The "Workshop Build" Financing Question

[avayan]

Considering a massive Accessory Building (as called by my city) is not something you pick up at your local Walmart and pay up with a credit card, what techniques have you employed to pay up for the addition?

1. Is it a financing deal where you do a construction loan, second mortgage or whatever banking term we want to use here?

2. Do you save up cash and when you have the whole deal then break ground?

3. Or is there any other technique I may be missing here?

At the moment I am leaning towards waiting until I have all the cash, but something tells me a move like this doesn't make sense when adding such a structure. Thanks in advance for enlightening my ignorance here!

 

[benjamintmiller]

Until recently, the best avenue for financing would have been a home equity loan. Congress killed the interest deduction with their recent tax bill, so this becomes less favorable.

If you have the equity and need to finance, a cash-out refinance of your home is probably the best option right now. You get to deduct all of the interest, but there are transactional costs (origination, closing, application) and it re-amortizes your mortgage back to 30 years or whatever you decide.

 

[benjamintmiller]

Also, I think my county assessor values accessory structures at something like 30% of the original price, and that's pretty fair. I'm building one right now that will cost about 75k, and I don't expect it would add more than 30k or so to the value of my home.

I certainly wouldn't want to finance so much structure that I have no equity in my home, but I also realize that most people would have to save for decades to afford such a structure. Better to finance it when you're young and have time to enjoy it than save for decades only to build it in failing health, IMO.

 

[stm317]

You need to figure out how much the building you want will cost, and then you can figure out how long it might take you to save up the cash. If it's going to take 6-12 months of saving to pay for it out of pocket, that's probably worth biting the bullet and saving. If it's going to take 20 years, then it might not be.

Personally, I think financing something that will cost more than the value it adds should be avoided. Buildings like these are already money losing propositions, so paying even more via interest is just throwing good money after bad. Of course everybody has their own situation and priorities.

 

[kd3pc]

save up the cash, have a huge yard sale or barter for some/all/most of the cost....

NOT financed. It is really a depreciating asset.

 

[blair683]

When I built my building I looked into financing. Your only option is a home equity loan. Which in my opinion is not a smart move. I bit the bullet and paid cash. I saved a lot by doing 90% of the work myself.

 

[avayan]

Thanks for your input folks! A problem that I see with saving is that in my case I could probably save 50K-75K in about 10 years or so. By then, though, chances are that 50K-75K are not going to buy me as much as today. Not to mention I will be 10 years older... If I was in my 20's, that would be a no brainer. Being 45, however, seems like I am running out of steam here.

But I understand the disadvantage of a home equity loan as well...

Looking for options at this point in time, as if "there is a will there is a way". That doesn't mean the way is easy or practical, though...

 

[PAToyota]

NOT financed. It is really a depreciating asset.

Another vote for saving up. As KD says, you're not likely to get out of it what you put into it - unless you can find the perfect buyer who wants exactly what you've put together.

Figure out the costs to do the shell and save up that much before you start. Then finish it off as you can. The more "sweat equity" you can put into it, the better the numbers will be for you.

 

[T_R]

I saved and paid cash for everything, then built it myself. I pay for everything and don't use credit. Home took about 5 years to save for, new truck took about 2 years, garage took less than a year. Once you get the big things like a home and a reliable car without payments, you will find it's easy to get things you want in life like a garage.

 

[blair683]

You could always sell your current house and buy a house with a nice shop/ garage already built. If you aren’t to far in life to start over on a mortgage that is.

 

[firebirdparts]

If you borrow to do it, you'd be borrowing against the house. The garage isn't really worth anything. So if you don't have any house equity without the garage, then you would need to pay cash, basically.

 

[Done That]

Did mine on a HELOC last summer, expect I'll have it paid in 4 years. No regrets.

 

[DarrenF]

I bought a property that would normally be worth 375k, for 250k because the landscaping and lot layout was really bad. I fixed all that with hard work over 4 years. Had the place appraised after, which came back at 375k, owed 180k. Bank said "how much do you need?"

 

[benjamintmiller]

Accessory buildings kept in good shape are an appreciating asset, not a depreciating asset.

It is true that their initial value is a fraction of what you paid (like all home improvements), but the value they add to the property rises over the years with the value of the house.

My credit union offer 10-year home equity loans at 3% right now (for total LTV up to 80% of the house).

If you borrow $50,000 at 3% over 10 years, you pay about $57,936 in total for the building. This is an extra cost of about $66 per month over saving and paying in cash, but you have to keep in mind that a lot of the dollars you pay will be tomorrow's dollars, which will be worth less due to inflation.

If the rate of inflation is 2%, the opportunity cost of the mortgage will be only $2728, because your $50,000 building today will cost $55,208 in 10 years.

You need to ask yourself in this situation if it's worth it to spend an extra $22 per month to have the building now while you're in good health instead of saving and building it in 10 years with $2728 in your pocket. I know what my answer would be...

