Moving out of 2 year house hack

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Moving out of 2 year house hack

Billie Miller
Real Estate Agent · Denver, CO · Member since 2014 · 151 posts · 101 votes

The first part of this house hacking success story could have been written a couple years ago, but it wasn't, so here is the final part!

We bought a duplex with owner-occupied financing in March of 2015. We had to evict the inherited tenants and then clean the unit (@Luke Miller did almost all of the cleaning and remodeling!) after they trashed it, but we moved into one unit in May of 2015. 7 days after we moved in, we found out the inherited tenants had left us with bedbugs, so after getting rid of those and finishing the remodel, our tenants moved in September of 2015. The rent from that unit paid for all but $14 of the mortgage/insurance/taxes, so we have basically been living for free for the past couple years! 

We closed on a new home (which I think deserves it's own success story in the Denver market) a couple of days ago and will move out of our unit of the house hack in a couple weeks. Our new tenant will move into our unit on 4/1, at which point we will start pocketing $600/month in cash flow. We drastically underestimated what we could get in rent when we first analyzed this duplex, so we really lucked out. Our new home is just a couple miles from this duplex, so we will continue to manage it ourselves. There is more than enough room in the numbers for property management if we decide to do that later though.

The best part however, is that we didn't use our own money for the down payment. Some family members had some money they wanted to invest with, but didn't want to put the work in. We wanted to put the work in, but didn't want to invest our own money. So it was a win win for everyone. We are taking the cash flow now and they will take a larger chunk of the capital gains when we sell it.

Here are the numbers:

Purchase price: $299,000

Down payment: 20%

Monthly Rental Income: $2,800

Mortgage/Insurance/Taxes: $1,316

Vacancy/Repairs/CapEx: $700

Water/trash: $70

Cash flow: $714 (we're counting on $600 after taxes)

We learned so much from this deal (including, but not limited to):

  • Inherited tenants are seriously the worst
  • Bedbugs are a thing
  • Conservative underwriting in the beginning is so worth it
  • We are unapologetically bad at painting

I know everyone says this, but this deal definitely would not have happened if it weren't for Bigger Pockets. We spent an embarrassingly long amount of time in analysis paralysis (like 2 years, seriously embarrassing) before we pulled the trigger, but we are so so glad that we did! 

Over the last 2 years we have also flipped a condo (thanks @JeanBolger!) during this time and are about to close on another flip in a couple weeks. This first deal really gave us confidence to start building a business around real estate investing.

I don't know if we are qualified to give advice yet, but if we are, it would be to just take the first step and buy your first deal. It takes courage and confidence, but you just have to do it. It might not be a great deal, but you will learn so much from it and the future deals won't be nearly as scary. Also, house hacking is the greatest, we definitely recommend it!

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Bill S.Pro Member
Moderator
Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
9y

@Billie Miller nice success. You left out one nice piece of info as well. What is the value of the duplex now. Probably easily $350,000 so for a few bedbugs and some sleepless nights you "earned" a share of $50k. Probably a pretty good hourly wage as well. Cheers to you and yours.

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  • Billie Miller
    OP
    Real Estate Agent · Denver, CO · Member since 2014 · 151 posts · 101 votes
    9y

    Thanks to @Micki M. and her team for the duplex purchase and @Jean Bolger for helping us get the first condo flip! 

    2Reply
  • Kristopher HanksPro Member
    Rental Property Investor · Davenport, FL · Member since 2016 · 593 posts · 382 votes
    9y

    @Billie Miller Nicely done! And I agree I will never do a deal with inherited tenants again. I have had a really bad one myself. 

    1Reply
  • Willie Abad
    Bronx, NY · Member since 2017 · 7 posts · 12 votes
    9y

    Amazing this is exactly the route I hope to pursue besides the bed bugs and inherited tenants of course lol ! Congrats! @Billie Miller @Lucas Miller 

    2Reply
  • Rado Stanchev
    Investor · Arvada, CO · Member since 2016 · 4 posts · 0 votes
    9y
    That sounds like a nightmare, but glad to hear that it was a success at the end. We are also house hacking our house currently in Arvada, CO and will watch out for the bedbugs and pick tenants wisely :) thanks for the input. You guys should checkout my post since we are in the same area it might be interesting to you :)
    0Reply
  • Joe Norman
    Property Manager · Baltimore, MD · Member since 2014 · 1k+ posts · 1k+ votes
    9y

    So awesome, congratulations on your persistence and initiative!

