Goal Achieved: Duplex House Hack

32 Replies

Hey BP Family,

I want to thank you all for the great advice I've received over the last few months; it's all starting to pay off. A week ago today I closed on a duplex in Olathe, KS using an FHA loan. Two days later, I moved into one of the units. This was one of the goals I set for myself more than 6 months ago and it is on my profile as a goal (I'll be checking it off the list as soon as I post this). One goal down, many more to go.

For the record, the unit I don't live in was and currently is leased to a pre-existing tenant.  There have already been many stressful nights with moving and with maintenance calls, and I'm sure I'll have many more because I am determined to build a profitable business not only as a real estate investor but also as a property manager.

  If it was not for Bigger Pockets and the teachings of Robert Kiyosaki, I may still be renting and wondering why I am not anywhere close to financial freedom.  I've been a renter my entire life, but now I can finally say I'm a home owner and it feels great!  I can share a ton more information about the duplex, the deal, and the drama if anyone is interested.  For now, let's just stay things have been interesting and I'm really looking forward to receiving that first rent check.

I want to point out also that this could not have been done without @Tracy J. .  She was such an asset to help me with all the stress of packing, moving, and unpacking.  It's always great to have quality people in my life, especially when performing something as daunting as becoming an overnight home owner/investor/landlord in a town you've never lived.  Thanks Tracy.

@Edward Stephens

Congratulations and clearly you have demonstrated the ability to take action. Yes, there will be some minor bumps  along the way as you become a landlord, but, these issues will lessen as you gain knowledge and experience in handling them.

Good luck and best wishes on your REI journey!

Congrats, Edward.

I think the FHA (or VA) owner occupied 2/3/4-plex has got to be one of the best deals Americans have to get started in (profitable) REI. I own my own (mortgaged) house, but am working on a deal to buy/occupy a duplex for cash flow.

I'm sure others here would join me in encoraging you to share your good/bad experiences as a new landlord.  Sometimes advice from the "experts" is harder to relate to.net 

Originally posted by @Jeff S. :

Congrats, Edward.

I think the FHA (or VA) owner occupied 2/3/4-plex has got to be one of the best deals Americans have to get started in (profitable) REI. I own my own (mortgaged) house, but am working on a deal to buy/occupy a duplex for cash flow.

I'm sure others here would join me in encoraging you to share your good/bad experiences as a new landlord.  Sometimes advice from the "experts" is harder to relate to.net 

(1)  I absolutely love people.  I love interacting with people, helping people, and creatively working together to solve problems.  Landlording has challenged me to do this to a large degree.  It is helping me with creative thinking, negotiating, and interpersonal skills which are invaluable in other industries I will find myself in (e.g., real estate agent, property manager of others' units, real estate investor, and fund raising sponsor).

(2)  You must absolutely know the deal's numbers backwards and forwards.  I did the numbers over and over and over again as new information was available.  I always used the rental property calculator on bigger pockets and it helped a ton.  The further I got in the deal, the more accurate would become the calculator's result.  For example, I estimated my initial insurance.  As the deal proceeded and as it looked like we might be able to come to a final agreement, I got quotes from several insurnace agents, selected one, and put that quote in my rental property calculator to refine my numbers.  The whole idea was to keep my rental property calculator as accurate and precise as possible as the deal progresses to ensure I'm always cashflow positive with enough margin.  A few things you can refine as the deal progresses are: closing costs, insurance, utilities, and loan interest rate.

(3) Read the leases that are currently in place with existing tenants.  I did not read these leases until after I had signed the final loan agreement, and it was my lender (not my realtor) who told me it was foolish to do this deal if I had no idea the kind of lease agreement I was stepping into.  And that is so key.  Of all the BP podcasts I've listened to, I've never heard @Brandon Turner  or @Joshua Dorkin discuss this super important point.  When I bought the property, I inherited the lease.  As the new landlord, I am bound to that lease, for good or for bad.  Read the lease agreement with a discerning eye (as I did not until it was too late), and look for those pitfalls or loopholes that could have you at the tenant's mercy.  Mine has some kind of weird clause about how it's $5 per day for late fees until the tenth day, at which point it escalates to $10 a day.  With this kind of language in the agreement, I feel less able to evict in the event of untimely payment (a very real problem at this very moment).

