Hello, Here is my situation. I just became a real estate agent a few months ago. I also work a W-2 job that allows for a loan program. I will be leaving this job soon to focus on my realtor business. I've been holding onto my W-2 income simply for the allowance of getting a home loan and realize once I convert full time 1099 my chances of getting the loan decrease significantly. I want to take advantage of my financial history and climbing credit while I have it. I have been aggressively searching for my first multi-family unit property and live in the Salt Lake City, Utah market. Being fairly new to the real estate world and am trying to leverage my license on this first deal by using my commission for the down payment. I've wrote offer after offer and have been beat out by stronger offers. Most mutli-family units are under contract within a day or two here in this market, at either asking or over asking. The good news, I finally won. I was able to lock down a duplex over the weekend. It's a 2 bed/ 1 bath side by side legal duplex. One unit is fully gutted and is under a full remodel while the other has a month to month lease that has been in place for 5 years at very low rent. We are wanting to house hack this first property by living in one side and renting out the other for 1 year per FHA owner occupancy rules. Then, move out and do it again. The contract breakdown: Sales Price $325,000 Duplex: 2 units (2 bed/1 bath) one side completely remodeled. -Fenced in yard per unit, roof 5 years old, new water heaters within a few years FHA 3.5% down (3% of that coming from sales commission) Rents: Local rents vary from $900-$1200 Mortgage: $2050 I understand this deal will not produce that much cash flow in the short run (Once I convert more equity in the unit I can drop PMI to increase cash flow) Remember, this is my fist deal with little to no money in which doesn't produce a strong cash flow standpoint. What do you guys think about all this? Do you feel like it's a good first opportunity? Or is it to risky because it doesn't produce that much cash flow? I know there are other options like hard money and BRRRR. I want to use those next. I am just trying to take advantage from a first time homebuyer and house hacking.

First property under contract. Is the deal worth it?

Rental Property Investor · Columbus, GA · Member since 2016 · 634 posts · 337 votes

7y

Personally I don’t like to speculate on appreciation, so I wouldn’t do the deal since it doesn’t cash flow. However, you have to live somewhere.

Interestingly you left out what cash flow you are bringing in. Why is that? You only mentioned what the rent ranges are which doesn’t help much to estimate cash flow since the reader doesn't know the area/ address or (most importantly) the rental history.

Also we’d need to know what your income currently is what what you made in real estate commission thus far and what you expect to make from your realtor income in the immediate future. This will help us determine if you should quit your day job.

2 Reply

Sam Shueh

Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes

7y

Need to work out the return numbers. Everyone uses a calculators here.

0 Reply

Bjorn AhlbladPro Member

Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes

7y

@Dane Kania that is not a good deal for an investor-it looses money. In a high market prices may be flat or go lower. The guy/gal that is getting the appreciation in this market is whoever is selling the property to the new buyer. I am betting on income not appreciation in this market. All the best!

2 Reply

Dean Hunter

Real Estate Broker · Washington, DC · Member since 2014 · 30 posts · 21 votes

7y

Hello Dane

As a realtor you should know if this is a good deal. You state that the demand is high for the property. You are going to have to live in it. Look at the comps and enjoy. Smart use of your commission.

1 Reply

Casey Christensen

Rental Property Investor · Lehi, UT · Member since 2016 · 105 posts · 96 votes

7y

Hey Dane -

Where in utah is the property located?

How much will it take to finish the remodel of the unit that is gutted now?

Do you know what the ARV will be once the gutted unit is completed? May be a great way to build more equity in it if it costs $25K to finish but would be worth $375K once done and rented.

I think the house hack is a brilliant idea and depending on where this property is located should easily pull in $1200/month per unit. That would mean you would only be paying $5-600/month for the side you are living in (you really cant rent or own for that price anywhere in Utah). After a year or two when you move out and are getting at least $1200/month on that unit as well then you will be cash flowing nicely and will have gained a ton of experience in being a landlord and remodeling a unit. That experience alone is probably worth it. Good luck in whatever you do.

7 Reply

Jaiden Olsen

Rental Property Investor · Kaysville, UT · Member since 2017 · 141 posts · 120 votes

7y

@Dane Kania, Congrats on getting it under contract! That is awesome!

I wouldn't post publicly on the internet that you are planning to quit your job. That is a good way to get fired.