    1Reply
  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    9y

    @Billie Miller nice success. You left out one nice piece of info as well. What is the value of the duplex now. Probably easily $350,000 so for a few bedbugs and some sleepless nights you "earned" a share of $50k. Probably a pretty good hourly wage as well. Cheers to you and yours.

    3Reply
  • Tripp Howell
    Real Estate Agent · Denver, CO · Member since 2016 · 58 posts · 24 votes
    9y

    Wow, great story, thanks for sharing!  I love the encouragement, and you have definitely are qualified to give advice!  Could you give us some info on your flips that you've done?   What source did you use to find them, where were they, what financing did you use??? 

    Thanks!   

    0Reply
  • Matt M.
    Realtor · Denver, CO · Member since 2013 · 2k+ posts · 1k+ votes
    9y

    This is awesome! Congrats to you guys. Tell Lucas that painting just takes practice...lots of practice! 

    2Reply
  • Susan Maneck
    Investor · Jackson, MS · Member since 2014 · 1k+ posts · 769 votes
    9y

    One thing I notice about inherited tenants good or bad, is that the rent is usually way below market value. Typically they have lived there for years often without any increase. 

    2Reply
  • Wesley Emison
    Rental Property Investor · Knoxville, TN · Member since 2015 · 16 posts · 4 votes
    9y

    $114/month for taxes? No way! (at least in the first few years) You should consider paying for a cost segregation study to be performed and accelerate the depreciation. I believe you could even catch up on missed out on depreciation and flow that through to yourselves and the partners in the deal! (depending on entity structure, assuming they are equity partners since you mentioned capital gains sharing later). Better yet, if you have receipts of all of the remodel that you did then you should be able to provide that to the cost segregation expert and they should be able to provide you with the amount of the $299,000 that you/your business "abandoned" (assuming you removed anything from the property that you purchased during your remodel) and should be able to write off of the original investment (seriously a massive write off in some cases..like if you ripped out bathrooms and refloored the house or new windows or whatever...your tax accountant will know more). Don't forget to track and deduct your mileage (including trips to your remodel store of choice, assuming you own a car that you use(d) to conduct business with), deduct a portion of your cell phone (assuming you conduct business on your phone) and deduct a home office expense (assuming you conduct your property management out of a room in your house) and consult a tax accountant to see what other tax write offs you should be able to have. I put all this out there, while am I not a tax accountant, to share that you could actually be able to benefit from your tax position from this remodel (for a first initial years) instead of planning on paying taxes. The government wants you to do exactly what you did so they incentive it! Apologies if you have already considered all these things and still have to pay but I find that unlikely if you have the study done and accelerate as much depreciation as legally possible. Also - congrats on the remodel! 

    3Reply
  • Account Closed
    Rental Property Investor · Orlando, FL · Member since 2016 · 463 posts · 220 votes
    9y

    Congrats on a great find and thanks for sharing your experience! My husband and I moved to a new city a few months ago, leaving behind our big, beautiful house (*sheds a tear*) and have since discovered Bigger Pockets, so we are considering house-hacking a duplex in our new city. It will be weird/scary going back to having "next-wall" neighbors again, but the financial benefits are too good to pass up! Just need to find the right property now. A fixer-upper would be ideal, but in the current environment it may be hard to find one in a decent neighborhood. 

    Thanks for the inspiring story!

    1Reply
  • Frankie Woods
    Investor · Arlington, VA · Member since 2012 · 1k+ posts · 491 votes
    9y

    @Billie Miller, how did you structure the partnership on the duplex?  Did you add your family member to the title?

    2Reply
  • Monica Young
    Baltimore, MD · Member since 2017 · 30 posts · 6 votes
    9y

    Congratulations! All of that sounds a little scary, but you made it through. My husband and I are looking for a house hacking deal right now. It seems to be pretty difficult to find in our area, but stories like yours give me hope. Thanks!

    1Reply
  • Paul Caputo
    Cost Segregation Specialist · Naperville, IL · Member since 2016 · 204 posts · 168 votes
    9y

    Awesome story and congrats on the successful house hack! I'm just north of Denver so this gives me some local inspiration! It's nice to see local success stories. 

