Closed my first house hacking deal in Los Angeles (LA) - Part 1

22 Replies

Hello BiggerPockets Family,

I wanted to share my first purchase that I closed in LA back in August 2017. Now that the dust has settled, here is my story. I hope this reminds beginners like me that it is possible to purchase in LA. Might be challenging but possible.

History:

I bought the house I currently live in back in August 2017. Prior to that, I have been looking for a property for over 6 months at that point. All I had about $40K to my name and spent a good deal of time looking at properties, reading blogs, browsing Bigger Pockets, attending seminars. I came very close to buying a triplex in Reseda but that fell through in the last minute. The property I eventually purchased was listed on the MLS for $699k. It was a duplex in the Valley. There were 2 separate individual (non-connected) houses on the lot. The front house was a 3 bed / 2 bath with a bonus room (1100sqft) and the back house was a 2 bed 2 bath (800sqft). The property had a lot size of 6500 sqft. It has a nice little front yard and a nice patio area for the back house. There are a few fruit trees as well on the property. It also had enough room at the back to park upto 6 cars. The houses weren't maintained by the owner that well. The back house had long term tenants and the place looked dirty - wasn't taken care of or cleaned in a very long time. The owner lived in the front house in one of the rooms and rented out the other rooms.

About the deal:

I put in an offer for $700K. I went over the price to sweeten the deal since I was going with a FHA loan and there was always a ton of competition in buying that property. The agent mentioned that they had multiple cash offers. However, they were interested in my offer as I was ready to pay full price (and perhaps a little over). I was ready to pay full price as the numbers added up and secondly, as I mentioned earlier, I was on a FHA loan. FHA loan is not the most favored loan in a competitive seller's market or at least that is what I have found after putting offers on over 50 properties.

After the inspection, I found that there were more than few repairs that were put off. They were not urgent but were going to come down the line anytime now. I took that back to the seller agent. The seller agent mentioned that the owner was not financially able to fix the repairs. Instead, they offered to the reduce the price by $13K. I requested that I was willing to pay $700K and that I get a check for $13K to a contractor for the repairs at closing. There was a little hesitation from the seller initially since they didn’t understand the process. However, once I explained it to them, they were ok with it as long as the money came from the sale price. So that worked out in the end. This helped since that gave me money to fix up the place without having to search for the money and since I was approved for a loan of 700k with 3.5% down. In the contract I also requested for the duplex to be delivered vacant which the owner obliged.

After closing:

With a few repairs and touchups, both the front and the back house could have been rented out for market rents. However, my girlfriend and I decided to upgrade few aspects (namely kitchen since she loves cooking) of the front house since we were going to live in it for the next few years. Also, it would add value to the property.

So the first couple of weeks we took care of the back house doing some repairs and fixing it. We buffed the floors (rented the buffer at Home Depot and got a buffing 101 lesson on You Tube), painted the walls, got new socket plates, new appliances (fridge, dryer, washer). We also got a contractor to replace the toilet and kitchen sink with a new one. Once everything was done, the place looked great. I took photos of the place and put the pictures up online as it was ready to rent it out.

While we were working on the back house, we got the contractor to remodel the front house. That involved updating the kitchen with new cabinets, flooring, sink, appliances, made the living room / kitchen an open plan. We added recess lighting, got the laundry inside the house, converted the extra room into a gym and also painted the whole house including the tiles in the bathroom (since me and my girlfriend were experts in painting from all the experience we had from the back house).

All of this costed about $30k. That includes the $13K I got from the seller. I got a wonderful tenant that I screened myself for the back house. The rental is $2500. As mentioned earlier, my girlfriend and I moved into the front house. If we were to rent out the front house that we currently live in, I would estimate it to be about $3500 or more for it, since it was remodeled, and it looks great.

Analysis:

So I did the math (high level) using 2 different scenarios.

Scenario 1: If both the houses were rented.

Property/Deal ProfileGeneral Guidelines
Purchase Price700,0001 Percent Rule (%)0.857142857
Down Payment (%)3.50%50 Percent Rule3000
Down Payment ($)24500Cap Rate8.214857143
Interest4%Cash-on-Cash Return26.73744578
Term (years)30
Loan amount687,321
IncomeCash Flow
Rental Income 12500Total Monthly Income6000
Rental Income 23500Total Monthly Expenses5075.33
Laundry Income
Storage Income
Misc IncomeTotal Monthly Cash Flow924.67
Total Monthly Income6,000Total Annual Cash Flow11096.04
ExpensesCash-on-Cash Return
Taxes750Down Payment24500
Insurance58Closing Costs0
Water/SewerRehab Budget30000
GarbageMisc Other-13000
Electric
GasTotal Investment41500
HOA Fees
Lawn/Snow
Vacancy200
Repairs200
CapEx
Property Mgmt.
Mortgage Insurance Premium586.33
Mortgage3281
Total Monthly Expenses5,075.33Cash-on-Cash Return26.73744578
Based on the above analysis, here are the key takeaways – 1)The property cash flows - $924/month 2)Cash on cash return is 26% which is pretty good in LA I reckon.3)The main thing I would like to note is the solid Cap Rate of 8.2

Scenario 2: The actual scenario with only one rental income since we moved into the front house.