I ran your numbers through my calculator. My assumption is that when you say "Mortgage Payment," you are including PMI, Taxes, Insurance, Principal and Interest, correct? By my best estimation, this property will cost you $1000 per month on average not including Utilities.

That being said, I don't know that you could live for cheaper than $1000/month in the Salt Lake Valley. Rent would likely be that high for anything decent, buying anything would result in a PITI payment more than that, and the help of someone else paying down your mortgage for you is awesome too! Not to mention the tax benefits, potential market appreciation, and everything else that is awesome about real estate.

Honestly, from an investment standpoint, it isn't great. But from a lifestyle standpoint, it sounds like it will ultimately save you money! I say go for it!

My one concern with the deal is that you say that one side has been completely gutted. Make sure you have a plan to get it remodeled and how you are going to pay for it.

Good luck man!

9 Reply

Frank Geiger

Rental Property Investor · NC · Member since 2018 · 776 posts · 776 votes

7y

Nail down your rents; a $300 spread is too much. Depends on how much it costs to live in your area. If rents are super high, this might make sense to do for a few years then sell when you move. The property will lose money when you move out unless you can find something creative to do with it. Personally, I would not purchase this deal.

1 Reply

Steven Kleppin

Rental Property Investor · Manama, Bahrain · Member since 2015 · 96 posts · 68 votes

7y

@Dane Kania what's your family situation? Each side is 2 bed, take a look at renting out the other bedroom that you're living in to pull in even more cash.

0 Reply

Caleb Heimsoth

Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes

7y

@Dane Kania. You will lose money on this long term. Can you float a 2k per month loan payment if you have vacancy or lots of repairs?

I would be cautious about speculating on appreciation at this point in the market cycle

3 Reply

Adam Mitchell

Rental Property Investor · Richardson, TX · Member since 2019 · 120 posts · 82 votes

7y

@Dane Kania

I would not do this deal and continue to look for better sources for deals.

1 Reply

Ryan Mertens

Developer · Holladay · Member since 2019 · 64 posts · 36 votes

7y

Even with your high estimate on rent it's a poor investment. It is however a better option than renting. Other people that say they don't buy on speculation, the majority aren't from Utah, don't understand the rental crisis here, and don't know that Utah has been in the top 5 for same year sales growth (double digit) for the past five years. If you are ever going to buy on speculation our market is one to do it in.

What's the rehab cost for the gutted unit? Ok, now double it, no i'm not kidding. You are going to have a hell of a time getting contractors that have any talent to help. Why? You're not repeat business. The good contractors you do get, are going to quote you high, because you are a one and done customer in their eyes.

And $1200 for a 2 bed/1 bath?? This better be east of 700 in Sugarhouse or in the Aves for that kind of rent, and it better be dialed out to the nines.

3 Reply

Dane KaniaPro Member

OP

Real Estate Agent · Salt Lake City · Member since 2018 · 11 posts · 4 votes

7y

Thanks for all your help. Yes, I should of been a little more descriptive in the rents. It's an up and coming area in the valley and rents are increasing. I could most definitely rent each unit for $1100, if not $1200. One side will be completely remodeled before closing. They are working on it now. New carpet, new countertops, brand new bathroom, fresh paint. etc. The roof was done a few years ago. new water heater in remodeled unit. Water heater a few years old on older unit.

Let's say I get the short end of $1100. That's $2200. Mortgage to be $2050, leaving me $150 per month. I will be managing the property. If I can get $2400, that would leave me $350. Per my lender, my PMI would fall off around 20% equity and drop around $220 putting more cash in my pocket.

From a lifestyle standpoint I would live less then I'm paying now for 8 months to a year. And, after renting both units, the mortgage and expenses would be covered with some cushion on top.

0 Reply

Jackson Pontsler

Flipper/Rehabber · Salt Lake City, UT · Member since 2016 · 211 posts · 174 votes

7y

@Dane Kania I understand with the housing crisis right now in utah but I would hate to burst your bubble on that last $150 per month. Lets assume that $2050 included PMI and property taxes. I also want to know if you've included landlord insurance and utilities because in Utah the owner is incharge of water, sewer, garbage not tenant.

Furthermore the other side of the duplex that is already rented out. Is it remodeled too? What has your inspector said about repairs needed? As a flipper I've seen how many just slap lipstick on a pig but don't fix structural issues, electrical and plumbing issues so you definetly want to skip this pitfall.

2 Reply

James M.

