Need advice on house flip that I have to occupy

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Need advice on house flip that I have to occupy

Nathan Arnold
Rental Property Investor · Hurricane, WV · Member since 2017 · 10 posts · 1 vote
Hi folks. I have an interesting situation that I would like some comments, advice, and input on. So I’m currently managing properties for my grandparents and am trying to get started with my own properties. I currently live in a house that is paid for. I’m looking at investing in a house that is slightly bigger than mine. It needs a lot of work but I could get it for $30,000. I could have it fixed up for less than another $10,000. It should resale for $60,000-$75,000. Sounds great right? 20-35 thousand dollar profit. Well they require you to be the primary resident for 1 year. So my thought right now is that I make that house livable and move in. The payments would be around $150-175 a month. My house would rent for around $575. Then at the end of one year I could find another house to live in that is more convenient for me and either sell or rent the house out. So here are my questions: 1- Is it worth the move? The location would be a little less convenient for me and there’s the hassle of moving. But I see potential of profit in the long run. 2- If I decide to rent the house out after a year and find another house for me to live in, would it be difficult for me to get a second loan? I would have the income of my current house, the new house, and my day job. But how hard is it to get a second loan? Thanks for your help in advance!
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Melissa Kirchhoff
Ottawa, IL · Member since 2016 · 242 posts · 107 votes
9y

@Nathan Arnold - 

1. I think that's a very personal decision. I would take a hit like that for a year to make that money but it depends on you and your life situation. Just me and my SO, we are simple people, so we'd deal for that future profit. However, if you had a family or a very intense life/job, maybe not. Also, is a deal like that fairly easy to come by in your area or really a once in a lifetime? That's what I would look at before deciding.

2. I would do something like a brrrr on that and have a nice sum for the next purchase. (I think the more money you have in your account the more likely they are to throw a loan in your direction!) But it would probably depend on how long and how much income you are showing. I would assume your day job would get you the loan, but I think to consider the income from being a landlord, most banks want 2 years (so worst case, you stay another year at that property or your house) and then move forward.

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  • Melissa Kirchhoff
    Ottawa, IL · Member since 2016 · 242 posts · 107 votes
    9y

    @Nathan Arnold - 

    1. I think that's a very personal decision. I would take a hit like that for a year to make that money but it depends on you and your life situation. Just me and my SO, we are simple people, so we'd deal for that future profit. However, if you had a family or a very intense life/job, maybe not. Also, is a deal like that fairly easy to come by in your area or really a once in a lifetime? That's what I would look at before deciding.

    2. I would do something like a brrrr on that and have a nice sum for the next purchase. (I think the more money you have in your account the more likely they are to throw a loan in your direction!) But it would probably depend on how long and how much income you are showing. I would assume your day job would get you the loan, but I think to consider the income from being a landlord, most banks want 2 years (so worst case, you stay another year at that property or your house) and then move forward.

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  • Sarah Lorenz
    Specialist · Ann Arbor, MI · Member since 2016 · 356 posts · 191 votes
    9y
    Seems like it would be worth it. Why do you have to live there for a full year?
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  • Nathan Arnold
    OP
    Rental Property Investor · Hurricane, WV · Member since 2017 · 10 posts · 1 vote
    9y
    Mellisa, thanks so much for that input! Sarah, this is a Fannie Mae house and they have a rule on this one that you have to live in the house one year before selling or renting it out.
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  • Mitchell Berry
    Evansville, IN · Member since 2017 · 20 posts · 1 vote
    9y
    Are you able to get the loan with the shape the house is in? I’m actually closing on a house (if inspection and all goes well) in about a month that’s quite similar.
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  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    9y

    Howdy @Nathan Arnold

    Nathan are you using FHA financing? Based on your commit "this is a Fannie Mae house and they have a rule on this one that you have to live in the house one year before selling or renting it out." it sounds like it. If you use any other type of financing to purchase with such as a conventional loans using 20% down payment or hard money loan you should not have to live there a year. If this is a HomePath property Investors can purchase them (without having to live there). Also, are you sure they will finance $30K purchase price? Most will not go below $50K. Need more detail on this and the financing.

