, should we want to do that there someday.
We paid $89k for the lot, had the seller finance it for a few months, and then paid it off (so we paid minimal interest and never involved a bank).
The Project
We recruited the help of a well-reputed contractor as well as a designer and architect. After changing our minds a dozen times about what we wanted, got an awesome plan back for a little under $5k.
The structure will have a 3-bed, 2-bath “main house”, and an attached “mother-in-law suite” with 2 bedrooms and 1 bathroom. The total square footage is a little under 3k. The build is estimated to cost $506k.
For the sake of comparison:
“The median home value in Sedona is $505,400. Sedona home values have gone up 11.4% over the past year and Zillow predicts they will rise 4.9% within the next year. The median list price per square foot in Sedona is $281…The median price of homes currently listed in Sedona is $599,450.” (Zillow, December 2018).
Our yet-to-be-built house just appraised for $706k.
We’ll let you know how much we hate or love the experience of trying to build something like this. We’ll also, of course, be sharing the cash flow of this property once it’s up and running as a vacation rental. Then we’ll know if this thing is a huge win or a huge failure investment-wise.
The Costs So Far
For now, here’s where we’re at (approximately):
Lot: $89k
Design: $5k
Property taxes paid to date: $2k
Other (weed clearing/”sewer standby” fees): <$1k
Builder’s risk insurance: <$500
The Upcoming Costs and (if We’re Lucky) Profits
As mentioned above, the build itself is going to cost $506k. We are planning to borrow $450k as a construction loan and pay for everything else in cash. The construction loan will convert to a traditional mortgage when the house is finished.
If we were building this as a spec home and could sell it for its appraised value when it was finished, we’d pocket about $158k before taxes. That’s over $52 per square foot or 22% profit, however you want to look at it. I feel pretty good about these numbers but they also don’t matter too much because we don’t plan to sell.
The best-case scenario is that we will be raking in scads of vacation rental income – beyond our mortgage and maintenance expenses – starting in summer of 2019. Similar properties in that area are currently renting for $300-500 per night.
The worst-case scenario is that this thing generates zero money and/or the economy tanks real hard (like the media seems to want us to believe it will at any minute). That would be a huge bummer, but even in that case we should still be able to stay above water with this thing for the long haul.
We’ll keep you posted.
