I feel like I made a mistake

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I feel like I made a mistake

Gerardo Hernandez
Member since 2021 · 34 posts · 44 votes

Hello everyone, 

I have to say I am freaking out!! I got a new job over an hour away and I have been driving for over a month and I hate it! I have been trying to find a duplex to house hack but there isn't much in the market at the moment. Well yesterday I put an offer on a new duplex that came in the market. The asking price was 215k and I offered 190k to start the negotiations. My real estate agent came back and said someone else had an offer in already. So she said that houses are selling 10% above asking price and that if I truly wanted to get it to not ask them to pay closing cost. Under pressure I put an offer of 215k. Now that I am running the numbers. It just doesn't make sense. I am still waiting for an answer but I am super scared that I get it because I feel like that wasn't smart at all. Taxes were 4300 in 2019, current tenant pays 795. I feel like I can raise that to 900 or 950. I got a 3.25 percent interest with 3% down. Any advise? I feel like I really screwed up my first deal. 

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Brad L.
Rental Property Investor · Manitowoc, WI · Member since 2016 · 178 posts · 186 votes
5y

General rule of thumb when analyzing is that gross rents should be at least 1% of purchase price. Even if you were to get $950 from the current tenant and if we assume $950 for your side at some point in the future, you're at 0.88% when looking at monthly mortgage, property taxes and insurance. This doesn't take into account repairs, general maintenance or capex which would push you lower than 0.88%. 

That being said, this all doesn't necessarily mean it's a bad deal for you; what is your goal with this property? Will you live here permanently? Do you intend to move out and rent your unit in the future? What would you be paying in rent elsewhere if you did not purchase this property, is this purchase reducing your living expenses? Do you see a good amount of appreciation in value in your area? Not a deal I'd do personally, but just because it doesn't fit my goals doesn't mean it won't fit yours.

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  • Michael Plante
    Deland, FL · Member since 2017 · 2k+ posts · 1k+ votes
    5y

    Call, email and text your agent right now that you withdraw your offer 

    12Reply
  • Brad L.
    Rental Property Investor · Manitowoc, WI · Member since 2016 · 178 posts · 186 votes
    5y

    General rule of thumb when analyzing is that gross rents should be at least 1% of purchase price. Even if you were to get $950 from the current tenant and if we assume $950 for your side at some point in the future, you're at 0.88% when looking at monthly mortgage, property taxes and insurance. This doesn't take into account repairs, general maintenance or capex which would push you lower than 0.88%. 

    That being said, this all doesn't necessarily mean it's a bad deal for you; what is your goal with this property? Will you live here permanently? Do you intend to move out and rent your unit in the future? What would you be paying in rent elsewhere if you did not purchase this property, is this purchase reducing your living expenses? Do you see a good amount of appreciation in value in your area? Not a deal I'd do personally, but just because it doesn't fit my goals doesn't mean it won't fit yours.

    21Reply
  • Gerardo Hernandez
    OP
    Member since 2021 · 34 posts · 44 votes
    5y

    @Brad L. My plan was to live there for a year and half or so than get another duplex to house hack  and rent the current one. I feel like I am just desperate to move because I truly hate driving 2:30 Hours daily. 

    3Reply
  • Brad L.
    Rental Property Investor · Manitowoc, WI · Member since 2016 · 178 posts · 186 votes
    5y

    If your plan is to grow a portfolio, this property will likely weigh you down significantly moving forward. Don't let frustration get you into a bad deal or you will end up being way more frustrated down the line.

    11Reply
  • Damaso Bautista
    Rental Property Investor · Hawthorne, CA · Member since 2018 · 655 posts · 900 votes
    5y

    @Gerardo Hernandez

    Is this post about driving an hour to work, a non cash flowing property, cold feet, or not being able to afford the property you just put an offer on?

    There is a whole bunch to unpack here, I think you need to break down the situation and place values on each because believe it or not everything in life is about the bottom line.

    I hope you figure it out.  Good luck!

    20Reply
  • Matthew Irish-JonesBusiness Member
    Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
    5y

    @Gerardo Hernandez everyone freaks out when they first get a property under contract, especially the first one. It’s buyers remorse.