(4) After reading books, listening to probably hundreds of hours of BP podcasts and hundreds of hours of other real estate seminars, taking real estate agent courses and becoming an agent, and analyzing probably a 150 deals, bidding on several, negotiating in 5, using 2 real estate buyer agents, and conversing with a dozen or more seller's agents, I have found the vast majority people in real estate investing have no idea how to help you analyze your deals.  The few people that do ( @Brandon Turner , @Joshua Dorkin , @Ben Leybovich , and several others that have been on the show) should be listened to intensely.  I asked my first buyer's agent if he'd look over my numbers that I'd put together for a deal we were trying to do.  He said, "Looks good!".  Then when the seller's countered my offer, he was confused why I would not offer more money.  "Because that's the most I can spend and still be cashflow positive" was my response.  To which he replied, "Well, I get all that.  I get the numbers stuff, but sometimes it's about more than numbers.  It's about emotions and making the seller's feel good about the deal to.  So, you should offer more anyway."  In the next deal, he tried to convince me to make up the difference when an appraisal came back $25k below sales price.  He was then fired. My second buyer's agent was not much better.  He could not understand the "2% Rule", even when I explained it.  He also recommended a property I later bought would be a great deal if I bought it at $190k, even though I told him the property couldn't (by my estimation) cash flow unless I paid $184k or less.  I got it for $184k.  The appraisal later revealed the property was worth $188k.  I was right, he was wrong.

(5)  Most landlords as a general rule have absolutely no idea what they are doing.  In my estimation, these landlords overpaid for the property, have no experience in what it takes to manage tenants or property, and will throw anyone into a unit, regardless of credit score, criminal background, monthly income, employment history, or rental history.  They do this in part because of desperation - the landlord is losing money every month because of inaccurate cashflow projections and does not have enough leads to lease his property because of ineffective marketing.  In the end, he settles for a sub-standard tenant who becomes a huge headache for him.  Why is this a problem for me (or you)?  We already know how to screen tenants, so that won't happen to us, right?  It's important because you'll find out very quickly (as I did), that these un-vetted tenants become your tenants when you buy the property.  So buckle up and prepare for an eviction immediately.  And as difficult as an eviction may be, it's even harder (and scarier) when you house hack a multi-family dwelling.  Do you feel safe going out to your car at night when the neighbor knows you're throwing them out?  Are you ready for a showdown?  It's not like evicting a tenant in one of your trap houses on the wrong side of town - make a few phone calls and the sheriff is over there throwing their console TV onto the lawn.  In my case, this is my home too.  I live here 24 hours a day.  I can't hide.  They know me and I'm totally vulnerable.

(6) Have reserves on day one. The reserves should cover an immediate eviction and vacancy for at least a month while you repair the unit, get it rent ready, and market it for a new tenant. If you are househacking a fourplex, be ready to evict 3 people. DO NOT wait for the first rent payment to come before you start to build your reserves. That tenant may decide never to pay.  The reason I say this is because of what I said in "(5)" above: the landlord you bought from more than likely did not properly screen this tenant, meaning they'll probably pay late (if at all) or do other things that deserve eviction.  In my case, I lucked out.  I had a couple thousand bucks left over from a 401(k) withdrawal and was going to use it to fund some fixes on my unit. It doesn't look like that's going to happen. The money is instead being used to fund the cleanup of a backed-up sewer line into the tenant's half-finished basement (where a bedroom existed). The money is also being used to spray for roaches in both my and the tenant's unit. I didn't know there was a roach problem when I bought the property.  The tenant is currently 1 day late on rent and I haven't received a rent check yet.

(7) Understand your agency agreement, meaning find out to whom the agent owes his loyalty.  For whom is he working?  I always had exclusive buyer's agency agreements with my agents - they worked only for me, and I worked only with them, not with other buyer's agents.  I made the mistake, however, of telling my buyer's agent how much I was willing to spend.  As I later learned, even if your agent works for you, don't tell them anything you don't want the other side to know.  I might have saved thousands on the property by not letting my buyer's agent my highest and best offer.  Somehow the property's price magically fell from $199k to $184k in a single phone call after I told my agent "We have to be able to get this property for $184k or less, so my offer is $180k."  The seller's counter was $184k.  I think my agent may have told the seller's agent, but I have no way to prove that.  

If there's anything else I can expand on or answer, let me know.  i'm always happy to share.  I feel a little self conscious posting such a long post, but hopefully it helps some of you.  I welcome your feedback.  Thanks.

Thanks Edward for all that detail.  A lot of things I never would have thought of.  Evicting a neighbor, for example - creepy/scary and not something I had thought of before.  As a newb I still imagine all my tenants being good/nice/happy/reasonable, so its helpful to get these little realty checks. 

