Building A Cabin Step 1: Creating A Budget
I recently purchased some rural property in southern Alabama. I wanted some acreage not only to hunt but use as a family getaway where we could kick back and just relax. While we are currently “roughing” it in a camper, our ultimate goal is building a cabin as a more substantial “home away from home”.
I’ve found that I am not alone in this desire and it can be an involved and difficult scenario if you don’t take the time to learn the steps and educate yourself on the process and how the puzzle all comes together.
The big question is, “where do you start?” Sure, you can look at examples of cabins and rural homes and what you envision yourself in. Realistically, before you go any further you need to decide exactly what type and size of residence you really want to build and what your true needs are.
Do you want a rustic cabin with minimal amenities, a cottage type residence for weekends, something larger and more substantial to accommodate family and friends or a “barndominium” where you have a residence and storage for equipment? Are you building rental property, like a cottage or even a corporate retreat? All of this needs to be addressed.
You don’t have to go for the gold all at one time. You can start small and expand but to do that you need to begin with the end in mind so the smaller cabin you start out with has a design and floor plan that is conducive for future expansion at a reasonable cost.
Before you can truly decide on what your cabin will be, however, you need to create a budget. I interviewed Dale Williamson of Alabama Ag Credit to learn how they help their borrowers create a budget that works for everyone involved. Alabama Ag redit has nine offices in southern Alabama . You can listen to the full interview below or read on for some of the highlights.
“The budget is our number one driver,” Williamson says. When we look to finance the construction of a cabin, we look to use the budget that the builder creates for the client to put together a package and that drives the whole building process and what the appraiser values that cabin to be built for.”
“By knowing the square footage, finishes, bedrooms, bathrooms and all the details, we’re going to come up with an appraised value for the cabin based on the comparable sales in their area and that number allows us to know what we can loan on those improvements,” Williamson explained.
Murphy’s Law, “If anything can go wrong, it will” so it is prudent to factor in an “over-run” amount. In my experience, in any building or improvements I’ve ever made, I always allow for 20%. If you are planning on spending $100,000 on a project, you should figure it will ultimately cost $120,000. Cost of materials can suddenly spike, labor may increase and you may simply run into unexpected hurdles.
“I would definitely say that a minimum of 10% up to 20% reserve would be a healthy number. You always run into unforeseen things and in the COVID age there are pricing issues and inflation and you need to have some wiggle room so you are not going to get caught short,” Williamson said. “I have been doing this for nearly 20 years and I have rarely seen a project come in under budget.”
One thing that people have to be aware of is not to “over improve” their property but it depends on their intent in terms of their short- and long-term objectives.
For example, if an owner is just interested in building a small cabin and enjoy it with the intent of selling it after a certain period of time and making a profit, that is one thing. If an owner plans on keeping that property long term (or maybe even not selling it at all) and then suddenly the “return on investment” part of the equation isn’t as important.
The improvements made are not market driven but personally driven and getting the money back in the short term may not be an issue. Having said that, owners need to be cognizant of what the market will bear in the neighborhood they are in when it comes to over-improving and salability to make sure they will get their investment back.
“We will get an appraised value and we can normally loan somewhere in the 80% neighborhood and if there is a difference then the customer will need to cover that difference themselves. That just means the customer has additional equity in the property and we can work with that, “Williamson said.
Regardless of whether a customer owns the property to be built on outright or has a lien against it, Williamson pointed out that Alabama Ag Credit has structure a plan that works. AAC will get an appraised value for the entire property as a whole, which means the property plus improvements and then based on whether the land is free and clear or whether there is a debt on the property, they can net out the amount that they can loan and have available for the construction.
“In the case of a customer owning the property free and clear they may not have to put anything down. If there is some debt against the property, we typically would just refinance that into a new construction loan. If they want to keep the cabin loan separate from the land loan that is possible but we’ve found that nine times out of ten most people put everything all in one loan with one payment,” Williamson explained.
As in any business scenario there are always going to be extenuating factors and circumstances. For example, if you own a larger tract free and clear and have the goal of building a cabin that is on the higher end, terms can be worked out that allow financing the construction without excessively preventing you from doing other things with the unencumbered portion of the property, such as harvesting timber, harvesting pine straw or even selling off parcels.
“It is about the loan to value ratio and we want to be sure that we don’t over-collateralize the property and limit the other activities of the customer,” Williamson said.
Williamson noted that Alabama Ag Credit has basically two programs that are applicable to cabin construction. The first is a rural home loan which is normally for people with smaller acreage who want to build a “primary” residence in the country. The second is an agricultural type loan and that would be to build a cabin on a timber or recreational tract and the loans and terms differ for each one.
“For the rural home loan we can go up to a 30-year term and the interest rates right now are going to be in the fours. On the agricultural side the programs, which mimics our land products, we typically offer around a 20-year term, although we have some wiggle room and the fixed rates are also running in the fours right now, which is historically low,” Williamson said.
Whether it is building a cabin on your property or other capital improvements it is critical to keep in mind the vitality and pricing points in order to stay competitive in your local market. If you are going to keep that property for 30 years and enjoy it then that is one thing. On the other hand, if you plan is to enjoy it for a while and then sell you need to make sure that the improvements don’t overprice the property.
For example, most recreational and rural land buyers are used to looking at properties through the lens of “price per acre”. Let’s say that you’ve bought 100 acres at $2,000 per acre. You decide to build a $200,000 cabin and improvements which means to get your money back, you’re going to now need to sell that that property for $4,000 per acre.
If your property lies in an area where $4,000 per acre is in the median range of properties sold, then you’ve hit the mark to be able to get your money back and maybe even a return on your investment. If the average price per acre is say, $2,500, then you’ve got an uphill battle to climb to get potential buyers to take your property seriously.
That doesn’t mean your property won’t sell but you have reduced the pool of prospects and that most likely means more time on the market to move it and a possible a price reduction and paper loss (you still received the enjoyment from the property) on your investment to get it sold.
Creating a budget is an integral first step in building a cabin. If you want to follow our series on building a cabin, be sure to subscribe to the Huntin’ Land Podcast by joining our email list at the top of the page.
Important Contact Information
Alabama Ag Credit