    Trust what the numbers tell you. If you can’t make the numbers work you can back out before attorney approval or use one of the contingency’s in your contract to back out. Assuming there are some.

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    11Reply
  • Gerardo Hernandez
    OP
    Member since 2021 · 34 posts · 44 votes
    5y

    @Brad L. Thank you so much! Yeah the numbers didn’t make sense and got carried away. I was able to call my realtor and they were literally about to accept my offer. It all worked out thank you! Lesson learned.

    10Reply
  • Bruce C.
    Seabrook/Galveston · Member since 2018 · 274 posts · 178 votes
    5y

    I don’t know if this was the ONLY option you had available, but don’t discount your time spent driving. You are waisting 2.5 hours a day of your life. Easily $1000 if you tack a $/hr cost to your time plus gas. Maybe an extra 2.5 hours a day gives you the time to find a great deal. And it’s not all about the money. Maybe just you live a happier healthier life because you aren’t in the car all the time. 

    Figure out what your priorities are first and go from there. I hate commuting so much that I would consider moving in your circumstances   saving my life.  That is worth not hitting a home run. Hell, you’re still doing better than most getting half your monthly mortgage paid. 

    21Reply
  • Tanya Krolicki
    Member since 2019 · 2 posts · 5 votes
    5y

    My rule of thumb is that bare minimum I need to net 300$ month after all bills are paid. Bare minimum, but I’ve always fared 700-1000$ net. This creates quite the cushion for emergencies. I’m also educated in costs of repairs so that’s basically how I originally formulated my numbers 20 some years ago. I’ve always seen the “math” that investors use on should I or shouldn’t they invest in a property, so I did the math one time. I was a cherry on top and right in line. What’s your reiterate, I educate myself in every aspect of repairs that are needed current and future, as well as to any work myself in my skill set.

    3Reply
  • Shiloh LundahlPro Member
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    5y

    @Gerardo Hernandez It is important to look at house hacking numbers differently than when evaluating a regular rental. First, you have to live somewhere so if you are able to offset the cost of your personal housing by renting a portion of your home out then it will reduce your personal monthly expenses. Then figure out what that time in the car is worth to you now and what it will be worth to you in the future. Your time has a value. But also, keep in mind your commute time. If that time allows you to consume audio books or podcasts that improve your mindset and help you learn how to invest better than your time in your car might be a predetermined study time that could help you improve your real estate investing knowledge and skills (although you could dedicate your work out or exercise time to listening and learning too).

    Basically, what I am saying is you have to look at more than just the numbers to make the best decision for you. You have to look at what the opportunity costs to stay or move would be also.

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    13Reply
  • Clint Galliano
    Real Estate Agent · Houma, LA · Member since 2016 · 240 posts · 115 votes
    5y

    @Gerardo Hernandez I saw that you rescinded your offer. As others have said, you need to put a $$-value on your commute time AND on the physical & mental stress of 2.5 hours of commute. These need to be factored in to the cost of the next property you analyze. Make sure to take into account the difference in costs of your current living situation and what it will be once you buy your house hack closer to work.

    You also want to ensure that once you vacate the property that it will cash flow enough to maintain a reserve fund and still provide you with income OR that it will have appreciated enough to bring you a gain if you sell.

    Instead of 18 months you may want to consider at least 24 & do improvements to the property to force appreciation. Then when you sell, the gains should be tax-free.

    Good luck!

    6Reply
  • Gerardo Hernandez
    OP
    Member since 2021 · 34 posts · 44 votes
    5y

    @Bruce C. @Shiloh Lundahl @Clint Galliano and Everyone else. I am aware of the cost of the driving and the toll its taking on me. I just don't want to rent from someone else anymore but I also don't want to get into a deal that might weight me down and that I might have to stay in for a long time for it to make sense. I want to start something so eventually I can have a decent passive income to be able to quit my job. Paying 215k plus closing cost was a horrible deal for my goals. I Will learn from those mistakes and be ready for the next deal that comes my way. I appreciate all of your inputs and I promise you guys I am learning and putting in the time to educate myself. I use those 2.5 hours to listen to books and podcast. 