Rental Property Investor · Seal Beach, CA · Member since 2016 · 115 posts · 85 votes

7y

Hey Dane,

I think like others are mentioning, more information is need. I dont know the salt lake market at all, but I do know it is growing, which is definitely a plus for you. Its hard to understand if this is a good deal, without knowing your intentions. At face value, I dont like the deal, but if you are planning to rehab, and the ARV is much higher, and you can get top dollar for rents, who know, the deal might look ok, but im looking at this from the surface. I crunch your numbers on my excel sheet and here is what I got.

purchase325,000

Down: 3.5% = 11,375

Closing: Roughly: 5,000

Repair cost: 5,000 (All units need some sort of love.)

Gross Monthly Rent: 2000 (assuming the numbers you gave)

Expenses

Mortgage: 1,497

Tax: 604 (I think Salt lake is 2.2%)

Insurance 2%: 55

water: 50

Gardener, snow removal, etc( 100)

Cap X 6%: 120

Maintenance: 100 (50/unit. I always just assume this when under writing)

Vacancy 4%: 80

Cash flow: -656/mo

Even assuming the market appreciates 4% per year and income increase every year, the numbers still would not work for me..

This is down and dirty, a lot more to it. Like i said this is just from the surface.

6 Reply

Michael Ealy

Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes

7y

Hi @Dane Kania, as others have said - this does not sound like a good deal.

Cashflow is NOT rent minus mortgage payment.

Cashflow is Rent minus mortgage payment minus expenses.

Expenses like taxes, insurance, property management, and you have factor in capital expenditure (capex), vacancy and repairs & maintenance. If the landlord pays the utilities, you have to include that too.

However, as a house hack, below is the equation I would use:

House Payment = Mortgage payment plus expenses less Rent (you receive from one unit)

If your house payment for this property is LESS than what it would be if you rent a house in the area, then by all means go for the deal. At least you can capture the appreciation, the tax advantages of ownership as well as the loan paydown.

Makes sense?

3 Reply

Braden Downs

Oklahoma City, OK · Member since 2016 · 62 posts · 37 votes

7y

@Dane Kania One thing I don't think anyone mentioned was the PMI. In order to take it away you would have to refinance since FHA (I assume you already knew that lol).

I have seen a couple posts recently about people having trouble refinancing a duplex/multiplex. Not sure if it is or isn't the case, but definitely something to make sure you have checked out.

Good luck!

2 Reply

Victor S.

WorldWide · Member since 2016 · 1k+ posts · 1k+ votes

7y

Dane, if you hang around long enough, you'll hear about the "1% rule" folks live by on here. That alone disqualifies your property. $2400 max rent with a $2k mortgage. You'll be very lucky not to lose money on this every month (long-term).

I understand your frustration and the market being competitive, but you will always have a chance to buy something that's not a good deal (daily). You make money when you buy, not when you sell.

1 Reply

Ned J.Pro Member

Investor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes

7y

I think the biggest concern I have is that you are calculating your "cash flow" without factoring in ALL you expenses.

Lets say you are "losing" $1000/month....but it would cost you $1200 to live somewhere else.... so you aren't really losing that full $1000/month....since you have tax benefits, equity, possible appreciation etc etc.......but do you have the cash to deal with that "loss" and be able to afford the expense that will come up..... the upkeep, repairs, rehabs, turnover etc etc.....other expenses WILL come up....not IF but WHEN....

When you are accepting short term "loss", you are counting on a long term payoff, often via appreciation....plus you have to have deeper pockets to weather that loss for extended periods

1 Reply

Ryan SajderaBusiness Member

Realtor · Manhattan, KS · Member since 2016 · 170 posts · 89 votes

7y

@James M.

Spot on with the blind side expenses - nice post! I never assume things will go accordingly and I usually build in some fluff to cover hardship

[email protected]

0 Reply

Taylor Chiu

Real Estate Agent · Salt Lake City, UT · Member since 2014 · 473 posts · 230 votes

7y

@Dane Kania Hey there, welcome to BP and the world of real estate investing! I don't own anything in Ogden (all our Utah stuff is in Utah and Salt Lake county). But I have looked at some properties up there.

I bet you've done your research, but make sure you are spot on with your rental estimates. Most 2/1's I've seen in Utah valley rent for more like the $800-$1000 range. And up in Ogden rents tend to be $50/$100 less than Utah/SLC county.

Where are you looking to get your rental estimates? Rentler, rentometer, zillow, and craigslist are my main go-to's.

