First purchase and 2-yr plan. What do you think?

Question

Last October I closed on my first purchase! A primary residence, single family in midtown Sacramento. We had been house hunting since March, focusing mainly in North Oak Park (since we thought we couldn't afford midtown), but hadn't been able to find anything that made sense as an investment. I'm glad I stuck to my numbers, because after an unsuccessful three month search, I came across this deal off-market and was able to close after a 3-month escrow! (Long story...)

We were able to purchase it at 8% less than the bank's appraised value. (Though it's difficult to find true comps in this area and I disagree with the houses they chose. I would say comps put it at about 15% more than we paid, but you gotta go with the bank!) But here's the main reason we bought it: It has a full-height basement AND an unfinished 850'sq second floor which is currently considered the "attic" despite the fact that it's huge, has a floor, windows, and an actual staircase leading up to it (not a ladder or a drop-down stair). We plan to finish the upstairs into a true second floor, making the house a 4 bed, 2.5 bath, 2,000'sq single family. ARV would be more than double our purchase price, and that's looking at current comps. In the next year the new arena will open less than 1.5 miles away, and in the next two years a new Whole Foods will open just a short walk away, plus new developments being announced what feels like every few weeks, so the area is appreciating fast.

After we renovate the upstairs, we plan to rent that space out (either as a traditional rental or a vacation rental is still TBD) effectively house-hacking the property and living for free! Then we plan to tap into that new equity to buy a second rental property. Sort of a house-hack/live-in-flip hybrid? (Is it a live-in flip if you plan to hold but leverage equity from forced appreciation?)

I'd love to hear what more experienced investors (especially in the Sacramento area) think! Do you have experience on creating a rentable "apartment" in a single-family home? (Like an in-law unit, we don't want the house to be considered a duplex.) Any advice on aiming for a traditional rental vs AirBnB? Any tips for leveraging that equity once we've completed our renovations? Let me know!

Account Closed · Answer

@Jessica Sorensen

I'm not sure I am an experienced investor, but I have been renting out the spare bedrooms of my home for a few years now and I have learned a bit about the unique nuances that are involved.

I would look into what you can charge using airbnb and compare it to what you may get from consistent renters. Also consider occupancy will be much easier to manage with traditional tenants... but it is very very very important that you screen with rigor to ensure that you will be willing to live with this person for a potentially longer term.

I ruled out airBnB because of how actively involved I would have to be in renting and managing my space. My roommates now are professionals and grad students in their mid 20's, we have a great family at home, we hardly even see each other, and they're here to stay... they also pay my whole mortgage. :)

David Faulkner · Answer

One thing my wife and I did house hacking, admittedly on accident but it worked out great, is to buy your next place to move in after 2 or more years AND when the housing market tanks. After buying their first place, most people have to sell to move to their next place, so they have to either sell low then buy low or sell high then buy high into the same market; similar problem typically exists with 1031 exchanges. True you could still get ahead by selling retail and buying wholesale (distressed), and that is a great technique you should definitely utilize but it is hard work. With house hacking if you time it right, though, you can buy low, then a day short of 3 years later sell high tax free. Or alternately, my personal favorite, buy low, buy low, buy low ... without ever selling. In other words, you are free to take full advantage of market volatility in a way that most repeat home buyers are not.

Sergey Tkachev · Answer

@Jessica Sorensen, congrats on your purchase, and in a great location, too. Your description of the property sounds great, a lot of potential to add. We have a property that also has a basement that we wanted to convert into living space but couldn't because the ceiling is below 7'. If it was about 3-4" higher, it'd be an option. Hopefully your ceiling heights are good. The 12' ceiling in the attic sounds awesome!

Jake Weir · Answer

@Jessica SorensenWhile Sacramento may not be the hottest vacation rental market, the Convention Center seems to be always buzzing. AirBNB could be a fun thing to try before you go longer term rental.

Pat McGrath · Answer

Lol. no, i was the agent working & he was with his parents, mentioned he worked on ahmads show and another one called 50/50 that i guess didnt make it 3 episodes.

my wife has worked with a number of out of state 3 or 6 month nurses, so they do come by. You just have to find them.