    @Wesley Emison is right about cost segregation. The tax benefits from accelerated depreciation are quite impressive. The depreciation catch up provision is a section 481(a) adjustment that allows you to take any previously unclaimed depreciation in the current year and carry forward into future years if the adjustment is large enough. 

    On a $300K property you'd probably see $10K-$25K in tax benefits over 5 years depending on your tax rate, land value and the amount of tangible personal property in the home. For many investors this puts their taxable rental income close to zero and maximizes cash flow. 

    The best part is the IRS accepts and approves engineered cost segregation studies so they actually want you to do this. It's one of the few instances that the IRS wants you to do something that will substantially lower your taxes. Depreciation is the greatest untapped resource in real estate, and engineered cost segregation is how to get the most out of it. 

    Be careful with it though and only accept a true engineered cost segregation study done with a site survey by a construction engineer or architect qualified in cost segregation. Anything less does not follow IRS guidelines and can open you up to fines and penalties. 

    3Reply
  • Patricia K.
    Vancouver, WA · Member since 2017 · 23 posts · 9 votes
    9y

    Congrats on the deal and making it work! That is awesome. I am encouraged reading your story! 

    1Reply
  • Susan Maneck
    Investor · Jackson, MS · Member since 2014 · 1k+ posts · 769 votes
    9y
    Originally posted by @Wesley Emison:

    $114/month for taxes? No way! (at least in the first few years)

    Is that considered a lot? I'm paying as much as $1700 a year in taxes for houses I paid 35K for. 

    0Reply
  • Micki M.
    Flipper/Rehabber · York, UK · Member since 2013 · 895 posts · 453 votes
    9y

    @Billie Miller @Luke Miller this is my favorite kind of story! It's been so fun to part of your journey, congratulations on the first steps in building your real estate empire.

    2Reply
  • Wesley Emison
    Rental Property Investor · Knoxville, TN · Member since 2015 · 16 posts · 4 votes
    9y

    @Susan Maneck It's really hard to say just purely based on the information you provided but I would anticipate that because you only paid $35K for a house (assuming you did not put any money into the house in capex) that there would be very little to depreciation that would economically be able to be accelerated. You can only depreciate the building, not the land. So, for easy math let's assume the land is worth $7.5K and you have $27.5K of depreciable assets. There really is not going to be that much benefit of accelerating the depreciation in your case because there is not that much to accelerate. You have to pay for the study to be performed and I would anticipate that it would be very difficult to justify that expense given the low basis you already have. But it's not all bad news. Hopefully that means you got a really good deal on the property! In @Billie Miller's case she/they have a much higher depreciable base. In your $27.5K depreciable base, over 27.5 years - you would only have $1,000 of depreciation a year. In the Miller's situation they would have (assuming $24K of land value for easy math) $10,000 of depreciation a year ($275,000 straight line over 27.5 years). Now, if the Miller's are able to pay to have a cost segregation study performed and able to get 20% of their depreciable base into the 5 year bucket, 2% into the 7 year bucket and 20% into the 15 year bucket (wild examples that are not benchmarks, just using for this discussion) then that would accelerate a massive amount of depreciation and (depending on a lot of other factors) could allow them to legally claim a loss on their personal/applicable returns in the first 5-7 years (guessing) even though they may be actually cash flowing and having the tenants pay down the mortgage. Of course, there is a trade off with this which is that any depreciation accelerated is taken away from later years - but there are strategies for that as well; see 1031 exchange. There is no one solution to what the right answer is for you. All that being said, cost segregation studies are a valuable tool to be used in RE investing (particularly when there s a renovation) but for a $35K investment it may not be economically justified to pursue.

    0Reply
  • Lacey S.
    Durham, NC · Member since 2015 · 48 posts · 18 votes
    9y
    Originally posted by @Susan Maneck:
    Originally posted by @Wesley Emison:

    $114/month for taxes? No way! (at least in the first few years)

    Is that considered a lot? I'm paying as much as $1700 a year in taxes for houses I paid 35K for. 

     @Susan Maneck, I think he is saying the 114$ is too much to reserve for income taxes on the rental. The OP lists "Mortgage/Insurance/Taxes: $1,316" which I assume is already deducted from the cashflow number. I think 600 is her after tax estimate of cashflow from the raw number of 714/mo but I could be wrong.