That said, even if you are getting $1100 per side, this deal appears too thin to me. Does your $2050/mo expense number include utilities, and capex/repair/vacancy reserves? If not, you'll be cashflow negative even when you are renting out both sides.

Best of luck whatever you decide!

3 Reply

Irina Belkofer

Real Estate Broker · Cleveland, OH · Member since 2017 · 719 posts · 658 votes

7y

1. It's not a deal from cash flow point but might be from appreciation. Price is to high to cash flow, you're paying to keep the house

2. 3% comissions won't go 100% to you unless you're a broker, also the title company has to send the check to your broker first and then you can pay off the lender of that money (if you borrow the downpayment money from your qualified relatives)

3. Closing costs might be quite high especially with FHA loan.

4. As was mentioned above, PMI with FHA loan won't ever go away until you refinance it with conventional which is defeat the purpose of house hacking. If you qualified for conventional, you might buy with the same 3.5% down, have PMI disappear when 20% equity is reached (or order new appraisal in 3 years if it appreciated enough)

Well, and overall, if there is recession soon, you're in trouble. If market goes up, you'll survive

0 Reply

Sara Wallace

Real Estate Broker · Oklahoma, OK · Member since 2018 · 15 posts · 8 votes

7y

@Dane Kania

Hiya Dane-

As a fellow Realtor, I’d highly suggest speaking with your managing broker. As stated, commission can’t typically be used toward down payment in the terms you are thinking. Plus, your brokerage is usually going to expect their cut unless they have a deal in place for no commissions on your personal residence. Even then, it’s usually smarter to reduce the purchase price by that commission amount otherwise be taxed on it once your 1099 comes around.

I bet your broker could go through the numbers & help you solidify your decision. Smart to house hack though! Good luck.

0 Reply

Ryan Naylor

Lender · Salt Lake City, UT · Member since 2017 · 77 posts · 76 votes

7y

Originally posted by @Dane Kania:

Thanks for all your help. Yes, I should of been a little more descriptive in the rents. It's an up and coming area in the valley and rents are increasing. I could most definitely rent each unit for $1100, if not $1200. One side will be completely remodeled before closing. They are working on it now. New carpet, new countertops, brand new bathroom, fresh paint. etc. The roof was done a few years ago. new water heater in remodeled unit. Water heater a few years old on older unit.

Let's say I get the short end of $1100. That's $2200. Mortgage to be $2050, leaving me $150 per month. I will be managing the property. If I can get $2400, that would leave me $350. Per my lender, my PMI would fall off around 20% equity and drop around $220 putting more cash in my pocket.

From a lifestyle standpoint I would live less then I'm paying now for 8 months to a year. And, after renting both units, the mortgage and expenses would be covered with some cushion on top.

Just an FYI, Mortgage Insurance no longer just "falls off" You are going to have to refi out of it. FHA continues payments towards MI for the life of the loan now. You can't be banking on that. Investment wise this is not a good deal, house hacking wise, it's a great deal! You have a big property for half the cost.

Good Job!

1 Reply

William Hochstedler

Broker · Logan, UT · Member since 2013 · 1k+ posts · 1k+ votes

7y

My two cents.

The people who are outbidding you are people in exactly your same situation: owner-occupants who lower their cost of living by buying small multi's in an increasingly unaffordable market while simultaneously building long-term equity.

If you're looking at this as a pure investment deal (which we all do on BP), nothing in desirable areas makes sense in SLC (that doesn't need a ton of work).

If you're looking for a living situation that builds equity and is some place that you want to live, this is the way to do it. If you keep your day job or can start earning conventional real estate commission income and do the work yourself on nights and weekends, this is a great opportunity to build for the future.

A friend of mine poses the following question: Which is better saving $500 a month for 5 years for a down payment years or taking a $500 loss on a rental for that same period? If you're saving that (or more) on your living expenses, it's a no brainer.

So the question is not "is this a good deal". It's "Does this meet your lifestyle plans for the foreseeable future at a cost that is significantly better than your alternatives?"

Good luck!

3 Reply

Matt P.

Investor · Columbus, OH · Member since 2015 · 625 posts · 601 votes

7y

@Dane Kania If you need somewhere to live buy it. It's not a good cash flow investment though. You need to understand that this deal doesn't cash flow at all even if it were rented for 2400 a month.

0 Reply

First property under contract. Is the deal worth it?

First property under contract. Is the deal worth it?

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