I'm getting excited about 2018 and planning my goals for the year to come. I'm looking to move out of Jersey City and purchase a Duplex in Westchester, NY. I'm shooting to qualify for an FHA 203K loan depending on what I can find. I understand how much I need to save for the down payment, closing costs and such. My question is how much should I save for the unexpected issues with buying my first property?
Any experienced House Hackers would love to hear your experience!
@Account Closed , if you feel the need to ask, then you're not saving enough!
(Hint: The correct answer is: every spare dollar that's not needed for necessities!)
@Account Closed My rental isn't owner occupied so I cant really help you there but one piece if advice I see going around a lot was 1) wish they started sooner and 2) made sure they had large cash reserves for the unexpected and/or economic downturns.
@Account Closed that, ideally, you should save every spare dollar. But you can get better perspective if you know your goals and understand the cost-benefit analysis associated with those goals.
Save as you would for anything and factor in buffers.I house hack and that is my determined style to achieving financial freedom among other frugal practices.I have house hacked on all my past purchases and closing next week on my latest purchase with the intent of continuing to house hack.Moving out of current property to my new property, a duplex in Denver, CO.I love house hacking and would highly recommend it.Cheers!
Honestly, I have an account dedicated to taking in only rent each month. I don't touch that money. Any "profit" I make on my property is basically held there as a rainy day fun, until it grows large enough to be parlayed into another deal.
I have been house hacking for the last year (single family home with a legally zoned basement apartment) and spent the six months prior to closing that deal looking for the right property. In terms of "unexpected" issues, I have had a minor gas leak and have been dealing with issues pertaining to city zoning/permits on an outbuilding (garden shed) and the furnace and hot water tank. I did a lot of research prior to completing my deal and you never know what will come up.
The answer to your question is: "who knows". Here are some things that can help though:
- Build up your emergency reserves. Listen to any Dave Ramsey podcast if you don't know where to start, adjust accordingly. I think most of his practices are very basic and conservative but if you have a buffer like this then it will help. If you are relying on the rental income to help pay the mortgage then this buffer may be useful if you have a month or two of vacancy.
- Talk to your bank about getting a line of credit. I have had a line of credit of a few thousand dollars for many years. Have never had to draw on it, but if you have a major issue or a couple issues stack up in short time then this is a good second line of defense. If you have a good relationship with your bank you may be able to negotiate a reasonable interest rate.
- Complete as much due diligence as you can prior to removing conditions. Most people know about home inspections, but additional research to make sure that all the permits/zoning are in check can go a long way. This is all jurisdiction dependent but I think in most cases you can call your city office and do a permit check on a property. This is not always something that a home inspector knows about so you may need to hire an electrician or HVAC expert to make sure permits and zoning are clear in your mechanical room. If you need a permit for a secondary suite then you may need to call the city to confirm these are in place and that final inspections were completed. If there are issues the seller needs to have them fixed prior to removing conditions. You may also want to look into title insurance (I had the seller buy the policy for me).
This is a lot longer than I expected, but these are a few ideas.
@Account Closed , will this be your first investment purchase?
@Dan Jensen I really appreciate you taking the time to respond with that much insight!! I used to listen to Dave's podcast quite a bit and I read his total money makeover so I agree an emergency fund is a good start and the LOC is also interesting to look into. THANK YOU!!!
@Michael Ehmann Yes this will be my first investment purchase.
Well, for starters, your lender will want to see 6 months of PITI (principal, interest, tax & insurance) in reserves beyond your down payment and closing costs. They’ll consider any investments that can be accessed quickly, like a Roth IRA, but if you are looking for a number, that’s one we’ve aimed for. Provided you get a good tenant relatively quick and that you do good due diligence to minimize too many surprises (which will most likely happen), those reserves should cover you.
You don't need to have any reserves. You are looking at a 2 family with FHA which doesn't require Reserves. I would save as much money as possible for any contingencies that get found over and above the 10 to 15% that gets added for 203k loan anyway.
@Account Closed , I recently house-hacked my first investment (condo) by adding an extra bedroom, effectively turning it into a 3/2. Everyone else has covered anything I'd say about how much to save for extra costs, so I'll just throw in my 2 cents and talk about the different things I've had to deal with.
In the past few months I've replaced one toilet, the washing machine, and the oven (which is like half of the appliance stuff that could go wrong). One of the biggest lessons for me: have a plan BEFORE things go wrong. When my washing machine broke, I was out of town answer got a call from one of my roommates saying that the machine was full of water but wouldn't drain. I hadn't thought through all of the "what if" scenarios to know what to do in this situation. You'll never be able to plan for everything that will will wrong, but at least think through the most likely ones (like your appliances breaking).
The other key, as mentioned in many of the podcast episodes, is to effectively train your tenants. I have some new guys moving in next week, and we will be sitting down to review the lease together in detail so that we can set proper expectations about our tenant/owner relationship.
Oh also, one other thing I forgot to mention. I'm all for systematizing things and outsourcing a lot of rehab/repair tasks. However, I personally have found it valuable to try and do some of the things myself, at least on my house hack.
For example, before this property, I didn't know how to replace a toilet, how a washing machine works and how to diagnose problems associated with it, how to hang a ceiling fan, etc. While I do not want to be doing these things for every one of my future properties, I think it's valuable to at least have some fundamental home maintenance skills, and experience can often be the best teacher.
So for you, I would still plan for the inevitable things that will go wrong and plan them such that you can outsource the work if you need to. But when something does go wrong, I would at least consider whether you can try to do it yourself if you have time or if you can observe the outsourced work, just so you have a better understanding of home maintenance. That's my 2 cents anyway.
I will touch on one thing. Besides vacancy, etc... It will truly depend on your skill set, especially in the construction area. When I bought my 2 family which I still house hack, I did most of the reno until now actually. I spent about 7k to get the tenant unit rent ready and about 3k to get my unit ready. Over time I've spent about an additional 15k in updates. These were planned from the beginning. I do plan to put about another 60-80k for a basement renovation and exterior concrete job I want to do. Now if I would've paid out a GC I probably would have paid at least 3 times that. Assuming you don't have to renovate, then what happens if a pipe breaks. Do you need to call a plumber everytime? I had a hot water line corroded at a T fitting, and had to replace the fitting which was behind a wall and about 15 feet of copper piping. Did it myself and maybe paid about 200 to do it. A licensed plumber would've been about 2k in NYC. I've replaced gas valves, boiler and radiator valves at material cost and a few hours of my time. I would say you should want at least 5k per unit in reserves. If you only have 5k then make sure you save, save, save until you get to what you need.
@Ceasar Rosas thank you so much for the detailed explanation and a more accuratw figure. I one day, hope to have the skills to be able to do some of the same repairs you did. Great insight!