Durham, NC 路 Member since 2017 路 74 posts 路 38 votes
Investment Info:
Single-family residence buy & hold investment in Durham.
Purchase price: $185,000 Cash invested: $3,000
This is a buy & hold "house hack" that I will be living in while also renting out some of the rooms to students/AirBnB guests. My aim was to purchase something that would cash flow, while also appreciate long term (or at the very least sell for its' purchase price) and allow me to live rent free so I can allocate my savings from living rent-free towards saving for a second investment property. On paper it is not the best deal since it doesn't meet the 2% rule (it shakes out to around 0.8%) but since I'm going to be living in it, it's worth it to me because it's a lovely safe location within walking distance to downtown. I bought it off MLS and while I might've overpaid slightly, I'm ok with that because there's no way I would be able to afford a place like this if I shopped on MLS. Location also is as important to me as cashflow, since I'm looking at this from a hospitality perspective and it's walking distance to a well attended school. The cash invested price is a rough estimate of what I spent on closing costs/inspections, and the most comparable comp to this property sold for $262k. I still need to account for the bathroom/kitchen remodel costs, and will update the investment amount once I have completed these tasks and have an idea of the true numbers. I ended up with this instead of a flipper because the profit margin is very slim and it's the type of property that really only makes financial sense if you plan on living in it to eliminate your rent. The monthly cashflow is based on projections/current market analysis and is very conservative.
The reason why he is asking is because you said you only invested $3000. In actuality you invested $18,500 (10% down) and $3000 (closing costs&inspections). Your actual investment which is money spent to acquire the property is $21,500.
He wanted to know if you had a special deal where you only invested $3000 to get through the purchase process.
In my original reply I was wondering how you got into a $185,000 house including closing costs and inspections for only $3000.
Durham, NC 路 Member since 2017 路 74 posts 路 38 votes
7y
@Damaso Bautista@Dan Barli Thank you! Yep, definitely going to keep going, prices should start to slow down around the next election, as will mortgage rates, so I should be in a good spot by then to purchase my second property. I aim to have 3 investment properties by 2021.
Rental Property Investor 路 New Braunfels, TX 路 Member since 2018 路 141 posts 路 103 votes
7y
@Julia Rockwell
Congrats. Can you share what your loan terms are? What kind of financing did you get? Traditional mortgage or HML etc... I'm interested in a loan like that. Thanks in advance.
Durham, NC 路 Member since 2017 路 74 posts 路 38 votes
7y
@Account Closed Traditional mortgage, 10% down, 4% interest rate. Ultimately it didn't make sense to go with a FHA loan since the PMI wouldn't drop off. I posted this thread twice somehow and wanted to delete this version (since the other one has more detail) but BP won't let me. I have more specifics in the other duplicate thread I posted. It's part of the reason why I didn't mind slightly overpaying the wholesaler, since if this were to go to auction I'd probably lose to a cash buyer. But since it was cosmetic fixes (and the appraiser like hardly looked at it) the bank agreed to finance it (although I had to explain to my mortgage lender how this all worked, the role the wholesaler played, why I can't just eliminate the middle man lol etc). I also had to explain the process to the realtor since he hadn't done a deal like this before, and ultimately while I thought this was fairly common and mortgage lenders/realtors would be familiar with this type of transaction, they weren't. Happy to answer any other questions. Also, there's some general wisdom that if the bank is willing to finance a wholesale deal then you're overpaying. However, the current climate of the market I'm in, while that might be true, I don't mind paying what I did because it's like 50k less than what properties are going for on MLS. Sure the profit is made on the purchase price, but maybe for my second property I'll get something that's less expensive. I didn't want to take on more than I could handle and didn't want to do a flip on my own and I didn't like any of the multifamilies that have been popping up. I think my strategy works for me because of how hot the market is and because my ultimate goal was just to eliminate my rent. More people probably have more aggressive goals they want to accomplish.
