In need of some House Hack advice!

11 Replies

Hey guys I've been doing some research on house hacking for the past 3 months and I think I'm ready to get my feet wet.

A little about me. I just turned 21 two months ago, I have a FICO credit score of 759 and I make 100k a year through w2 salary. I work as a software engineer in a pretty stable company so I'm not super concerned with losing my job. Even if I did, my expenses right now are pretty low and I am confident that I could use my skills to pay some of the property expenses myself if I had a high vacancy for some reason.

I just recently moved to Milwaukee, WI to live near my mentor. The opportunity cost of staying in Houston became too much.

MY GOALS:

  • I don't want to pay rent anymore
  • I want to have at least a few hundred dollars of positive cash flow
  • I want to build on an asset instead of throwing rent money away building someone else's
  • I want to gain experience as a landlord and a property investor
  • I want to live in a relatively safe area
  • I want to live in an up and coming neighborhood
  • I want the property to have some kind of added value potential, meaning I can fix it up a little bit and not pay a premium on a turn-key property

PREAPPROVED LOAN DETAILS:

  • 30 Year Fixed FHA
  • Purchase Price: $350,000
  • Down Payment Required: $12,250
  • Base Loan Amount: $337,750
  • (Damn I can't find my rate. what kind of rate should I be looking for?)

PROPERTY I AM LOOKING AT:

  • Purchase Price: $219,000
  • Property Type: Triplex
  • Year Built: 1902
  • Unit 1: 3bd 1 1/2 bathrooms
  • Unit 2: 3bd 1 bathroom
  • Unit 3: 2bd 1 bathroom
  • Location: Brewer's Hill, Milwaukee
  • Estimated SQ FT: 3,216
  • Owner pays: water, sewage
  • Tenant pays: gas, heat, electricity

The property is sitting on a double lot and has a full basement. Unit 1 is currently occupied at $1000 rent, Unit 2 is occupied at $900 rent, and Unit 3 on the third floor is currently vacant but if I lived here I'd be living in the 3rd unit which is the smallest, and get a roommate in the 2nd bedroom for around $400 a month.

THE PROPERTY EVALUATION:

- Purchase Price: $219,000

- Gross Potential Income (GPI): $27,600 | Sum rents multiplied by 12 months

- Vacancy loss: $1,380 | GPI multiplied by 5% as a fund in case there's unit vacancy

- Gross Operating Income (GOI): $26,220 | GPI - Vacancy loss. This is the property cashflow after potential losses

- Property Taxes: $4,905 | Purchase price * 2.24% Milwaukee county property tax

- Net Operating Income (NOI): $20,260 | GOI - Taxes. Income after all expenses not including mortgage

- Replacement Reserves Account (RRA): $7,000 | Long term repairs and costs. This is honestly just an arbitrary figure I threw in here. I have no idea how to calculate this (someone help)

- Mortgage payment: $1,540

- Before Tax Cash Flow (BTCF): $11,720 | NOI - RRA - Mortgage. equals to the cash flow the property will produce before taxes

(Note: These numbers aren't accounting for some operating expenses such as maintenance and utilities)

Now, these next set of values are calculated without taking into account I am using an FHA loan. The calculations are made using 25% as the downpayment. The reason for this is to crunch the numbers as if it were a normal real estate investment, so I can get a more accurate picture.

- Capitalization Rate: 9.251232877 | (NOI / Property Price) calculates return on investment

- Cash on cash return: 21.4063926941 | (BTCF / 25% of Purchase Price) return on investment assuming you used leverage

- Debt coverage ratio: 13.15597403 | (NOI / Mortgage)

If anyone is wondering where I got this formula from, it's called the S.E.O.T.A formula from a book called "Buy it, Rent it, Profit". This is a "dumbed" down version of that formula.

I failed math two years out of the four years that I went to high school. If someone could do a double check on these numbers I would greatly appreciate it. Also if you guys see anything that looks funny or know of a simpler formula I could use to evaluate properties please let me know.