    @Melissa Kirchhoff is correct when she said moving is a personal decision.

    As far a the deal goes you need to included all your costs (Purchase price, Rehab costs, Holding and Closing costs). You say the property needs a lot of work yet you only budget $10K for the Rehab. That amount is more a cosmetic price and not "a lot of work" in my experience. Do you have experience doing Rehabs? Just be sure to do a thorough inspection and create a realistic estimate. Generally to budget for Flips you need to use the 70% rule for your all-in costs. Stay conservative and use $60K for the ARV. $60K x 70% = $42K for your all-in costs. $30K Purchase + $10K Rehab = $40K. There will be two closings to account for. I would put in a minimum of $2K per closing. Holding cost for a normal Flip include the cost of the acquisition loan (interest payments and points), Insurance and utilities until the property is sold. However, if you live there for a year that complicates these numbers somewhat. As you can see your profit margin may not be as great as you think. I hope it is. But, just be sure to do a complete analysis.

    Also be sure to do a complete analysis on using your current home as a rental property.  I realize you should have good cash flow (no loan payment).  You still need to account for all expenses.

    When it comes to qualifying for a 2nd loan in comes down to meeting the lenders requirements. DTI will probably be the main issue. How long have you been managing your Grandparents properties? If over 2 years then you can include a percentage of rental income.

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  • Nathan Arnold
    OP
    Rental Property Investor · Hurricane, WV · Member since 2017 · 10 posts · 1 vote
    9y
    Hi John Leavelle Thanks for all of your information! I guess a lot of work is overstated. It needs carpet, paint, new doors, a bathroom sink, and a great deal of cleaning. Worst case scenario AC unit and a stove. I’ve done the calculations and can’t imagine this being over $10,000. I’m aware of the other expenses you mentioned. I was just trying to give a brief overview. As far as the loan and one year rule goes, it is included in the contract with Fannie Mae that I must occupy the house as my primary residence for one year. That has nothing to do with the loan. I will be getting a conventional loan through a local bank.
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  • Nathan Arnold
    OP
    Rental Property Investor · Hurricane, WV · Member since 2017 · 10 posts · 1 vote
    9y
    Mitchell Berry I am getting a loan through a local bank. They said that since I have the funding to do the repairs, the condition will not affect the loan.
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  • Melissa Kirchhoff
    Ottawa, IL · Member since 2016 · 242 posts · 107 votes
    9y

    @John Leavelle @Nathan Arnold

    Yes, I think he's talking about HomePath. I have seen ones that do strictly OO, I only remember one though and that was a long time ago (and I'm not even positive if that memory is right...) that being said, Nathan, have you looked into if there's a period that investors are allowed in on it, I think it's a 10 day window of OO preference then investors can step in, think it's call First Look?

    Also, not that I'm encouraging any crazy stuff, but I've never heard on them checking up on that...

    However, in your situation, I think you have the right idea, especially if you don't mind living there while you fix it up (I'd personally live in the cheapest place and rent out the more expensive!) so I wouldn't write it off, just want to make sure you know all your options!

    Also, @John Leavelle, good point on the managing!

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  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    9y

    @Melissa Kirchhoff you are correct it is call First Look. It is a 20 day period for Owner Occupiers to bid on properties. After which investors can bid on the property. The OO must live in the property for at least a year. Investors do not have to live in the property. This is what I think @Nathan Arnold is looking at.  The OO is required to sign a intent to occupy certification.  This is the contract I think he is talking about.

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  • Nathan Arnold
    OP
    Rental Property Investor · Hurricane, WV · Member since 2017 · 10 posts · 1 vote
    9y
    Update: I talked to the listing agent today and the waiting period has ended so I can buy it as an investment. Again, thank you all for your knowledge!
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