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.
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.
Please analyze and help me understand how is it a good deal.
Price: 214,900
Closing cost: 3500
Taxes: $4500
Home insurance: 1900/year
Morgage insurance: 1900 (could be more )
I am doing 3% down
Interest rate: 3.25
The house does need some repairs but current rent is 800 could increase it to 900 and maybe 950 if I remodel to compete with similar apartments.
So your cost is 3% down and you roll closing costs into the mortgage. Monthly payment is $923. Let's assume your numbers on taxes, PMI, and homeowners insurance are correct (even if they are off, it's not going to make a big difference). Your monthly payment is now $1615.
You collect $800 rent. You live in the other side at a cost to you of $815. I'm going to assume that your current rent is about the same.
Over the first year, you'd have received $4243 in principal reduction. That's $4243 in equity. $4243 adding to your net worth.
You'd have paid $6825 in interest. Assuming you're in the 25% tax bracket, that's $1706 that you get to keep instead of giving the government.
So your out of pocket is basically break even, but you're building up equity at a pretty nice pace, and you're paying less in taxes.
Now let's talk about your commute. Saving two hours a day driving. Saving money on gas and wear and tare on your care. Your mental health improving - which improves your overall health. Value to that is priceless.
You achieve all the above for a $6,447 down payment. You get a 92.3% first year return.
Rents go up. Principal reduction increases. Most of these easily outpaces repair expenses.
Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
5y
@Tanya Krolicki
You are talking about "math" but your $300 a month net profit seems to be irrespective of the ARV of any houses you are referring to. So much for "math."
@Gerardo Hernandez If you didn’t feel comfortable analyze the next one with the BP calculator and hopefully you’ll feel better.
Had a coworker tell me today she was planning to buy a 3br/2ba SFH for under $150,000. So I showed her a pocket listing that would make her a great house hack for $250,000 that my realtor sent me a bit earlier. I explained to her she'd never find a house like that in that price range in our area and suggested a multi family. I told her I'd help her analyze it. She insisted I didn't know what I was talking about!
You must be very vigilant to land the good deals constantly searching the MLS, sending letters to potential owners off market, thinking outside the box. I know you can do this! Don't let the first one get you down! Forget about this one and move on to the next. You've got this!!
Tampa, FL · Member since 2021 · 108 posts · 68 votes
5y
If you're in an appreciating market, run the numbers. Your first house hack is never going to get you a home run in todays market. Aslong as your mortgage not including PITI can be covered, just relax and get the house. This is the name of the game right now unless you want to move to a different city where you can find a home run house hack.
Based on the numbers you mentioned, $900 covers half the mortgage on the property. Is this cheaper than rent in the area? Can you potentially update the units over time with your cost savings through rentvesting to get higher rents like 1100? Is the market appreciating 5%?
To many people getting caught up in the hype of perfect BRRRR's or perfect House hacks when the reality is those don't really exist and neither do HML lenders who finance 100% LTV for someone with less than 10 deals under their belt unless they are a friggin rockstar.
99% of people fail in this business... within that 1% who doesn't fail 50% make a huge mistake on their first deal... 25% move on to do big things... 20% get to 50-100 flips a year... 4% are able to 1031 their way to larger properties and portfolios.. and the last 1% become developers with 50+ million projects (think donald trump)....
Run your worst case scenario numbers and run your best case scenarios... run your appreciation... run amortization... run tax deduction incentives.. compare against alternatives... and relax.
Honestly though, if the market is the way you say it is and you need a place to live; this isn't the worst situation you could be in. Sounds like the next offer isn't going to get any better. You're winning also at that great interest rate and have rental income helping you as well. If it will eliminate the hours long drive that is a plus as well. Is it the greatest deal maybe not. Can you in anyway improve on that property to go back and cash out to put towards a better property?
If you do buy, just make it your next step to buy an undervalued property cash. Find a partner that has the funds to do help you.
New to Real Estate · San Diego · Member since 2020 · 41 posts · 14 votes
5y
@Gerardo Hernandez
Hi Gerardo. I am a newbie to real estate too and trying to find a deal here in my backyard in California.
I don’t have much experience and I am not here to say if it’s a good or bad deal and keep beating you down.