I scheduled a showing tomorrow. I'm going to give the property a walk around with my roommate who is a home contractor. I'm hoping he can help me spot some red flags. The plan is, if everything checks out I am going to put an offer at asking price and do my due diligence during the inspection period. I'm hoping everything checks out and maybe I can find a few cosmetic things that can help me negotiate the price right now. Or I might just back out completely if I don't like it.

A FEW THINGS I AM CONCERNED ABOUT:

- It seems like in a lot of markets homes are at an all-time high, I'm thinking it's still worth it to buy even if I pay a little bit of a premium.

- I'm a little worried about the moratoriums on evictions that were placed during covid allowing tenants to not pay rent

- By purchasing this property I am basically inheriting 2 units full of people. I need to do my due diligence to find out who these people are and how long they have left on their leases. I have no idea how much effort the current landlord put into screening these tenants.

- The property only has street parking on a street that has a few bars down from the property. I'm a little worried about the parking situation for a triplex that has 8 bedrooms.

- I'm not super sure about what things are going to need fixing on the property, there seems to be a lot of slumlords out here in this county. But I guess I won't find out until I get there and check it out - I think I'm gonna need a CPA cause Idk what I'm doing at all

MY PERSONAL FINANCES:

- $10k in savings

- $1k in actual cash

- $17k in bitcoin (give or take at current price)

- $3k in silver

- $2k in a Capital One Roth IRA savings account (I did this by accident thinking it was a normal Roth IRA. I'm hoping I can liquidate this towards the house purchase and not pay taxes on it)

- $3k in a Roth IRA (I know this looks weird. I just don't know wtf I'm doing lol)

I'm probably going to need to have a way bigger nest egg in case anything goes wrong or happens to the property, my job, or me while I own a home.

I would appreciate any advice you guys have on what I wrote above or tips on how to inspect the property, what to look for, etc.

Also if you currently live in the Milwaukee area feel free to hit me up. I am currently working on a startup here with 3 colleagues and would love to network with you guys.


Alan,

The MKE market is hot right now and has been all summer. It's a sellers market. With that being said I'd recommend you buy now anyways. Barring a completely atrocious deal, you will come out ahead when you're living rent-free in a cash-flowing house-hack. Rent is expensive in MKE.

The inherited tenants could be an issue, but it doesn't have to be. Since you are going to be house-hacking the place you will get a good feel for who your tenants are as people pretty quickly. Read through the current leases and understand the terms. Also, just talk to them and try to understand any issue they have with the house. Everyone appreciates being heard. As a landlord you are in the service industry as well as the real estate industry. I also would try to get the previous owners rent roll or payment record to try and identify tenants that may be problem-childs or have habits of late payments. Lastly, in Brandon Turner's book on managing rental properties he talks about sending the current tenants a letter or email explaining who you are and how you run your company. I would highly recommend this as well. Start out on the right foot from day one. Also, read that book if you haven't.

On street parking is very common for Milwaukee and unless you live downtown it really isn't all that bad, just inconvenient. 

Prior to the inspection, I would go on the county website (https://lio.milwaukeecountywi....) and check out what kind of permits were pulled on the property and the county records. Just type the address in and click on the Assessment Info. Then click on the tax key and permit info. Knowing what permits were pulled and the property record has a few advantages. First, you can see what work was down on the property and who did it. Knowing what companies worked on your property can give you an idea of the quality of work. Are the contractors still in business? What do their reviews say? What are their ratings on the BBB? Make note of all of this and have your friend look at them during your inspection. If everything looks kosher, you just found yourself a contractor you can use on your property in the future. Second, during your inspection make note of anything that has been updated but didn't have permits pulled for the work. If the electrical boxes or plumbing look updated but no permit was pulled this is a huge red flag. Electrical fires caused by incorrect wiring are not covered by insurance so this could be a serious problem. Most of the time its just small things though, like a fence or retaining wall. It helps to have a good understand what work requires permits in Milwaukee. This can be found on the county website as well. Finally, when you pull the records you can see what kind of citations were issued on your property and how the previous landlord ran things. If they tons of citations for bushes over-growing into the alley or sidewalk you can guess they were pretty hands off and maybe didn't give the property the attention it needed. 

