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I got a crazy idea and I'd like to know if this is even possible.

Let's say I buy a house for $100k. After 2 years the house's value will go up to $150k. I will ask a bank through home equity to lend me another $50k and I will add an addition to the house. After I add the addition I will have the house appraised again and the house's value will increase to $200k this time. So I will repeat the process and ask a bank to give me additional $50k. Again I will add another addition which will increase the houses value again.

Can I do this process until I build the castle or is there a catch?

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    Borrowing more money also means paying more every month, so unless your income grows at the same rate, you'll soon hit a limit... – jcaron Feb 8 '16 at 23:10
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    Nice try, Sarah Winchester. – JohnFx Feb 9 '16 at 1:28
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No, you can't do this indefinitely. For one, you can't just take money out as home equity with no strings attached. The cash out is done as a loan (often a HELOC) or second mortgage and you have to make payments. The lender will always make sure you are able to afford the payments. At some point, you won't qualify for the loan because of insufficient income or too many previous liens on the property.

While home values often go up, there's no guarantee. And your examples are more than a bit optimistic.

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    +1, also if the value increased to $150K you would usually only take out an extra $40K at 80% LVR, unless you are paying quite expensive LMI. – Victor Feb 9 '16 at 2:11
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Another problem with this plan (assuming you get past Rocky's answer somehow) is that you assume that $50K in construction costs will translate to $50K in increased value. That's not always true; the ROI on home improvements is usually a lot less than 100%. You'd also owe more property taxes on your improvements, which would cut into your plan somewhat.

But you also can't keep doing this forever. Soon enough, you'd run out of physical and/or legal space to keep adding additions to the house (zoning tends to limit how much you can build, unless you're in the middle of nowhere, and eventually you'd fill the lot), even if you did manage to keep obtaining more and more loans. And you'd quickly reach the point of diminishing returns on your expansions. Many homebuyers might be prepared to pay more for a third or fourth bedroom, but vanishingly few in most markets will pay substantially more for a second billiards room or a third home theater. At some point, your house isn't a mansion, it's "that ridiculous castle" only an eccentric would want, and the pool of potential buyers (and the price they'll pay for it) diminishes.

And the lender, not being stupid, isn't going to go on financing your creation of a monstrosity, because they are the ones who will be stuck with the place if you default.

  • I would disagree with the statement that the house doesn't get the value of the addition. I noticed Americans don't understand this because they are so focused on new houses. My house worth is 6k and the land is over 100k. So if I add new addition build in 2016, the house's value will increase to 250k, The value of the house now is 150k. Also the addition will add another 1000sq ft. Who wouldn't want to live in a house with 2500sq ft. for only 250k? Run out of space on 1 acre land? Lol, not if you are going upwards... – Grasper Feb 9 '16 at 13:42
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    @Grasper The house may gain some value, but the fact that you spent $50K on construction costs doesn't magically mean the house is now worth exactly $50K more. Read the article I linked: "But the incremental amount a buyer will pay for a home after such projects are completed is likely to be well below the seller’s cost." And you can only build upwards so much before you reach a municipal height limit or just reach the physical capacity of the existing house and foundation below to hold more weight. – Zach Lipton Feb 9 '16 at 17:19

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