Jessica Sorensen · Answer

@Gordon Cuffe Ok for a true "vacation" rental maybe not... but there are a lot of people that come through for government work. There are also medical students that do month-long interviews at UC Davis. And once the arena goes in there may be more activity from out-of-towners looking for an overnight stay? You have a point though, Sacramento isn't a hot vacation destination, and it's easier to find a regular renter.

Gordon Cuffe · Answer

@Jessica SorensenI am in the mortgage business just as a disclaimer. If you need more cash then either a cash out refinance or a heloc will do the job. At least lenders have increased the ltv percentage on heloc over the last couple of years. I have found a couple going up to 90% ltv where as a plan old conventional refi goes up to 80% ltv or you can go up to 85% ltv with a FHA cash out refi. I would have never thought people come here for vacation. I would like to hear how that goes if you go that route. I might rent a room in Kansas city via airbnb just to see what it is like since I am visiting there anyway.

Jessica Sorensen · Answer

@Rick Santasiere We're definitely planning on staying here for at least two years, so yes, we can avoid those capital gains when we finally do sell. I plan to stay here for some time though, since it's also a great primary residence, so the main purpose of renting it out is for that added income before we sell (whenever that may be).

@Gordon Cuffe I don't mind someone living above me. I've lived in apartments for the last 10 years so I'm used to sharing walls. Especially if I get to choose the person up there. And you'rr right about doing a cash-out refi. My concern though is that the PITI would end up being too much to be covered by the rents. Based on current market rents, this property would gross at least $2800 (maybe more, but I'm going low for now). I feel like that would limit me to about $450,000 before I start losing money each month paying the mortgage. If it appraises higher than that, what's the best way to get the rest out? HELOC?

@Pat McGrath Haha, was it the real estate agent? I feel kind of bad. I was working with a great agent but when I found this deal the seller wanted to just do a handshake, as-is sale neighbor to neighbor without realtors. It was too good of a deal to turn him down so that's what we did!

@Chris Vail That's good to know, thanks. Right now I'm planning on staying in this property and using future equity to buy a second property as an investment, not a primary residence, but you never know what could happen...

@Erin N. The attic currently has no ceiling, but there's plenty of space to put 12' ceiling throughout most of the space, so I should be good there. ;) Good point about the kitchenette. That's one of the reasons I'm thinking of making it a vacation rental vs a traditional rental. Vacationers don't necessarily expect a full kitchen, just a nice bed and clean bathroom. It's something I'm going to have to research a little more. And yes, "separate entrance" is what generally gets a building designated a duplex, so our plan is to create a sort of mudroom off the back door, where one exit leads you to the downstairs and one leads up. That way if we ever want to convert back to a fully-single-family, we just take down the mudroom wall and have it back to the way it is now.

Erin N. · Answer

Is the attic full ceiling height all the way around? If not it will affect the sqft when they do the appraisal. Also, if the 2nd floor shower height and height above the toilet don't conform to ANSI standards, the appraiser may not count it as a bathroom.

I have created additional living spaces in SFRs to rent out. Make sure there is a door between the 2nd floor and your living area - even if it's permanently locked with a deadbolt. If you create a solid wall, it will most likely violate building codes. I also suggest stopping short of building a full kitchen but rather put in a kitchenette with a counter top convection oven and a 1 or 2 burner cook top. Codes again. You could potentially get shut down for trying to create a duplex by the local building inspector. That's what happens sometimes where I live, but YMMV since you're in a different state with different laws. However, a lot of the local and state laws are based on certain national standards so many of them are the same.

Chris Vail · Answer

@Jessica SorensenGlad to hear you got the property and have the startings of a plan. Some helpful information for you from some very recent experience on the ReFi hoops. If you plan on keeping the house ReFi at least a year out from when you plan to buy your next property if you are planning to do the same thing again (another Owner Occupy). Large conventional banks are not excited to give you a new primary loan if you just refinanced your current primary. We found this out recently and had to change course to refi our current primary as an investment (higher interest rate and smaller LTV) instead of a primary. The "no new primary loan after a recent primary refi" rule is a Fannie/Freddie red flag and they generally like to see 1 year between them. And since most large banks sell their loans to Fannie and Freddie they will conform to them.

Good luck with the live in flip and keep us posted.

First purchase and 2-yr plan. What do you think?

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