For the inspection I would just use this post (https://www.biggerpockets.com/...) by Mindy Jensen as a checklist as you go through. Be very thorough.

Buying your first investment property is an exciting time and a great step towards wealth. Feel free to PM if you have more questions about the home buying process or personal finance ($17k in Bitcoin?!?! I get the feeling you love volatility lol) Good luck and happy investing!

You have the right idea by doing a house hack for your first deal.  Sounds like you have done the proper due diligence on this deal as well.  As long as the numbers hit your cashflow goal (once you move out), while being conservative on occupancy and expenses, go for it.

Originally posted by @Benjamin Beyer :


Alan,

The MKE market is hot right now and has been all summer. It's a sellers market. With that being said I'd recommend you buy now anyways. Barring a completely atrocious deal, you will come out ahead when you're living rent-free in a cash-flowing house-hack. Rent is expensive in MKE.

The inherited tenants could be an issue, but it doesn't have to be. Since you are going to be house-hacking the place you will get a good feel for who your tenants are as people pretty quickly. Read through the current leases and understand the terms. Also, just talk to them and try to understand any issue they have with the house. Everyone appreciates being heard. As a landlord you are in the service industry as well as the real estate industry. I also would try to get the previous owners rent roll or payment record to try and identify tenants that may be problem-childs or have habits of late payments. Lastly, in Brandon Turner's book on managing rental properties he talks about sending the current tenants a letter or email explaining who you are and how you run your company. I would highly recommend this as well. Start out on the right foot from day one. Also, read that book if you haven't.

On street parking is very common for Milwaukee and unless you live downtown it really isn't all that bad, just inconvenient. 

Prior to the inspection, I would go on the county website (https://lio.milwaukeecountywi....) and check out what kind of permits were pulled on the property and the county records. Just type the address in and click on the Assessment Info. Then click on the tax key and permit info. Knowing what permits were pulled and the property record has a few advantages. First, you can see what work was down on the property and who did it. Knowing what companies worked on your property can give you an idea of the quality of work. Are the contractors still in business? What do their reviews say? What are their ratings on the BBB? Make note of all of this and have your friend look at them during your inspection. If everything looks kosher, you just found yourself a contractor you can use on your property in the future. Second, during your inspection make note of anything that has been updated but didn't have permits pulled for the work. If the electrical boxes or plumbing look updated but no permit was pulled this is a huge red flag. Electrical fires caused by incorrect wiring are not covered by insurance so this could be a serious problem. Most of the time its just small things though, like a fence or retaining wall. It helps to have a good understand what work requires permits in Milwaukee. This can be found on the county website as well. Finally, when you pull the records you can see what kind of citations were issued on your property and how the previous landlord ran things. If they tons of citations for bushes over-growing into the alley or sidewalk you can guess they were pretty hands off and maybe didn't give the property the attention it needed. 

For the inspection I would just use this post (https://www.biggerpockets.com/...) by Mindy Jensen as a checklist as you go through. Be very thorough.

Buying your first investment property is an exciting time and a great step towards wealth. Feel free to PM if you have more questions about the home buying process or personal finance ($17k in Bitcoin?!?! I get the feeling you love volatility lol) Good luck and happy investing!

 Thank you, Benjamin! I was actually able to apply a lot of this during m=the property viewing. So much value, I shot you a DM. Thanks again for your time!

Originally posted by @Brock Mogensen :

You have the right idea by doing a house hack for your first deal.  Sounds like you have done the proper due diligence on this deal as well.  As long as the numbers hit your cashflow goal (once you move out), while being conservative on occupancy and expenses, go for it.

Thank you so much! I think the deal is gonna fall through because the property won't qualify for the FHA loan. I would have to paint the outside of the home, fix all the rotten wood, and make a handrail for all the stairs. In order to purchase with an FHA loan. I'm not sure how this process goes down. Do you know what options I would have?