I just wanted to say that I relate to the emotions you went through and it’s completely okay to back out if you don’t feel it’s right. You can always find a similar deal. It’s a learning experience.
You may not even find another in this hot market, but that’s still not worse than getting into a bad deal.
It’s the same fear which is preventing me from submitting even my first offer.! But I have other concerns in my market where I have to depend on appreciation for at least a decade for me to reap the benefits and come out of negative cash flow!!
Hi Gerardo. I am a newbie to real estate too and trying to find a deal here in my backyard m but in California.
I don’t have much experience, but I am not here to say if it’s a good or bad deal and keep beating you down.
I just wanted to say that I relate to the emotions you went through and it’s completely okay to back out if you don’t feel it’s right. You can always find another similar deal. It’s a learning experience.
You may not even find another in this hot market, but that’s still not bad, than getting to a bad deal.
It’s the same fear which is preventing me from submitting even my first offer.! But I have other concerns in my market where I have to depend on appreciation for at least a decade for me to reap the benefits and come out of negative cash flow!!
Don't be afraid to break into other markets! It can be done.
Leclaire, IA · Member since 2016 · 161 posts · 130 votes
5y
@Gerardo Hernandez
If you really want out when they counter just drop out. But remember some deals that start out lean
End up being great investments over time. Especially if you are young and have a long term view. Additionally if the location is good it should help long term.
Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes
5y
@Gerardo Hernandez - I also hate commuting so I have always rented a furnished bedroom in the area usually 5 minutes from my workplace for $400-600 utilities included. Usually when you’re renting a bedroom you can have a flexible lease in case your job changes again. You can find rooms for rent on Facebook marketplace, zumper, hotpads, craigslist (less so now), Facebook local yardsale/rental groups, Nextdoor, and community or church board classifieds. Airbnb can also be an option where you locate a room that’s not rented in the future, then book it long term off platform after staying a day or week or whatever. I found one roommate that way who booked for a month and stayed a year and a half until I rented the house for a year to students.
Overall 3% down and a 3.25% interest rate is a great deal. So what if you overpay today. Someone showed you a calculation with almost a 100% return on your investment year one between less out of pocket rent, mortgage principal paydown, additional tax writeoffs, etc. If you improve the quality of your side of the unit, you can rent your side for more money and move into the other side when it goes vacant. You can get a roommate or Airbnb your unit when you’re traveling. My house hack was buying a 5 bedroom 3 bathroom for $255k (there were multiple foreclosures on the street for this price at the time) and renting the 4 spare bedrooms for $2200 plus 4/5 utilities and paying a mortgage of $1500. So I was paid approx $700/mo to live in my house while sharing the kitchen and laundry with 4 other people who were usually in their rooms or out doing stuff so I barely saw them. Plus the $600-700/mo benefit my room was worth. Plus the $300/mo principal paydown. Plus the benefit that my property appreciated to double over 10 years (not as great as San Fran or Austin but I’ll take it). And vacancy and actual maintenance expenses were relatively low. So, did I win? Absolutely. Do you think the lenders will be offering 3% down loans if there’s a huge spike in foreclosures that may drive down prices? Probably not.
The main reason not to buy a house hack near your job is if you think you’ll move within 2 years.
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
5y
@Gerardo Hernandez actually if the utilities are separate, the taxes decent and the place is in pretty good shape, and it’s a decent town with some upside, then the numbers are pretty decent, especially if u like living there. If it’s a cash flow only low end tenant and sale to another investor? Nah.
I don’t think u needed to panic but I don’t think u are missing the deal of the century if u are out.
A house hack that’s cash flow positive at all based on the two full rentals whith only 3% down? Not bad.
St. Johns, FL · Member since 2018 · 23 posts · 5 votes
5y
@Sherjil Ahmed seems pretty hard to meet the 1% rule in many parts of the country right now. A huge influx in North Florida is driving purchase prices sky-high. In these situations, the appreciation side of the spreadsheet starts to weigh more. Do you agree or disagree?
@Sherjil Ahmed seems pretty hard to meet the 1% rule in many parts of the country right now. A huge influx in North Florida is driving purchase prices sky-high. In these situations, the appreciation side of the spreadsheet starts to weigh more. Do you agree or disagree?
