I live in Middlesex County NJ with my fiance. We have been staying rent free at her parents for about 6 months since our apartment lease ended. For the past year we have been looking for an investment/first home purchase. We were looking at live in fix and flips and small multis up until about March of this year when we pivoted to focus strictly on house hacking. The idea behind that was since the price of materials have gone up so much, buying a house that needed a 15 or 20k rehab would actually cost us 30 or 40k, and could prohibit us from buying another home next year. Our goal is to buy a house every year for the next 5 years.
Now we have an offer accepted on a duplex in South Amboy NJ. Its the first time we actually played the "offer over asking" game and we ended up winning. I have to say it doesn't really feel like we're winning anything. We are still in Attorney Review and I'm not sure if it's buyers fatigue or if I'm actually realizing the numbers are as bad as they are.
List price: $525,000
Offer: $535,000 full inspection and appraisal contingencies
Down payment: $80,000 (15%)
Monthly PITI $2,950
The property is a top / bottom duplex with 2bed/1bath in each unit.
Currently fully owner occupied, the potential rents are 1950 in each unit making total monthly income around $3900
So as you can see we are very far off the 1% rule (0.85% is more common for my area but in this case it's 0.73%)
As a house hack, we'd be living for about $1,000/mo. That is semi cheap for what we'd be getting in our area, but we need to come out of pocket almost 100k to have the opportunity. Doesn't feel like a win.
We plan to finish the attic to add a 3rd bedroom in the upstairs unit, spending about $3000. When this is accomplished the 3/1 upstairs will rent for 2200-2300.
SO, after we move out, here are the numbers.
1950 + 2200 = 4150 gross monthly income
4150 - 5% capex - 5% maintenance - 5% vacancy - 5% management = 3320
3320 - 2950 = $370/mo in cash flow
370*12 = $4440
4440/105000 = 4.2% Cash on Cash return.
Now the whole point behind this post is I am worried I am sacrificing finding a better deal, a better use of our money, just to get started investing in real estate and to have a place to live. I feel like I'm throwing up my hands and saying "in this market and in this area that's the best I can do"
We've put so many offers out on homes with better numbers but we've been outbid every time.
Every week when I see new houses that come on the market I think to myself "I can't imagine how anyone's making money buying at those prices" and now I am in the same position.
I've read a few posts about duplexes under appraising and people in similar situations to mine. I'm thankful we are still in AR and I have a day or two to receive feedback from this wonderful community that has taught me so much.
Sorry for the long post and if you're still with me thank you so much for reading.
@Emilio Attardo a few questions and comments:
-You said that you're in the Attorney Review period, do you have inspection and financing contingencies as well?
-5% management is low, I would assume 10%.
-Are there any utilities that the owner pays, like water or sewer, or is every single last one split and payable by the tenant(s)?
-Are there any grounds or maintenance costs, in addition to capex and repairs?
-You mentioned "potential" rents, but what are the actual rents? Are you going to keep the one tenant in place? Do you have a copy of their lease? Are they current on payments?
-Do building codes allow the attic bedroom to be counted as an actual bedroom?
-What's the projected ARV when the rehab is done?
@Nicholas L. Hey Nick, thanks for the reply. Here's my answers to your questions in the order you asked them.
-Yes we have full contingencies on financing, appraisal and inspection.
-I assumed 5% management because I am going to be self managing and I have yet to find a property that cash flows with 10% management.
-All utilities including water are separate
-Landscaping and grounds is lumped into the 5% maintenance cost.
-The actual rents are unknown because the property is fully owner occupied and will be delivered vacant at closing.
-The building codes in South Amboy do not allow the attic room to be an official bedroom but many properties in the area list the attic as a "bonus room" which can be used as a bedroom.
-A big reason I am not thrilled about this deal is there is not much value to add.. the place does not need really need work. Any value I could add (addition of a driveway or rear deck for upstairs unit) would likely not raise the value much higher than the cost to complete each project.
I don't expect the "bonus room" in the attic having a significant impact on the value of the home but we are certain it will increase the rent.
@Emilio Attardo got it. It's a lot of your cash to tie up as you noted, given the CoC return.
I am not familiar with the area how is the market there? That market seems like you make money off of the appreciation side(more speculation) rather than the cash flow perspective. Me personally I'd be fine with it if it's in a nice area where the schools are great and it's appreciating. You'd still be living in cheaper than rent. Also you've said for the past year you've been looking. Not every deal is a home run this seems like a stepping stone. If you held it for 2-3 years you can capture the equity and go into something else. Also you mentioned raising the rent after some changes so that should boost value. Do inspections see how that goes, then appraisal.