I asked about an FHA 203k loan but they said the interest is really high. Thank you Brock

 

@Alan Ayala

Well, you’ve done your math 😂. I’m not a math person, so my eyes glazed over a bit...ha ha. Two things stand out for me:

1. The year it was built. Check around with some contractors, realtors, home inspectors, etc. In my area, I wouldn’t touch a property that old. It’s guaranteed to have foundation/structural issues due to the type of cement they used at that time. Not to mention lath and plaster walls and knob and tube wiring and old plumbing. Some people specialize in this age, but it’s a niche that can destroy your rehab budget if you aren’t educated on what to look for.

2. Inherited tenants. Look at the leases and payment history. Meet them. If you think they will be trouble AT ALL; find out what the cost of an eviction is in you area and use that to negotiate. Problem tenants can be delt with....but it costs money. Use that to negotiate.

Good Luck!

@Alan Ayala

As a (former) fellow engineer, Im going to be very blunt and honest with you so please don’t take this the wrong way....

You are over-complicating everything you are doing. You don’t need a big fancy set of numbers and a million calculations on a deal you don’t even have in contract yet. You need to simplify things for your first purchase. All you need are these numbers:

Debts: PITI. Principle, interest, taxes, insurance.

Credits: rent from 2 of the 3 parts of the triplex in this particular situation and then rent for the bedroom you rent out.

If Credits - Debts = a good enough cash flow number for your standards, then let it rip and buy the deal. And also for a property with a little wear and tear, a FHA wont qualify.

Its my personal opinion that you should always go conventional rather than FHA anyway. Once your house appreciates to 80% LTV, you lose the PMI on the loan. For FHA, it sticks for 30 years. I personally like an extra $100-$200/ house by removing the PMI.

Shoot me a PM if you have any questions or need some help,

-Matt

@Alan Ayala

Chipping and peeling paint won’t pass any appraisal, so you can ask that the seller to fix that in negotiations.

VA loans will also call for the hand rail, so the seller most likely will have to do that for several loan types. But they say nothing about the quality. So, these can usually be done for $200. If you plan to rent to section 8, you will need a railing anyways...if this is the case you might as well negotiate something nicer be installed.

Rotting wood can mean many things. Most likely this will also be an appraisal issue. So this won’t pass for most buyers with any loan type. Again, just negotiate with the seller to repair this.

The paint and the rotting wood will probably also show up in your home inspection report. Just use them to negotiate- not deal breakers.

Due to the time of year, it might be hard to fix exterior issues. Talk to your realtor and lender about doing a hold-back for repairs.

This is a long post so I didn't read it all, but based on the rent to price ratio as long as the property does not have a lot of capex due soon and/or immediate deferred maintenance issues it is worth it. Especially if it is in a good area where you can attract good tenants.

Originally posted by @Alan Ayala :
Originally posted by @Brock Mogensen:

You have the right idea by doing a house hack for your first deal.  Sounds like you have done the proper due diligence on this deal as well.  As long as the numbers hit your cashflow goal (once you move out), while being conservative on occupancy and expenses, go for it.

Thank you so much! I think the deal is gonna fall through because the property won't qualify for the FHA loan. I would have to paint the outside of the home, fix all the rotten wood, and make a handrail for all the stairs. In order to purchase with an FHA loan. I'm not sure how this process goes down. Do you know what options I would have?

I asked about an FHA 203k loan but they said the interest is really high. Thank you Brock

 

For an FHA loan you do not have to do anything. The seller has to do those things for your loan to go through. So remember that the seller may not accept your offer unless it is a very good offer because he will have to pay for and do those things.

 

@Alan Ayala FHA will do a thorough inspection to make sure everything is up to code before approving the loan. They usually give you a few tries to pass the inspection though. Chipping paint, handrails, safety related stuff is what they check for. It's a hassle but well worth it, in my opinion.

Originally posted by @Brock Mogensen :

@Alan Ayala FHA will do a thorough inspection to make sure everything is up to code before approving the loan. They usually give you a few tries to pass the inspection though. Chipping paint, handrails, safety related stuff is what they check for. It's a hassle but well worth it, in my opinion.

 Thank you Brock! I had no idea there was some breathing room on making the property pass.