 

[blair683]

Accessory buildings kept in good shape are an appreciating asset, not a depreciating asset.

It is true that their initial value is a fraction of what you paid (like all home improvements), but the value they add to the property rises over the years with the value of the house.

My credit union offer 10-year home equity loans at 3% right now (for total LTV up to 80% of the house).

If you borrow $50,000 at 3% over 10 years, you pay about $57,936 in total for the building. This is an extra cost of about $66 per month over saving and paying in cash, but you have to keep in mind that a lot of the dollars you pay will be tomorrow's dollars, which will be worth less due to inflation.

If the rate of inflation is 2%, the opportunity cost of the mortgage will be only $2728, because your $50,000 building today will cost $55,208 in 10 years.

You need to ask yourself in this situation if it's worth it to spend an extra $22 per month to have the building now while you're in good health instead of saving and building it in 10 years with $2728 in your pocket. I know what my answer would be...

There is one big factor that you left out of this. If you fall on hard times in the next ten years and can’t make that $500 dollar a month garage payment, guess what is used as collateral on a home equity loan. You got it, you just lost your house over a garage.

 

[yeldogt]

Only you can determine the affordability factor. My advise .. start -- life is short. When you say "massive" ... why does it need to be massive?

Waiting until late 50's is a mistake .. scale back to a practical/ useful building and start.

 

[Bluedodge]

If you're not in a huge hurry.....

Right now, construction materials are high. Labor costs are high. Builders can pick and choose their projects and you'll pay accordingly.

Start saving what you can towards your building.

Sometime in the next 5 years, our economy is due for a re-set. Our economy is cyclical. Period. Always has been, always will be.

That's when you want to build.

Cheaper materials. Cheaper labor. Framers, concrete guys, and roofers willing to work just to make their monthly truck payment.

...and you'll be able to negotiate with a fair sized chunk of cash.

Patience is your friend, Sir.

 

[nes999]

I was on the saving route, however every time I had "enough" I always decided to spend elsewere like a newer car for the wife. To upgrade something such as new furniture. My wife kept pushing and pushing me to get the shop.

One day we were going to lunch and she pulled into bank. She said we weren't leaving until we at least got how much the loan would cost us. After discussing it with the bank we would get a much better rate if we did a line of credit vs a home equity loan. The money on the line of credit is next to nothing.

A few weeks later I picked out a builder and put down a deposit.

I should add we had enough for the structure less the concrete. At the time I was also only 5 years from paying off the house.

I would do it now. The interest payment isnt much considering how much renting a shop is or paying someone to work on the things you cant because you have no room.

Everyones situation is different. After living in places that have a high cost of living I moved to a place where, if my wife and I lose our jobs, we can afford our house and all of our bills fairly easily if we work minimum wage jobs. We would have alot less fun money but we wouldn't lose our house or cars.

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[garagelogician]

I was on the saving route, however every time I had "enough" I always decided to spend elsewere like a newer car for the wife. To upgrade something such as new furniture. My wife kept pushing and pushing me to get the shop.

Sounds like you have yourself an absolute keeper there. I love my wife dearly and she is very easy going and more understanding than most...but I can guarantee you it would be a cold day in hell before she pushed me to build a shop or even improve our garage.

 

[nes999]

Sounds like you have yourself an absolute keeper there. I love my wife dearly and she is very easy going and more understanding than most...but I can guarantee you it would be a cold day in hell before she pushed me to build a shop or even improve our garage.

Maybe she just wanted me out of her hair!

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[garagelogician]

Maybe she just wanted me out of her hair!

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True true. We're still newly married (3 years in September) and she still enjoys my company, so maybe I haven't managed to annoy her enough yet. We all need goals, right?

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[stm317]

Accessory buildings kept in good shape are an appreciating asset, not a depreciating asset.

It is true that their initial value is a fraction of what you paid (like all home improvements), but the value they add to the property rises over the years with the value of the house.

My credit union offer 10-year home equity loans at 3% right now (for total LTV up to 80% of the house).

If you borrow $50,000 at 3% over 10 years, you pay about $57,936 in total for the building. This is an extra cost of about $66 per month over saving and paying in cash, but you have to keep in mind that a lot of the dollars you pay will be tomorrow's dollars, which will be worth less due to inflation.

If the rate of inflation is 2%, the opportunity cost of the mortgage will be only $2728, because your $50,000 building today will cost $55,208 in 10 years.

You need to ask yourself in this situation if it's worth it to spend an extra $22 per month to have the building now while you're in good health instead of saving and building it in 10 years with $2728 in your pocket. I know what my answer would be...