    1Reply
  • Brock Crowe
    Real Estate Agent · Washington, DC · Member since 2017 · 3 posts · 4 votes
    5y

    @Gerardo Hernandez totally depends on your goals and your market norms in your area I currently house hack a small duplex and my mortgage is 2330 my upstairs tenants pay 2350 and I live in the basement apartment for free! For me this is a big deal since the previous year I was paying 2200 per month for my condo and hoa fee combined

    Now I’m paying -20 dollars per month for my housing this in my minds is adding almost 28k of money I no longer have to pay annually for housing! Even if I had big vacancy and repairs it would have to be really bad for this househack not to work for me.

    It seems your situation may be similar your PITI on 215k is probably going to be around 1k-1200 per month right? So maybe a duplex that 100% covers the mortgage while you live there may be a better plan?

    Totally situational if the numbers work for you then it’s a good deal! Also if your offer hasn’t been accepted yet you can pull it anytime even if the seller accepts you could say “I’m sorry I don’t think I can move forward with the property” there’s not a ton the seller could do about that and if they have multiple offers they will most likely just call the second best offer and move forward with them!

    2Reply
  • Account Closed
    Rental Property Investor · Indianapolis, IN · Member since 2020 · 562 posts · 554 votes
    5y

    @Gerardo Hernandez I would also suggest that you either have a conversation with your realtor, or find a new one. If they are pressuring you to make offers that don’t fit your plan, then they either don’t understand your plan, or they don’t understand the investing side of the transaction. So communicate with them and see if they get it. If they don’t, find a new agent.

    9Reply
  • Greg M.
    Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes
    5y

    I hate to say it, but I think everyone is being too soft on you. Running generic numbers:

    • The ~$900 rent would have covered your mortgage
    • You'd save by not paying rent - assuming ~$850/month
    • Taxes out of pocket would be ~$350/month
    • Insurance & repairs you'd pay, say $100/month each
    • Savings on commute
    • Principal reduction of around $350/month

    Basically, your out of pocket expenses would have been reduced by $300+/month, you would have been accumulating net worth because of the principal reduction by +$350/month, you had the possibility of appreciation, you'd have been able to deduct ~$7000 in interest expense from your taxes, and you'd have saved money / time / stress on your commute. The savings on the commute are hard to quantify, but you said an hour away, so figure 2 hours a day, 5 days a week, 50 weeks a year, at $10/hour (a very low estimate of your out of pocket cost and lost opportunity cost). That's a savings of +$430/month.

    Sorry, but this looked like a pretty good deal. 

    19Reply
  • Sherjil Ahmed
    Member since 2020 · 1 post · 0 votes
    5y

    Always consider net rent at least at 1% of the property price. Anything less than that and you're not making any money.

    This much I can tell you analysing rents for hundreds of properties in the last 15 months as property manager @ Kettle & Oak Inc.

    0Reply
  • Gerardo Hernandez
    OP
    Member since 2021 · 34 posts · 44 votes
    5y

    @Greg M. Yes, I understood that. My mortgage would be around 1350 a month depending on how much home insurance and M. Insurance would be. I would be living there for cheaper than rent but once I move out and saving money for vacancy and repairs that will be needed than I wont be getting enough to save for the big repairs. It just doesn't make sense for my goals that's it. RIght now I am car pulling and house hacking so its saving me money that way. I am tired of the drive but I would rather wait for a deal that makes sense for me long term. If that was a great deal well it's done now. On to the next one. Thanks for your input!

    0Reply
  • Alex Miller
    Rental Property Investor · Dallas, TX · Member since 2019 · 12 posts · 10 votes
    5y

    @Greg M. I’m with you 100%. Once he moved out it looks like it would start cash flowing decently. I think this is more a case of cold feet and nerves.

    5Reply
  • Reuben L.
    New to Real Estate · Redwood City · Member since 2017 · 8 posts · 7 votes
    5y

    I agree that as a house hack it seems like it would be a great deal as shown by @Greg M. for financial and commute reasons. 

    But as a rental after moving him moving out wouldn't it be a break even deal or slight positive? 