Man north fl is going nuts right now. I was thinking about pivoting to Jax, but even that has gotten obscene and it won't get any better. especially not once you calculate inflation over the next 5 years going into 2025 when we get our first rate increase.
looks like you let people talk you out of this property. in my opinion it wasnt a bad deal. your renter would have paid most of your mortgage. you would be living almost for free, traveling less which also saves you money. i had an offer to make 10k more a year recently but after adding in the gas, oil changes, tire wear and added potential for things to break on my care it came to over 7500 a year in expense for me. you should have stuck with your guns.
Dentist · Taylorsville, UT · Member since 2013 · 102 posts · 68 votes
5y
@Gerardo Hernandez
Your first deal Will never be perfect. The most important thing I look for is the cash on cash return-shooting for 7% to 10% minimum. Monthly rents - prop mgmt/mortgage/taxes/insurance/repairs/vacancy.
If this one doesn’t work out keep making offers. Once you get one down the second one gets a lot easier.
Investor · Searcy, AR · Member since 2018 · 53 posts · 39 votes
5y
the market will not stay hot! we have a shortage of supply which is driving prices up and a lot of what is out there is not the good stuff. when foreclosures start the market will crumble and the person who paid 215 will be selling to you for 170 and hoping you offer that. look for deals and make sure they work in your numbers. things are nuts right now and you do not want to get caught up in something or you will be the guy praying someone will buy your building at 175. be very careful out there!!!!!
@James Hamling Imagine this...you buy a house for 200k, 20 percent down, so 40k. Now, instead of cashflowing 200 per month, it is 0. Over 30 consecutive years. Now the market is cut in half. Your 200k house is worth 100k. 30 years have passed....how did you do? Up 150 percent. That is if basically Armageddon happened. Time in the market is key
Didn't Buffet call that his "Buffet'ism" rule #1 or #2; "it's not about timing the market, it's about time IN the market".
And on that line, I have been asked so much about "what if housing collapses again, value drop 50%, I will loose 50%....." NO you won't loose anything! I have a close friend who bought a duplex and closed I kid you not 3 days before the housing collapse, in 72 hrs he saw his investment $ fall off a cliff. At bottom he had more than 55% drop in value, and he never lost a cent, because he didn't sell. It's just that simple, DONT sell at the bottom. And as those of us know from 08/09, rents shot UP, not down.
Now, that same guy who was more than 55% in the red, just sold and is at $170k net on the sale. So that's pretty darn good proof for today, he bought at "THE" height of prices, just held it and now is nothing but happy about it. Time IN the market, far superior to timing the market.
the market will not stay hot! we have a shortage of supply which is driving prices up and a lot of what is out there is not the good stuff. when foreclosures start the market will crumble and the person who paid 215 will be selling to you for 170 and hoping you offer that. look for deals and make sure they work in your numbers. things are nuts right now and you do not want to get caught up in something or you will be the guy praying someone will buy your building at 175. be very careful out there!!!!!
This is an easy one because not 1 single thing you say here is correct, or accurate, or based on facts, data, logic, knowledge of experience. Fact is your the problem Ricky, your like that commercial where a guy says he can do brain surgery not because he's a surgeon but because he stayed at XYZ hotel the night before, the definition of ingnorant arrogance.
The supply shortage today is from 08/09 collapse, this experience today started back then and I know because in 2010 I was one of the Building experts who was blowing the whistle on this future problem that would happen, and we were ignored and belittled by arm-chair-quarterbacks and now here we are.
This situation will not change for years, many years, 7 more years minimum. UNLESS there is a mass sudden population decline to alleviate housing needs, last estimates was about 30million but if 10million died tomorrow that would help. How realistic does that sound, 10million Americans dyeing tomorrow?
Ok, than how about lowering cost of new units by 20%, how realistic is that? How about an easier one, lower the cost of a hamburger by 20%, it's just burgers, give that a whirl before trying to lower cost of housing and it's 4,000 components.
Ok, so costs won't lower, supply shortage and demand not going to lower, but still your gonna preach some foreclosure something will happen and what, foreclosed people will all go and live under bridges? Tents? Cardboard box's? No, they will all become tenants. So do the math, if a home owner becomes a tenant where does that housing unit come from????? it's called an off-set. There is not only nothing economically making a foreclosure event possible but reality is there is enough absorption rate out there to buy the entire 08/09 collapse 4 TIMES! FOUR!!!!