Houses CAN appreciate, but it's hardly guaranteed. Especially if the house was purchased when the real estate market was high like it has been in recent years. Tons of people were under water on their homes 8 years ago after they bought when prices were high, and then the value of the home plummeted. I've read that some people's home values still haven't reached the levels they saw before the crash. That's going on 10 years without gaining any value. Having additional payments in that situation can cripple a person's finances and leave them homeless. We've had an unprecedented uptick in the economy in recent years, but thinking that it will always be this way is a trap. If you don't plan accordingly, and things turn the wrong direction, you'll be in deep. My advice is always "Don't gamble with the roof over your head."

The fact is, that almost nobody even breaks even on buildings like these when it's time to sell the place. Adding another bedroom to the house is more likely to increase the selling price more than an outbuilding will. Most people simply don't care about extra garage space, and the fact that these buildings are highly personalized for the use and tastes of their builder doesn't help the appeal.

It also will cost more than $22/month when you consider utilities, insurance, and higher property taxes for the time that the building is there. The use of the building may be worth the cost, but it would be incorrect to approach it thinking that it would only cost $22/month.

 

[rattle_snake]

One way to make the project cheaper is to start with a smaller size (can add sq ft later if needed, possibly) and leave inside unfinished. Then pick away at finishing/upgrades as time/money allows. Save for a few years, finance the difference needed to build the shell.

Get plans/quotes now so you really know what it can/will cost.

 

[Hilltopmasonry]

The fact is, that almost nobody even breaks even on buildings like these when it's time to sell the place. Adding another bedroom to the house is more likely to increase the selling price more than an outbuilding will. Most people simply don't care about extra garage space, and the fact that these buildings are highly personalized for the use and tastes of their builder doesn't help the appeal.

Additional garages and buildings never return dollar for dollar. Addition wise if you are adding bedrooms and bathrooms will increase value but for renovations the biggest bang for the buck is new kitchens but the return is like 70 cents on the dollar of a value return.

Out buildings and shops are like pools, some buyers will like it however most will look at it like a liability



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[bczygan]

Do it now and post a thread here on GJ!

Bill

 

[hemifalcon]

Save up the money however you possibly can... pay then for what you can't do, do what you can to save money. I paid for excavation and site leveling, building erection and concrete. I did the rest as I had time and money available. When done-it's all yours...


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[rsanter]

Lots of ways to do it.
Refi your home and take money out
Second mortgage
Home equity loan
Save up till you have the money
Build little by little as you can afford

Will work different for everyone based on many conditions specific to you

 

[JazzBlueRT]

Considering a massive Accessory Building (as called by my city) is not something you pick up at your local Walmart and pay up with a credit card, what techniques have you employed to pay up for the addition?

1. Is it a financing deal where you do a construction loan, second mortgage or whatever banking term we want to use here?

2. Do you save up cash and when you have the whole deal then break ground?

3. Or is there any other technique I may be missing here?

At the moment I am leaning towards waiting until I have all the cash, but something tells me a move like this doesn't make sense when adding such a structure. Thanks in advance for enlightening my ignorance here!

Do you plan to make money from work conducted inside the garage? If not, then financing luxuries is a guaranteed path to financial ruin.

 

[Done That]

If not, then financing luxuries is a guaranteed path to financial ruin.

Blanket statements like this are useless. Credit is a tool. Some people abuse credit and some people understand how and when to use it.

rsanter is correct, a myriad of other background financial specifics are usually involved.

 

[Whitworth]

Investment loss or depreciation is irrelevant as this is a desire/lifestyle choice. No different from any large purchase like a motorcycle or a boat. If the OP feels this is important in his life, I’ve seen people take a couple years off work to travel the world, or spend thousands of dollars a month dining at 4 and 5 star restaurants. Those lifestyles choices have zero return in investment.

Consider 401K loan. You pay no interest, payments are automatic, and it has no effect on your credit score.

 

[nelstomlinson]

Do you want compound interest working for you? Or do you want it working against you?

 

[Falcon67]

*** pocket financing here. For the land and building. It's free and clear, so if we can't make the mortgage payment on the house we can live in the shop LOL.

Also, I think my county assessor values accessory structures at something like 30% of the original price, and that's pretty fair.

Eh? We spent about $15K on the shop and it hit the tax rolls at $25K. They did adjust it down after some discussion. But it still went on the rolls at cost and has gone up since along with the rest of the property.

 

[PoorOwner]

it doesn't sound like the "workshop" will be making you money, it may be harder than you think to pay back, unless you have a very good plan that can't go wrong.

the said "workshop" likely will actually make you spend extra money like additional HVAC, workbenches, and shop equipment that's why it's easy to get into a money pit situation and hinder paying back your loan.

One thing though if you want to make it happen, make sure you get receipts on everything, it can add up to the cost basis on the house (it's an "improvement") when you sell to avoid capital tax gain if you think the gain will be over 250K when you sell (if single). but check with tax / accountant about that. When I sub some of the jobs out like drywall, I could have someone come in and do it on the side with no receipt. But I chose a licensed contractor to do it for a bit more, but in doing so I can document the cost.