    Rough estimate numbers below. This of course doesnt take into account loan pay down or possible appreciation which would help the numbers out.

    Im still learning too so wanted to throw out my take on it to contribute to the conversation. 

    Income
    Both units rented           1900


    Expenses
    Mortgage (assuming PITI) 1350
    Management (10%)           190
    Repairs (5%)                      95
    cap ex (5%)                       95
    Vacancy (5%)                     95

    Net Cashflow                      75

    2Reply
  • Gerardo Hernandez
    OP
    Member since 2021 · 34 posts · 44 votes
    5y

    @Reuben L. That's what I was thinking also unless we are missing something. The mortgage payment would actually be higher since 1300 was for a property worth 205 that was about half of taxes. My rough estimate is around 1450-1600. I didn't take percentage for management but I did 10% for repairs since I seen some future expenses or things that needed to be fixed. I did 8% vacancy to be in conservative. The rent currently is 795 but I can raise it to 900 and maybe just maybe 950 but not sure since the area around the duplex isn't the greatest and the apartment needs some updating for it to be in the higher end of rents. I would be living for cheaper once I am there but I don't think once I am out of the property that it will be profitable. Specially considering the extra money I need to put into it. I placed a new offer on the property for 207k today. I don't think I will get it but if I do I will make it work. I was going to pay 1round 220k for the property after closing cost and it just didn't make sense. Best of luck to you in your journey BTW!

    1Reply
  • John Garcia
    Member since 2021 · 39 posts · 22 votes
    5y

    @Gerardo Hernandez Never pay over.

    Be patient. I know it sucks, but it the market will level out and you will eventually have more opportunities.

    Good luck!

    2Reply
  • Alex Miller
    Rental Property Investor · Dallas, TX · Member since 2019 · 12 posts · 10 votes
    5y

    @Reuben L. If it’s a house hack at the beginning the property management wouldn’t be needed so that 190 wouldn’t need to be paid out.

    Once the reality of hiring a property manager comes into play appreciation would have increased value, loan would’ve been paid down quite a bit, and rents would have probably increased a good amount.

    2Reply
  • Greg M.
    Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes
    5y
    Originally posted by @Gerardo Hernandez:

    @Reuben L. That's what I was thinking also unless we are missing something. The mortgage payment would actually be higher since 1300 was for a property worth 205 that was about half of taxes. My rough estimate is around 1450-1600. I didn't take percentage for management but I did 10% for repairs since I seen some future expenses or things that needed to be fixed. I did 8% vacancy to be in conservative. The rent currently is 795 but I can raise it to 900 and maybe just maybe 950 but not sure since the area around the duplex isn't the greatest and the apartment needs some updating for it to be in the higher end of rents. I would be living for cheaper once I am there but I don't think once I am out of the property that it will be profitable. Specially considering the extra money I need to put into it. I placed a new offer on the property for 207k today. I don't think I will get it but if I do I will make it work. I was going to pay 1round 220k for the property after closing cost and it just didn't make sense. Best of luck to you in your journey BTW!

    A 215K loan, 30Y, at 3.25% has a $935.69 monthly payment. If you're coming up with $1350, then that must have property taxes and possibly PMI and/or homeowners insurance included.

    I don't know your area, but 8% for vacancy seems high, not conservative. 8% is assuming that it is vacant once a year for an entire month. I would assume that a duplex has a vacancy rate higher than a SFR, but lower than an apartment. Therefore, probably once every 2.5 years or ~3%.

    No reason for a management company. It's two units. Your first place is the time to get your hands dirty and learn all the ways you can get screwed so you are prepared. 

    6Reply
  • Gerardo Hernandez
    OP
    Member since 2021 · 34 posts · 44 votes
    5y

    @Greg M. YES, that was with mortgage insurance, taxes and home insurance. But it was a very rough estimate. I didn’t know how the vacancy worked tbh so for future i should be going with 3-5% ?

    0Reply
  • Alex Miller
    Rental Property Investor · Dallas, TX · Member since 2019 · 12 posts · 10 votes
    5y

    @Greg M. Bingo.

    0Reply
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