Durham, NC 路 Member since 2017 路 74 posts 路 38 votes
7y
@Account Closed You're interested in a loan like what? A standard 30 year mortgage? I didn't do a special 203k or anything like that, those are harder to get, although I'd consider trying to get one for my second property. I basically just took the gamble that it would appraise for the purchase price or higher and trusted my read of the wholesaler that they were being honest about it being cosmetic fixes. Also for whatever reason the appraiser listed the bathroom as "remodeled" even though there was obvious wood rot on the floor and the bathtub wasn't properly sealed to the wall. I don't care about the appraiser's report since I was in a time crunch and just needed it to come in at purchase price or higher, but in the future if I had the luxury of time I would make sure I got one that is from the local area because they didn't even take the most comparable comp into consideration and market a lot of things as "standard" even though it's obviously a market with higher than average growth. For context there's townhomes starting at 650k being built like 6 houses down and condos starting at 850k being built two blocks away.
The reason why he is asking is because you said you only invested $3000. In actuality you invested $18,500 (10% down) and $3000 (closing costs&inspections). Your actual investment which is money spent to acquire the property is $21,500.
He wanted to know if you had a special deal where you only invested $3000 to get through the purchase process.
In my original reply I was wondering how you got into a $185,000 house including closing costs and inspections for only $3000.
Durham, NC 路 Member since 2017 路 74 posts 路 38 votes
7y
@Damaso Bautista Ohhhhhhh I see. When I was filling out the investment property intake form, it required me to fill all this stuff out (I wanted to leave it blank). I wasn't really sure what it was asking so I guessed. I'd change the numbers but then I think it would auto-repost it again (the last time I tried to edit it, it auto-posted and I don't need 3 forums of the same topic). They should fix that. Anyways, @Account Closed to clarify, I put down around 32k. It's a tight squeeze and I might have to borrow some money to repair the bathroom, initially I wasn't planning on having to cut such a large check to a wholesaler, but it's worth it for the location. I could've lumped that 10k into the mortgage had I bought it directly from the wholesaler once it was under-contract with them, but that would've taken more time and cost around the same in the end so it wasn't worth it. It should take me like 2-3 months to get it in AirBnB ready condition, at which point that'll cover the mortgage cost completely and bring in around $500 cashflow as a very conservative estimate. Like I said, it's not as awesome of a deal since it doesn't meet the 2% rule, but it suits my needs and is what I was looking for since I plan on living in it as well and I am placing more value on location and marketability than other factors.
Durham, NC 路 Member since 2017 路 74 posts 路 38 votes
7y
I respectfully disagree, it's in the space between a personal home purchase and investment property, which is what I was aiming for. There are several factors about it that actually make it a solid investment property & it's a stellar location, but I'm not going into too much detail about those because I don't feel like having my address be super obvious. I stated in a previous duplicate post that it's a house hack & I'm confident in my decision regarding the cash flow from the AirBnB market and have acquired enough data to know it's reliable. It will not sell for less than it's purchase price and while it might not be the most lucrative first investment property, it's a safe bet that will net at least 40k if I decide to sell, which I probably won't given the location. I'm very familiar with the town, neighborhood, projected downtown growth rates etc. This works as a reliable house hack, airbnb rental and first investment purchase. I was looking for a property that was in a safe neighborhood, with marketability to seasonal visitors, large outdoor space, the ability to always attract a certain target demographic of a particular type of medical student, mainly cosmetic repairs, near public transportation, high walkability and in an appreciating neighborhood. If you're familiar with the local market, you'd know this is decent given the location and projected growth of the city. At the very least, I'm not going to be losing money on this deal and my main goal was to not pay rent anyways. I agree that given the information I provided on paper, this doesn't seem that great as a traditional buy & hold (which it isn't, house hack was not an option I could select for investment category), but my understanding of the local neighborhood makes a favorable difference.
Rental Property Investor 路 Moline, IL 路 Member since 2018 路 39 posts 路 27 votes
7y
@Julia Rockwell
Nice!!! 馃憦馃徏馃憦馃徏馃憦馃徏
I always thought house hacking was a great way to get started. And it sounds like you picked a great location.Once bathroom is done you will be ready to rock n roll. Keep me posted on how the Airbnb works out. I have been considering doing that with one of my rentals but not sure how it would do in my area. Congrats!!!
While AirDNA isn't perfect, you can get a rough estimate from it, talking to local airBnB owners helps too. Depends on your area, but you'll make above market rates from AirBnB than a traditional tenant, although it comes at higher risk/amount of effort. I've found ways to reduce those, and it seems in this area for a room rental you can make roughly like $100-$300 more per room, depending on location. The better the location, the more you can charge, within reason.
