Detailed Experience Story: First House Hack
Hello to everyone!
On October 31st I closed on my first Duplex. It is in Fitchburg, WI. This is my detailed recollection of the buying process. For anyone who reads the whole thing I truly hope it helps you and please don't hesitate to ask questions! :)
It all started around Summer/Fall of 2015. @Chris Heeren and I had gone disc golfing a few months prior (he was way better than me) and he talked about real estate. I was 24 at the time and I was just barely starting to get in to the stock market, trading stocks (yes, I know--I have done very well though), and to be honest the thought of real estate didn't really make a lot of sense to me.
Over the next year I'd see him briefly and he'd talk about doing a roof on a house or something or another and I never payed much heed until....
Fast forward to October of 2016 and Chris and I are sitting next to each other in a meeting (we work at the same place). We started talking and he was telling me how he won the Disc Golf championship he played last weekend and that oh yeah, he is going to be hosted on the BiggerPockets podcast (which I had yet to hear of). He almost mentioned he was considering retiring to do real estate full time. Now that caught my attention. He inspired me to investigate real estate more. I had done very well in the stock market as far as % returns, but there is no leverage. Making 80% in a year on $5,000 (then giving 1000 away to taxes) did not change my life lol.
I listed to the podcasts...a LOT. I listed to them all, and I began to read books. Sometimes all the way through, sometimes not. I read books like The One Thing, Landlording on Autopilot, The Book on Flipping Houses, the Book on Estimating Rehab costs, plus every single BP Blog Post I could find. I listened to Podcasts and books on tape while bike riding, working out, running (I am very active). I got to the point where I can actually hold a conversation with someone about real estate and sound halfway informed!
That all took course over the next year. To be brutally honest, there were times when I was so excited and sure this was my ticket to fulfillment and happiness and what-have-you...then at others I was hopeless that I could do it, I couldn't gain the skills, didn't want to put in the effort. This is what I call the "Motivational Roller Coaster" and it went up and down for months and months over the course of about a year. The one time when the Roller Coaster was on it's way UP, I decided to take action.
In March or April of 2017, I reached out to some banks to get pre-approved. I wanted my financing in place first, just my personal preference, because it seemed like it would be easier in my head. I contacted 3 banks and found one that would approve me easy-peasy.
Note: I have a solid W2 income with 3.5 years job history of raising salary, and credit was over 700. Pre-approval took about half an hour for me
I went with a 7/1 ARM at 3.375% interest rate with a 10% down payment and NO PMI. This is an owner-occupied loan. Could have done FHA but I refuse to pay the PMI/MIP. Also I was not in dire need for the super lower down payment, just the 10%. Could have done 15% but wanted the reserves and then could make prepayments later if I feel like it (which I already have).
Then...I waited. I would sit on my ***, and watch the MLS. And say "this looks good wait noooo". "How can they possibly be asking that much this is ridiculous". etc., etc., etc.!
I was running some numbers, but not to the extent I could have. I even went driving for dollars a few times, generated 2 leads, never followed up.
In July of 2017, I was biking through my favorite neighborhood (literally the neighborhood I dreamed of owning a rental in someday) and saw a duplex with something outside (won't be specific for privacy purposes) that denoted the owner was a realtor! And he owned a duplex! He must know what I want, right?!?
I searched our county records website to discover he was an agent, and actually owned several properties throughout my area--which is just what I thought I was looking for. I called him a few days later.
Early august I met with him and:
- the first thing he did was set me up with MLS alerts (so much better than sitting on my *** looking at the same crap on Zillow every single day), plus you get the additional information you don't get from those sites)
- He also gave me records of all the sales in the last 3 years of multi families in my target areas so I could calculate cap rates and GRMs. I did this the night he gave me the info and in a couple hours had it all in excel.
- Learned the average GRMs for the various target areas and was able to get a good idea of what a good deal actually looks like.
- FYI the average GRM for my target are was between 11.75 and 12.5 depending on what comps you include.
So then we started looking. I got alerts every morning and had to pounce on opportunities as the market is HOT right now for anything that is even remotely reasonably priced.
- First showing
- The details: asking $365k for it, 3/2 both sides with 1 car garage. Rent was $1195 on one side (month to month) and the other side was owner occupied. Adverts said market rents were $14-1600, and they are WITH RENOVATIONS. This was all original early-90s stuff, no luxury anything but they did have a nice bathtub lol.
- There was some bad water seepage in the basement, evidence of mice (you could actually see light coming through the basement ceiling in a corner when the lights were off), one side of the driveway needed replacing, and some concrete jacking needed to be done. The basements were jsut big empty concrete rooms with metal support beams, totally unfinished. There was a crazy beehive on one side. Overall it was just NOT WORTH anywhere near $365k.
- I offered $300k on it. Honestly if I had gotten that I would probably be a little upset right now. It would have a been a lot of work for a first property and I am taking it slow right now. I don't know that it ever would have been a GREAT deal.
- After this HE DECIDED TO HUSTLE. If he was on BP I would give him a huge shoutout but basically he has been in the game for 30+ years and literally knows almost every owner/landlord in the area. He started calling people to generate leads for me. Calling everyone he knew in the area (which was a LOT of people). He literally knows the history of when which owner did what to which house, it's near encyclopedic). He came up with some that were out of my price range (Fitchburg/Madison area is very expensive -- $250k around here is on the low end for C class with problem tenants).
- In late September/early October he finally came up with a guy who was somewhat motivated (enough, anyway) to sell--he had just got a promotion, just had a second kid, just didn't wanna deal with the property anymore. The guy set his price and I ran the numbers and they were good enough to meet my targets. His price was take it or leave it, and I didn't think it was even worth it to try to negotiate.