Property/Deal ProfileGeneral Guidelines
Purchase Price700,0001 Percent Rule (%)0.357142857
Down Payment (%)3.50%50 Percent Rule1250
Down Payment ($)24500Cap Rate2.214857143
Interest4%Cash-on-Cash Return-74.46737349
Term (years)30
Loan Amount687321
IncomeCash Flow
Rental Income 12500Total Monthly Income2500
Rental Income 20Total Monthly Expenses5075.33
Laundry Income
Storage Income
Misc IncomeTotal Monthly Cash Flow-2575.33
Total Monthly Income2500Total Annual Cash Flow-30903.96
ExpensesCash-on-Cash Return
Taxes750Down Payment24500
Insurance58Closing Costs0
Water/SewerRehab Budget30000
GarbageMisc Other-13000
Electric
GasTotal Investment41500
HOA Fees
Lawn/Snow
Vacancy200
Repairs200
CapEx
Property Mgmt.
Mortgage Insurance Premium586.33
Mortgage3281
Total Monthly Expenses5075.33Cash-on-Cash Return-74.46737349

In the actual scenario, I am paying $2575 every month towards the house. My girlfriend and I were already paying that when we were renting. So it didn’t make a huge change for us in our lifestyles. The added benefit, however is, I am now slowly building equity in the property and my girlfriend gets her new kitchen.

My next step is to refinance. I will write all about it in the next few weeks.

If anyone has any questions, please let me know. I am happy to help.

Thanks

Nice job @Vinay C. ! Way to use all the resources at your disposal to get into the REI game! Looking forward to hearing about your next acquisition!

Cheers!

@Jon Crosby Thanks. I just downloaded your app. I work in tech in the mobile app space. Curious to test the app out. Will give you feedback :) 

Way to go! I loved reading your story especially since I am also a newbie in the LA Valley. What seminars are you attending?

@Aaron Sladek thanks for reading and glad you enjoyed it mate. I went to Sams real estate seminars inWest LA. You can also catch them online. They do seminars on Wed. It’s $7.99 to watch it online. Also attended the LAREIC meeting in West LA. They have cool tips and pointers but are sales at the end which I am not a big fan of. Let me know what you are looking for in particular and I can point you in the right direction perhaps. 

@Vinay C. Great read and great inspiration! Keep up the great work. I am looking to buy my first house hack with a FHA loan to start off. I am also looking to meet with people like yourself who have done deals in LA and to meet possible mentors to learn from. I appreciate your help in pointing me in the right direction!

@Aaron Sladek Are you looking to do flips or buy minor renos and hold? What part of LA are you looking at? FHA is a good starter program to go with, since you only have to come up with 3.5% down. I also came across a program where you put 5% down with a higher interest buy no Mortgage insurance. I would look into that too since then you can write that off with against your taxes. All the best with your search mate.

Loved reading your story. I am looking forward to hearing about the refinancing ! Thanks for sharing about the seminars as well. Do you have any other tips for educational courses that you used along the way? Also, what is the program you mentioned with 5% down and no mortgage insurance?

@Vinay C. I am looking to start out with minor renos, house hack and hold. I am currently looking at Inglewood area. Thank you, I will look into the 5% down program. Thank you and congratulations again on your first house hack!

@Andrea Barbee Check out Onewest bank. I haven't personally talked to anyone or looked into it in detail over there but heard they can do that. The interest rates are little higher though. I couldn't find the other link where I saw that as well. If I come across it, I'll let you know. I also listened to the commercial real estate investing for beginners by Peter Harris on Udemy. Its a free course you can do. I skipped through the different kinds of commercial investing and focused on apartment investing as that is more of interest to me. There were points like forced appreciation he mentioned that I wasn't 100% aware of at that point. Also he talks about finding a management company, what to ask them, what to look for etc. Eventually I will be needing those and I found those topics of conversation fascinating. Also the biggerpockets podcasts was good to listen and learn from. I also love browsing redfin, zillow, MLS, loopnet. I look at the cap rate / location / breakdown and decide if its a yay or nay for me. Right now I am focusing on the local area around where I live. i.e. LA. See how it goes. Hope this was helpful.

@Aaron Sladek Smart move going with minor renos I reckon. It helps you build relationship with handymen and contractors, helps you learn the ins and outs of the process a little bit. I did the same. Inglewood is a good place to look at. The cap rates are slightly higher than other areas. I don't know the area well enough but I have heard people on other posts on biggerpocket mentioning it. 

Thank you, I was thinking minor renos to add value to the property. Good idea, do you have any recommendations for contractors/handyman at any of the meetings you have attended? Where in the valley is your house hack?

Congrats on your purchase!

Was that 4% rate with a buydown? What lender are you using? That's pretty competitive for FHA right now.

@Clarence Johnson This was back in Aug 2017. The interest rates were lower compared to what they are today. I had FHA loan options of 3.75, 3.875 and 4%. I took 4% so that they paid for my closing costs. Today I believe this is hard to get. I went for 4%, so I could spend less out of pocket. Also I knew I was going to refi since I would want to get rid of the PMI. My lender was Stearns Lending. I would also suggest checking out CCU (California credit union). Their 7/1 ARM is about 3.875 about 8 weeks ago. That is what I ended up refinancing it for.

@Aaron Sladek My place is in North Hollywood. I will PM you more about the contractor. 

Makes sense, wheres my time machine lol.

@Clarence Johnson the interest rates are all relative to the deal though right. It makes it a tad bit more challenging to find that unicorn in LA. I see that you are a realtor and invest in buy and holds. Have any multi-fam on your list in the LA area with a cap rate of 7+? 

@Dahrian Barrett cheers mate 👍🏽👍🏽

@Andrea Barbee @Aaron Sladek FYI

The agent I worked with has partnered with a lender who is doing a 0 down program for first time home buyers. Not sure if this is of interest to anyone. If you are interested, DM me and I can send you his info. 

Have a great weekend. 

How's the house going? Did you refinance?

@Jeff Asher Yes I refinanced last year and yet to write a post on it. Will get around to doing that in the next couple of weeks :) 

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