There are no problems, only opportunities...

“The Obstacle is the Way” – Ryan Holiday

Obviously, I’m a fan of the BP Podcast – I always learn something new, but there are definitely some recurring themes – probably chief among them is that the best investors embrace and absorb problems, and usually turn them into huge wins...another would be to seek out mentorship. Thanks to some great mentorship, after a brief moment of sheer panic, I believe I’ve found a way to turn a huge a problem into a huge win.

In early February I closed on what was supposed to be my first “House Hack,” a duplex that I intended to make my primary residence. I am transitioning, well, medically retiring, from the Navy within the next 6 months and I’m really trying to consolidate some of my expenses – a house hack would have been a great place to start.

Although the house was structured as duplex, it was still zoned as a single family home, so I needed to figure out if that could be fixed. Prior to purchase, the listing agent provided a set of approved plans from the city that authorized the modifications which created the duplex structure (this was back in 2008). Obviously a great thing to have, but this was as far as my investigation went…HUGE MISTAKE. Lesson to be learned – BEFORE you close, if zoning is an issue, confirm with the city that it can be adjusted!! Shortly after closing, I had super awkward, “WTF” type conversation(but in a super polite way of course ; ) with a city representative. According to them, the property was modified illegally (they of course had no record of the paperwork on their own files) and any requests for re-zoning would be “most likely” denied. I was instantly left with impression that this was a battle not worth fighting. Well shit. Now what!? I have an illegally modified SFH that I want to use as duplex but can’t, and I’ve already started the process of breaking the lease at my current residence….f’n bummer. How can I win this?

The other troublesome part of the issue was that my plan had been to lease the vacant unit (and then later on my own) through the Housing Choice Voucher program (HCV formally Section 8 - great way to maximize cash flow) – of course, in order to be in line with HUD policy, the house needs to be properly zoned. SO…time to find a Plan B…I immediately got in touch with my mentor, and sought advice on finding a solution. She quickly recommended I look at the rental numbers for SFHs in the area, and see if it was a viable option…turns out…YES!! Like fucking big time, especially via HCV. Here are the numbers for the property as a SFH…

SqFt:2322

Year Built:1916

Tax Assessment:$167,200 (2016) / Z-estimate: $170,247

Beds:4

Baths:2.0

Purchase Price: $135,000 ($6K down)

**Note: Essentially just closing costs – utilized my VA loan, also covered the seller’s closing cost as she was going through some pretty difficult personal circumstances. For you Active Duty military/Veterans, be careful with the VA loan – it is for the purpose of a primary residence, not an unoccupied investment property. The primary stipulation here is do you have “the correct intentions upon closing”…in this case I did 100%, really having no clue the zoning would be an issue with the paperwork I had been provided.

PITI: $934.00

Rent (Comps/HUD Allowances):EST $2100

Cash flow (Net): EST $1100

Renovations/SFH Conversion: EST $12,000 (includes consulting fee for mentorship, WORTH IT!!!)

1st Year ROI: EST 66%

So the numbers are awesome – obviously the backend returns are still estimates, so we’ll see. I’ll definitely provide an update. Here is the other thing that has really helped me – I have absolutely ZERO desire to ever be a property manager…ever. So, I sought out a property manager that specializes in Section 8 – she was incredibly well qualified and had years of experience, not mention like 100 of her own properties. I knew pretty quickly she was the right person for the job, & I asked her to walk the property for me BEFORE I made any improvements to see what was necessary and what was not. She probably cut my rehab budget by nearly a 1/3. There is a totally different mindset and set of principles when it comes to creating a buy and hold rental (especially HCV) vs a retail flip.

Luckily, I was able to keep the lease on my current residence, and my goal is to have this property fixed up, completely HUD approved, and providing a great home by for a family by 01 Apr 16. Time to get after it!!!