My first deal - Los Angeles (LA) - House hacking with buy & hold

5 Replies

Hello BiggerPockets Family,

I wanted to share my first purchase that I closed in LA back in August 2017. Now that the dust has settled, here is my story. I hope this reminds beginners like me that it is possible to purchase in LA. Might be challenging but possible.

History:

I bought the house I currently live in back in August 2017. Prior to that, I have been looking for a property for over 6 months at that point. All I had about $40K to my name and spent a good deal of time looking at properties, reading blogs, browsing Bigger Pockets, attending seminars. I came very close to buying a triplex in Reseda but that fell through in the last minute. The property I eventually purchased was listed on the MLS for $699k. It was a duplex in the Valley. There were 2 separate individual (non-connected) houses on the lot. The front house was a 3 bed / 2 bath with a bonus room (1100sqft) and the back house was a 2 bed 2 bath (800sqft). The property had a lot size of 6500 sqft. It has a nice little front yard and a nice patio area for the back house. There are a few fruit trees as well on the property. It also had enough room at the back to park upto 6 cars. The houses weren't maintained by the owner that well. The back house had long term tenants and the place looked dirty - wasn't taken care of or cleaned in a very long time. The owner lived in the front house in one of the rooms and rented out the other rooms.

About the deal:

I put in an offer for $700K. I went over the price to sweeten the deal since I was going with a FHA loan and there was always a ton of competition in buying that property. The agent mentioned that they had multiple cash offers. However, they were interested in my offer as I was ready to pay full price (and perhaps a little over). I was ready to pay full price as the numbers added up and secondly, as I mentioned earlier, I was on a FHA loan. FHA loan is not the most favored loan in a competitive seller's market or at least that is what I have found after putting offers on over 50 properties.

After the inspection, I found that there were more than few repairs that were put off. They were not urgent but were going to come down the line anytime now. I took that back to the seller agent. The seller agent mentioned that the owner was not financially able to fix the repairs. Instead, they offered to the reduce the price by $13K. I requested that I was willing to pay $700K and that I get a check for $13K to a contractor for the repairs at closing. There was a little hesitation from the seller initially since they didn’t understand the process. However, once I explained it to them, they were ok with it as long as the money came from the sale price. So that worked out in the end. This helped since that gave me money to fix up the place without having to search for the money and since I was approved for a loan of 700k with 3.5% down. In the contract I also requested for the duplex to be delivered vacant which the owner obliged.

After closing:

With a few repairs and touchups, both the front and the back house could have been rented out for market rents. However, my girlfriend and I decided to upgrade few aspects (namely kitchen since she loves cooking) of the front house since we were going to live in it for the next few years. Also, it would add value to the property.

So the first couple of weeks we took care of the back house doing some repairs and fixing it. We buffed the floors (rented the buffer at Home Depot and got a buffing 101 lesson on You Tube), painted the walls, got new socket plates, new appliances (fridge, dryer, washer). We also got a contractor to replace the toilet and kitchen sink with a new one. Once everything was done, the place looked great. I took photos of the place and put the pictures up online as it was ready to rent it out.

While we were working on the back house, we got the contractor to remodel the front house. That involved updating the kitchen with new cabinets, flooring, sink, appliances, made the living room / kitchen an open plan. We added recess lighting, got the laundry inside the house, converted the extra room into a gym and also painted the whole house including the tiles in the bathroom (since me and my girlfriend were experts in painting from all the experience we had from the back house).

All of this costed about $30k. That includes the $13K I got from the seller. I got a wonderful tenant that I screened myself for the back house. The rental is $2500. As mentioned earlier, my girlfriend and I moved into the front house. If we were to rent out the front house that we currently live in, I would estimate it to be about $3500 or more for it, since it was remodeled, and it looks great.

Analysis:

So I did the math (high level) using 2 different scenarios.

Scenario 1: If both the houses were rented.

Property/Deal Profile General Guidelines
Purchase Price 700,000 1 Percent Rule (%) 0.857142857
Down Payment (%) 3.50% 50 Percent Rule 3000
Down Payment ($) 24500 Cap Rate 8.214857143
Interest 4% Cash-on-Cash Return 26.73744578
Term (years) 30
Loan amount 687,321
Income Cash Flow
Rental Income 1 2500 Total Monthly Income 6000
Rental Income 2 3500 Total Monthly Expenses 5075.33
Laundry Income
Storage Income
Misc Income Total Monthly Cash Flow 924.67
Total Monthly Income 6,000 Total Annual Cash Flow 11096.04
Expenses Cash-on-Cash Return
Taxes 750 Down Payment 24500
Insurance 58 Closing Costs 0
Water/Sewer Rehab Budget 30000
Garbage Misc Other -13000
Electric
Gas Total Investment 41500
HOA Fees
Lawn/Snow
Vacancy 200
Repairs 200
CapEx
Property Mgmt.
Mortgage Insurance Premium 586.33
Mortgage 3281
Total Monthly Expenses 5,075.33 Cash-on-Cash Return 26.73744578
Based on the above analysis, here are the key takeaways – 1)The property cash flows - $924/month

2)Cash on cash return is 26% which is pretty good in LA I reckon.

3)The main thing I would like to note is the solid Cap Rate of 8.2

Scenario 2: The actual scenario with only one rental income since we moved into the front house.

Property/Deal Profile General Guidelines
Purchase Price 700,000 1 Percent Rule (%) 0.357142857
Down Payment (%) 3.50% 50 Percent Rule 1250
Down Payment ($) 24500 Cap Rate 2.214857143
Interest 4% Cash-on-Cash Return -74.46737349
Term (years) 30
Loan Amount 687321
Income Cash Flow
Rental Income 1 2500 Total Monthly Income 2500
Rental Income 2 0 Total Monthly Expenses 5075.33
Laundry Income
Storage Income
Misc Income Total Monthly Cash Flow -2575.33
Total Monthly Income 2500 Total Annual Cash Flow -30903.96
Expenses Cash-on-Cash Return
Taxes 750 Down Payment 24500
Insurance 58 Closing Costs 0
Water/Sewer Rehab Budget 30000
Garbage Misc Other -13000
Electric
Gas Total Investment 41500
HOA Fees
Lawn/Snow
Vacancy 200
Repairs 200
CapEx
Property Mgmt.
Mortgage Insurance Premium 586.33
Mortgage 3281
Total Monthly Expenses 5075.33 Cash-on-Cash Return -74.46737349

In the actual scenario, I am paying $2575 every month towards the house. My girlfriend and I were already paying that when we were renting. So it didn’t make a huge change for us in our lifestyles. The added benefit, however is, I am now slowly building equity in the property and my girlfriend gets her new kitchen.

My next step is to refinance. I will write all about it in the next few weeks.

If anyone has any questions, please let me know. I am happy to help. 

Thanks

Pretty straightforward BRRRR strategy, nice job. Only thing I would have done differently was I would have moved into the unit worth 2500 and rented out the unit worth 3500. Granted you personally don’t live as nice. But it’s a sacrifice that would be saving you 1000 a month. Good luck with the refi!

Thanks @Keith Leckey . My agent said it would be in the $850K - $900K area. I have an appraiser coming in today. So I'll find out a more focused number in the next couple of days. 

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