diff --git a/ChangeLog.md b/ChangeLog.md
index ab19a94305..e37b93347d 100644
--- a/ChangeLog.md
+++ b/ChangeLog.md
@@ -3,6 +3,7 @@
 * Set the `HASKELL_DIST_DIR` environment variable [#524](https://github.com/commercialhaskell/stack/pull/524)
 * Track build status of tests and benchmarks [#525](https://github.com/commercialhaskell/stack/issues/525)
 * `--no-run-tests` [#517](https://github.com/commercialhaskell/stack/pull/517)
+* Targets outside of root dir don't build [#366](https://github.com/commercialhaskell/stack/issues/366)
 
 ## 0.1.2.0
 
diff --git a/src/Stack/Build/Source.hs b/src/Stack/Build/Source.hs
index 1b7cb5692d..139c2be4cb 100644
--- a/src/Stack/Build/Source.hs
+++ b/src/Stack/Build/Source.hs
@@ -172,16 +172,18 @@ loadLocals :: forall m env .
            -> Map PackageName Version
            -> m ([LocalPackage], Set PackageName, Set PackageIdentifier)
 loadLocals bopts latestVersion = do
-    targets <- mapM parseTarget $
+    (isWanted', names, idents) <-
         case boptsTargets bopts of
-            [] -> ["."]
-            x -> x
-
-    -- Group targets by their kind
-    (dirs, names, idents) <-
-        case partitionEithers targets of
-            ([], targets') -> return $ partitionTargetSpecs targets'
-            (bad, _) -> throwM $ Couldn'tParseTargets bad
+            -- If there are no targets specified: build all locals
+            [] -> return (\_ _ -> True, Map.empty, Set.empty)
+            targets -> do
+                targets' <- mapM parseTarget $ boptsTargets bopts
+                -- Group targets by their kind
+                (dirs, names, idents) <-
+                    case partitionEithers targets' of
+                        ([], targets') -> return $ partitionTargetSpecs targets'
+                        (bad, _) -> throwM $ Couldn'tParseTargets bad
+                return (isWanted dirs names, names, idents)
 
     econfig <- asks getEnvConfig
     bconfig <- asks getBuildConfig
@@ -191,7 +193,7 @@ loadLocals bopts latestVersion = do
     lps <- forM (Map.toList $ bcPackages bconfig) $ \(dir, validWanted) -> do
         cabalfp <- getCabalFileName dir
         name <- parsePackageNameFromFilePath cabalfp
-        let wanted = validWanted && isWanted dirs names dir name
+        let wanted = validWanted && isWanted' dir name
             config = PackageConfig
                 { packageConfigEnableTests = False
                 , packageConfigEnableBenchmarks = False
diff --git a/test/integration/tests/366-non-root-dir/Main.hs b/test/integration/tests/366-non-root-dir/Main.hs
new file mode 100644
index 0000000000..1855418810
--- /dev/null
+++ b/test/integration/tests/366-non-root-dir/Main.hs
@@ -0,0 +1,9 @@
+import StackTest
+import System.Directory
+
+main :: IO ()
+main = do
+    stackErr ["exec", "hello-world"]
+    setCurrentDirectory "app"
+    stack ["build"]
+    stack ["exec", "hello-world"]
diff --git a/test/integration/tests/366-non-root-dir/files/app/Main.hs b/test/integration/tests/366-non-root-dir/files/app/Main.hs
new file mode 100644
index 0000000000..377b6b5516
--- /dev/null
+++ b/test/integration/tests/366-non-root-dir/files/app/Main.hs
@@ -0,0 +1,2 @@
+main :: IO ()
+main = return ()
diff --git a/test/integration/tests/366-non-root-dir/files/new-template.cabal b/test/integration/tests/366-non-root-dir/files/new-template.cabal
new file mode 100644
index 0000000000..1ce3458647
--- /dev/null
+++ b/test/integration/tests/366-non-root-dir/files/new-template.cabal
@@ -0,0 +1,11 @@
+name:                new-template
+version:             0.1.0.0
+build-type:          Simple
+cabal-version:       >=1.10
+
+executable hello-world
+  hs-source-dirs:      app
+  main-is:             Main.hs
+  ghc-options:         -threaded -rtsopts -with-rtsopts=-N
+  build-depends:       base
+  default-language:    Haskell2010
diff --git a/test/integration/tests/366-non-root-dir/files/stack.yaml b/test/integration/tests/366-non-root-dir/files/stack.yaml
new file mode 100644
index 0000000000..6252712e3b
--- /dev/null
+++ b/test/integration/tests/366-non-root-dir/files/stack.yaml
@@ -0,0 +1,5 @@
+flags: {}
+packages:
+- '.'
+extra-deps: []
+resolver: lts-2.17