First off, thanks to the community for being such an invaluable source of information for a first time investor. I've been lurking for a while and finally pulled the trigger thanks in large to the information gleaned from individuals here on BP. So here's the long and the short of the deal.
HUD SFR 3 br 1 ba house listed for $73k
Bid accepted price is $67k all in with closing.
Paying "cash" using a 4% fixed HELOC I have on a separate property I own outright (current residence).
Potential Rents are conservatively $950 a month.
Property needs $8-10k in repairs.
The good news:
My Bid got accepted and all my financing is already lined up. My agent has experience with HUD and walked me through the process, so I have a very good feeling about actually closing on the home.
I'm very confident about the rents. I called on a 2br 1ba for rent with less square footage with just a street over and despite having a sign in the yard the property had already rented for $985.
While my agent has experience with HUD, I do not. I understand that if the contract submitted is not exactly correct, the property will go to a backup bidder. I'm a little nervous about this.
Repairs - I'm also a little nervous about this. I have a solid home inspector who I feel comfortable with (he's worked on family rental property for 20+ years), but I don't know much about repairs, so even though I trust him, I'm worried the repairs will come out to more than we expected.
The Twist:I got the house as owner-occupy. The reason I did this is because I'm young, single, live pretty simply, it doesn't disrupt my life too much to pick up and move, and the property was in a desirable location so I knew it'd go quickly if it went to open investment. I kind of like the idea of house hopping actually. So I'll be moving out of my current residence, into the new place for 12 months. Expected rents on my current house are $800 a month. It's in the local university district so it's likely I'll deal with a college tenant that will last 1-2 years at most.
So for 1-2 years I'll be taking in a lower rent due to the owner occupancy requirement on the hud home. Then I feel like this deal gives me a lot of options. After 1-2 years I can:
1. Exit the property completely via selling and still put 15-20k in my pocket.
2. Continue as is by taking the $800 on the first property if I decide I like living in the new home better.
3. Move back to the old home and take the higher rents on the new HUD purchase.
4. Find a new property between now and the end of the owner-occupancy obligation and move into it as my new personal home.
All and all, I've tried to make my numbers as conservative as possible (overestimating repairs by 20% or so, underestimating rents and ARV) and I look at this property as a very conservative "first run" at real estate. I think I'm doing it right, but in my mind, I'd be crazy not to ask for advice here from infinitely more experienced peers in all facets of real estate. So any feedback would be appreciated!
Hey Brad, congrats on pulling the trigger in the REI game. To summarize your deal, it sounds like you'll be roughly 80k in on a home with ARV around 100k, rent around $950.
As far as closing on a HUD home, I have purchased several, and never once did the contract not go through, and I was also using conventional financing, oftentimes using equity in another property as down payment, which slightly complicates the deal/financing (all credit goes to my agent, I simply sign where she tells me). So, you should feel confident that the contract will go through.
As far as repairs, it's difficult to say whether you will be under or over on the actual costs. I have a skilled home inspector (I no longer have him do inspections, but that is because I do my own), but I would not value his opinion on actual repair costs. Your inspector may be more knowledgeable in this area.
I'll assume you have a full-time job and are now investing on the side. If that is the case, the numbers seem like they will work, but they are a bit "tight" in my experience if you want cashflow. However, the fixed 4% with the HELOC should improve the cashflow. I usually think in terms of 20 year mortgages with 5 year balloons, or a 15 year fixed, but you most likely have a 30 year fixed with the owner occupy advantage. This will smooth out some of the learning curve in terms of expenses or a bad tenant.
Given the numbers and it being your first deal, I think this will prove to be an awesome starting point for your investing career. If you can still pull from that HELOC, look for a stronger margin on the next deal without owner-occupy, unless you want to wait the 1 year on the HUD home before your next purchase. Best of luck.
And one last point. Numbers give some idea, but being that there are so many factors (location, stability of job market, tenant selection (no matter what screening system you have, there is a degree of luck here), unforeseen maintenance expenses,and so on...in the end, if you're creative and keep learning, you can make "almost" any deal (within reason) a positive (financial and educational) experience.
The estimated repairs will always go over...Especially if you are doing major renovations...Lipstick jobs usually stay pretty accurate...Try and plan some contingency fund for that. Not a big deal since you are living there, you can fix as you go. The deal really can't be analized until you figure the Taxes, Insurance, add in Maintenance, Vacancy (will come into play later as you rent it out) and PM fees (even if you manage it yourself you need to figure this in). Good luck as you go forward.
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