    1Reply
  • James CarlsonBusiness Member
    Real Estate Agent · Colorado | stan.store/JamesCarlson · Member since 2014 · 2k+ posts · 2k+ votes
    9y

    Congratulations @Billie Miller and @Luke Miller. Great story! It's so great to see the fruits of what this site is all about. 

    [email protected]720-460-1770
    James Carlson Real Estate
    WebsiteView Page
    1Reply
  • Susan Maneck
    Investor · Jackson, MS · Member since 2014 · 1k+ posts · 769 votes
    9y
    Originally posted by @Lacey S.:
    Originally posted by @Susan Maneck:
    Originally posted by @Wesley Emison:

    $114/month for taxes? No way! (at least in the first few years)

    Is that considered a lot? I'm paying as much as $1700 a year in taxes for houses I paid 35K for. 

     @Susan Maneck, I think he is saying the 114$ is too much to reserve for income taxes on the rental. .

     Oh, this is income tax, not property taxes? 

    0Reply
  • Billie Miller
    OP
    Real Estate Agent · Denver, CO · Member since 2014 · 151 posts · 101 votes
    9y
    Originally posted by @Matt M.:

    This is awesome! Congrats to you guys. Tell Lucas that painting just takes practice...lots of practice! 

     Thanks!

    I'm sure practice is what we need, but we're not even willing to put that into it lol.

    0Reply
  • Billie Miller
    OP
    Real Estate Agent · Denver, CO · Member since 2014 · 151 posts · 101 votes
    9y
    Originally posted by @Wesley Emison:

    $114/month for taxes? No way! (at least in the first few years) You should consider paying for a cost segregation study to be performed and accelerate the depreciation. I believe you could even catch up on missed out on depreciation and flow that through to yourselves and the partners in the deal! (depending on entity structure, assuming they are equity partners since you mentioned capital gains sharing later). Better yet, if you have receipts of all of the remodel that you did then you should be able to provide that to the cost segregation expert and they should be able to provide you with the amount of the $299,000 that you/your business "abandoned" (assuming you removed anything from the property that you purchased during your remodel) and should be able to write off of the original investment (seriously a massive write off in some cases..like if you ripped out bathrooms and refloored the house or new windows or whatever...your tax accountant will know more). Don't forget to track and deduct your mileage (including trips to your remodel store of choice, assuming you own a car that you use(d) to conduct business with), deduct a portion of your cell phone (assuming you conduct business on your phone) and deduct a home office expense (assuming you conduct your property management out of a room in your house) and consult a tax accountant to see what other tax write offs you should be able to have. I put all this out there, while am I not a tax accountant, to share that you could actually be able to benefit from your tax position from this remodel (for a first initial years) instead of planning on paying taxes. The government wants you to do exactly what you did so they incentive it! Apologies if you have already considered all these things and still have to pay but I find that unlikely if you have the study done and accelerate as much depreciation as legally possible. Also - congrats on the remodel! 

     Yeah $114 was conservative. We've just had such low rental income since only one unit was rented out, that I don't know what to expect. Our tax accountant has done all of those things. I just like to be safe rather than sorry.

    0Reply
  • Billie Miller
    OP
    Real Estate Agent · Denver, CO · Member since 2014 · 151 posts · 101 votes
    9y
    Originally posted by @Frankie Woods:

    @Billie Miller, how did you structure the partnership on the duplex?  Did you add your family member to the title?

    We formed an LLC where we are all members. Our family members put money into the LLC then we took a loan from the LLC for the down payments. We took title and the mortgage in our personal name and then quit claimed it to the LLC. So we all own a business that owns the rental. It was pretty slick.

    2Reply
  • Billie Miller
    OP
    Real Estate Agent · Denver, CO · Member since 2014 · 151 posts · 101 votes
    9y
    Originally posted by @Tripp Howell:

    Wow, great story, thanks for sharing!  I love the encouragement, and you have definitely are qualified to give advice!  Could you give us some info on your flips that you've done?   What source did you use to find them, where were they, what financing did you use??? 

    Thanks!   

     The first was a condo flip and the one we are closing on later this month is a condo as well. I don't think there is as much profit to be made in a condo, but they are easy and quick. You don't have to mess with as much structural and mechanical so it's pretty easy to estimate repairs. We found both through wholesalers and are using private money from family members as well as our own cash to finance. I'll post more on this upcoming flip as we get to it.

    1Reply
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