So all you gotta do to be correct Ricky is either kill 30million + people tomorrow, get the entire housing industry, all it's labor forces and every manufacturer of 4,000+ items and distributors to lower prices 20%+, OR have 500% the number of foreclosures in 08/09 which is only something like 70% of all owned real estate in the entire US so yeah...... good luck with that, may as well do some easier tasks along the way like cure cancer.
Please analyze and help me understand how is it a good deal.
Price: 214,900
Closing cost: 3500
Taxes: $4500
Home insurance: 1900/year
Morgage insurance: 1900 (could be more )
I am doing 3% down
Interest rate: 3.25
The house does need some repairs but current rent is 800 could increase it to 900 and maybe 950 if I remodel to compete with similar apartments.
So your cost is 3% down and you roll closing costs into the mortgage. Monthly payment is $923. Let's assume your numbers on taxes, PMI, and homeowners insurance are correct (even if they are off, it's not going to make a big difference). Your monthly payment is now $1615.
You collect $800 rent. You live in the other side at a cost to you of $815. I'm going to assume that your current rent is about the same.
Over the first year, you'd have received $4243 in principal reduction. That's $4243 in equity. $4243 adding to your net worth.
You'd have paid $6825 in interest. Assuming you're in the 25% tax bracket, that's $1706 that you get to keep instead of giving the government.
So your out of pocket is basically break even, but you're building up equity at a pretty nice pace, and you're paying less in taxes.
Now let's talk about your commute. Saving two hours a day driving. Saving money on gas and wear and tare on your care. Your mental health improving - which improves your overall health. Value to that is priceless.
You achieve all the above for a $6,447 down payment. You get a 92.3% first year return.
Rents go up. Principal reduction increases. Most of these easily outpaces repair expenses.
Far too many are going to skip over and miss this example of ACCURATE COMPLETE PICTURE analysis.
That should be a whole other thread Greg, why so many are obsessed with just using rules of thumb analysis and terrefied of doing complete cost vs benefit analysis, with timeline projections.
My analysis calculator is something like 80 lines and 200 columns, and it's nothing fancy just, accurate.
Investor · Searcy, AR · Member since 2018 · 53 posts · 39 votes
5y
James,
let me rephrase my comment. IF you can find a deal where the rent will cover, Debt, Insurance, taxes, termites, vacancy, maintenance, and capital expenses then I say it could be a good deal. Remember to throw in all of your closing costs and fees as well. AND do not forget you could get a renter who does not pay and Joe will give them a pass so they do not have to move out!! MOST people never plan for all of these items. Now, would I drop $$$$$ into a deal that will cover those items and not have a return other than hoping the value of the investment goes up?? Depends. Would I do that at the present time? NO WAY!!! I am not a realtor. I am not trying to make money by telling someone to buy a piece of property so I can make a commission. I am saying to be very, very, very, very, very, very, VERY, weary of those who are trying to sell someone something that could or could not be a good deal!!! IF someone is trying to tell you that something is a great deal have a contract written up saying any money that is lost, the individual selling you such property is liable for the loss and they will repay you any such losses!! It ain't happening!!
Now lets talk about if's. You say the market is fine. I say the market is not fine. If what you say is going to happen then great. I do not have to worry about rents dropping or the values dropping. If what I say happens then those who break even in todays market with rents at what they are will: A) continually have to add money to their investment out of their own pocket or B) will sell with a loss. Either way that is not a great idea!!! I am pretty sure Warren said "what are the 3 rules to investing?? never lose money, never lose money, never lose money!!!!!!"
Typically banks will make you have a15% down payment on investment property. Why do you think that a lot of banks are increasing those percentages??? They do not want to lose money on the deal either. If a bank is increasing those down payments a huge light bulb should go off in your head warning you that something is not correct out there.
My question to any one buying investment property or who has never bought investment property before is this. Be very careful taking any advise from someone who makes money on the deal!!
My advise is do your homework!!! Run your numbers!! Know your market better than anyone else, or at least you should because you have money on the line!!! Remember, statistics are like noses everyone has them and they all can be picked at!!!!!