Congratulations on the house hack. I did the same thing. Found a duplex with an FHA loan. I rented one side and lived free on the other side. The plan was to move out and rent both sides but my wife fell in love with the property.

Are you cash flowing with just renting one unit out?  Or running numbers if you were to move out down the road, then it cash flows.  Thanks and great job.

After I purchased my duplex and moved in I planned on managing it myself. I did that for around 6 years.  What a pain the rear... Tenants constantly moving out or taking advantage.  Unless you know how to proceed legally I would recommend against self management because they will walk all over you.  Also, you're going to have to work with people, but not appear weak in doing so, everyone has a sob story as to why they can't pay rent, I can't tell you how many times I came out of pocket to cover their obligations.  Also make sure to have an airtight lease agreement otherwise you'll have people putting couches in your front yard to lounge in.  What the heck?  Anyway, another good idea is to charge them for trash and pay it yourself, otherwise inevitably you Erik have tenants that store it in the garage until they move, then you get to pay to get rid of it.  If you don't want smokers sinking up your investment DO NOT TRUST THEM when they promise they will only smoke outside.  They are lying to you.  Once I switched to a property manager it was one of the best decisions I could have made.  I have made more money with much less disruption since I've had them.  I'm cheap but 10% is worth having someone else deal with it all.  And like I said, even after the management fee I'm making quite a bit more money that before having them.

Originally posted by @Kyle Nagle :

Are you cash flowing with just renting one unit out?  Or running numbers if you were to move out down the road, then it cash flows.  Thanks and great job.

 Actually I've also rented out my master bedroom in my unit.  You can read about it here. My PITI is $1227/mo and the gross rental income is $900/mo + $415/mo = $1315/mo. Does it cashflow? I would say no, because there are maintenance costs and capital expenditures I've incurred since I've lived there the past two months (i.e., re-carpeting, tree removal, and new gutters). I predict it will cash flow before the end of the year though, because I will be able to raise rents.

Hi Edward.

Did you use any of the "rules" when analyzing your property? It doesn't look like you make the 50% rule.

What's your cash on cash look like?

I'm really struggling trying to find a property that is a deal. Did you find this property on the MLS? You said you became an agent, but you also said you had a buyers agent.

I'd love to hear back from you. Congrats on the purchase.

@Alexander Ball :

 I adhered to the 1% rule.  It turned out that market rent was: 

$965/mo x 2 units = $1930/mo

The purchase price of the duplex was $184,000.

1% Rule: $1930/$184,000 = 1.05% PASS

As far as my cash flow goes, PITI and escrow costs total to $1227/mo, and factor in $500/mo for vacancies+maintenance+capex for a grand total of $1727/mo in expenses. Assuming I get $1930/mo, the unit will cash flow $1930/mo - $1727/mo = $203/mo. The bookkeeping is a little weird right now, because I'm paying myself rent, and the tenant's rent is below market value (and will be until May).

I wasn't able to find any deals on the MLS that met my criteria. This property was originally listed at $205,000. Guess what I did. I offered $180,000. And got it for $184,000. I used the BP rental property calculator, applied my 1% rule, and made an offer. I had a buyer's agent and he wasn't thrilled with my offer, which made it even funnier when I got the property. BTW, I got the buyer's agent because I'd rather split the commission 75 him/25 me with a guy that knows what he's doing and is comfortable with all the paperwork, while I focused on managing my life during all the upheaval of house shopping and moving.

So the property was listed at 205, and then it came off market? And you saw that it was previously listed at 205k from your MLS access and approached the seller when it was off market?

Sounds great.  I'm looking at 4 on-market duplexs tomorrow.  I hope my buyer's agent doesn't shoot me when I tell her what I'd offer on them.  I'm hoping 10-15 offers means I get one deal.


Let me begin this reply by saying I know nothing about Kansas LL/T law, but I am familiar w/those laws in Pa and NJ, so the following should not be construed as legal advice.  

In regards to the pre-existing lease w/your tenant, the penalties for late payment you refer to are common.  They are usually added to the amount due and owing if and when the tenant finally pays the rent.  They are an additional remedy to the LL to make up for not getting the rent on time, and not a mechanism to relieve the tenant of the duty to pay the rent on time.   Usually eviction is still something a LL can avail himself of if the rent is not paid when due.  A consultation with a lawyer might clear up the issue for you, and many times will only cost $25 or so for half an hour.  You can call your local bar referral service for a few names, and they'll tell you the cost.

Don't let a tenant who's not paying stay!

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