- He asked $344k. Each side is 1630 sq ft. 3/2 with 1 car garage, one side has a walk out basement. Rents were $1310 and $1360 each.
- LOCATION: Also this is in highly desirable Verona School District on a cul de sac kiddy corner from a park!
- SAFETY: little to no crime at all, the Fire Department is literally 600 ft away and Police Dept is 1 mile down the street!
- CURB APPEAL: I plan to do a little here but it does back up to some prairie preservation land which is very beautiful
- GROWING AREA: populating and job growth has been fairly steady. Very close to large, well paying employers and not far from many others
- It seemed like the perfect opportunity in my market. I was so excited.
Then...mid-October, I was going through the inspection process, the remediation process (which he did not cure anything, my agent actually was nice enough to cure a plumbing issue for me out of his commission!) and reviewing the applications for the tenants since I did inherit tenants on both sides/getting all that paperwork (which has worked out great so far btw)
It was 3 or 2 weeks from closing when suddenly the bank didn't want to do the loan because I was not able to occupy within 60 days!!! It was another two days of drama back and forth. I applied for 3 other loans and was immediately approved but for the 60 day occupancy due to the Owner Occupied loan. I then found another bank who would do it and allow me to move in "earliest lease expires" which was great, but they wanted more down payment than I was prepared for to meet my numbers. I was getting discouraged at this point thinking it would fall though.
I re-called my original bank and brought up the "earliest least expires" clause that the other bank had offered, saying I might have to go with them and he said no they haven't done anything like that before....so that was it. It was over. I struggled with whether I should take a 401k loan out or not?!? I am averse to debt like that. The dilemma. It was very stressful honestly.
Then...little did I know that behind my back he was digging to determine if there were any other options the underwriters would accept. He called me back no 5 hours later telling me that would work out. and I was able to purchase the property anyway! I was still a little tight with the down payment (I used to put way too much in my 401k) and so my wonderful Mother gifted me a couple thousand dollars to help with the down payment so I'd meet the necessary "reserves" the bank wanted
- I closed for $344k with 10% down ($34,400). Total closing costs ended up being about $37,000
- Current GRM is 10.74 which is a bit lower (better than) average
At this point I could NOT have done it without my Agent who really kicked *** for me, and my loan officer who went out on a limb to find a way to make this work for me. I owe them both quite a bit. Of course my mom for the financial assistance, and for allowing me to live with her to save up money for this endeavor. And thanks again Chris Hereen for planting the seed that has grown into a sapling. I plan to take it somewhat slow, acquiring another property in 2020 once I have this experience and feel a little more comfortable. I plan to set my self up so I can have 10 units all paid off in the next 10 years.
Now, what you've all been waiting for: THE PLAN
I will be IMPROVING the property, although there are some things that need repairs (the decks on both sides must be replaced).
Essentially, the problem is that everything looks dated. This was build in 88/89, and it shows. I am going to update the house with two exits in mind. One is upping rents and keeping it as a rental. Two is if for whatever reason I need to sell then sell it as a duplex for another investor. Third possible exit is that I could do a zero-lot line duplex and sell each half as a "condo" (but there is no HOA). As such, I will be updating the units to the point where they are very nice, but I am going to be very careful not to overdo it, and will definitely be doing cost benefit analysis along the way (since this is all in my head right now). Also I will be doing much of the work by myself.
It is currently fully rented and cash flowing about $100 per door. In June I will be moving in to performing the following updates to Side B:
- Whole house:
- I will be painting the trim of the whole house (yeah...I know....PITA -.-) ether white or grey (more modern than the old light fake-oak color)
- Replacing closet doors with sliding doors
- Replacing the hollow core doors with solid core, nice doors
- Consider painting
- Kitchen remodel:
- Back splash!!
- New appliances: stove, microwave, dishwasher, fridge
- New sink
- New countertops.
- Debating materials still, there is not much surface area so even granite wouldn't be too expensive.
- Extend breakfast bar
- Paint cabinetry and replace some of the hardware
- Might get new some of the prefabbed cabinetry recommended in one of the podcasts (don't remember which...have it bookmarked on my app). Then get new hardware for it
- Possibly replace flooring with LVT. I love the stuff, tenants love the stuff, and it's not too expensive
- Potentially install recess lighting--the kitchen is below the attic so it might not be too bad of a job
- Living room
- Install LVT flooring.
- Potentially replace real fireplace with gas insert for safety purposes.
- Potentially install recess lighting--the kitchen is below the attic so it might not be too bad of a job
- Bathrooms
- New toilets
- New fixture
- New lighting
- Back splash above the shower/tub?
- Need to investigate, thoughts on this?
- New flooring/real tile.
- Upstairs bedrooms
- Potentially install recess lighting--the kitchen is below the attic so it might not be too bad of a job
- There's not much to do in the downstairs (finished basements)
- Look at making some minor improvements to the utility room for convenience and safety purposes.
After that the rent for this unit will easily be $1600/$1700/month.
I then plan to move to side A in June of 2019 to make similar updates to that side as well, and then when I move out I would up the rent to $16-1700 as well. All in all that would make this into an 8.69 GRM (not including money put in for rehab). But either way I will then be cash flowing about $250-$300 / door, with cash on cash return looking like it should be somewhere in the 15% range.
So that's the story! You've read your book for the day, and can go to bed now :P
Seriously though, any feedback, comments, information, suggestions...all appreciated!!!
I know I am more of a lurker than a poster, and less social than more social, but BP has been integral in my success and even in making positive life changes non-real-estate related! For me it was easier to jump in and purchase a property than to go to a meet up so far lol >.<