Ventura, CA 路 Member since 2017 路 29 posts 路 11 votes
7y
@Julia Rockwell you keep mentioning a 2% rule. For buy and hold investing I鈥檝e only heard of the 1% rule. Is there a different rule of thumb for Air BNB to cash flow? I鈥檓 looking at doing something similar to this and want to make sure I鈥檓 not missing something. Thanks in advance for your help and congrats on your first deal!
Thank you everyone :) @Tyler Barker This isn't exactly a buy & hold, it's really more of a house hack but that wasn't a classification option. However it also works as a buy and hold given the location, and it also works as a full time rental property as well (for either AirBnB or a traditional rental property given it's walking distance proximity to a great school). It's why the numbers are kind of so-so if you look at it from any one specific angle, but I like the diversity this property has and how it's a blend of all the categories since that's what I needed. I can dabble in all of the methods with this house which will be a good way to learn, and then I can apply what I learned to multifamily once I've saved up. It also has a bit of an exit strategy built in since if I decide AirBnB sucks and I hate dealing with that bs, after a year I can rent it out traditionally. Worst case scenario it works as a starter home since it's less than what I was paying for my rental property. I'm very risk adverse and feel more confident in my first purchase given it's flexibility.
The 2% rule is a guideline for a rental property that's saying like monthly rent should be around 2% of purchase price. Don't quote me on that, I am obviously NOT an expert by any means. Who knows, this thing could be a total money drain and I could fail big time (although I suspect I won't). So like, to hit the profitability of the 2% rule, given my purchase price of 185k, I'd want a property that ideally rakes in 3.7k/mo. Now, a lot of people think it's really hard to find a property that meets this standard, definitely the hotter the market the harder it is to find. A more C neighborhood or affordable area (maybe rural midwest etc) you are more likely to meet 2% but certainly it can be done. The way I view this property, it hits 0.87% which could be higher but I am ok with it. If I were to factor the money I am saving by not spending rent it hits 1.53%, but it's not smart to do that because that's not new income generated that's just redistribution of funds (but it's why I'm ok with this not hitting 1% fully). Depending on bathroom rehab costs it hits in the 0.87 to 0.89% range.
You're not missing anything, I'm just applying a lot of different formulas at this. It also doesn't meet the 70% rule for the fix/flip method due to the check I cut to wholesalers, which I already knew and had pointed out to me via constructive criticism. Again, getting paid $500/mo to live rent free and essentially run a hostel is probably way too much of a pain for most people, but I'm ok with this. For AirBnB to cash flow I would say you want to have higher profitability since they take a 3% cut and there's the risk that a guest could damage your property, your time is money and if you're cleaning you ant to account for that etc etc.
I also will be experimenting with designing a permaculture system in the backyard, so more than just my financial equity builds. If I plant fruit trees/sustainable ecosystems that essentially run on autopilot for a few hours of yardwork a month now, in a few years I'll be able to significantly reduce on grocery costs as well, which will help me save even more money, as well as build a more favorable local ecosystem and potentially get tax credits. I know this sounds like hippy dippy bs but I've seen it accomplished very successfully. At the very least if I decide to sell, it will be a competitive advantage.
Lastly, I opted for less cash flow to have something in a better location because either myself or a family member will always end up living here. It's across from a large park which will probably never be developed, 1 min walking distance to a Physician's Assistant school, walking distance to a private school and a 12min walk to downtown. There's a bus stop on the block so if I lose my job/car I can still have affordable transportation and down the street new townhomes are being built starting price of $750k (2 blocks away there are condos being built starting to sell at $850k). Across/on the street has about 3 or 4 large estates owned by Duke with sprawling lawns that will always be well maintained. When speaking to some people that house hacked prior to the recession one of the things I noted was that some of them got "stuck" in their properties but the ones that loved where they lived never minded this even when times got tough. Tim Ferris also said on a BP podcast that he only buys real estate that inspires him. That's a luxury, but I think location for a place I could get stuck living in is important and I'll focus more on hitting the 2% rule on my second purchase.
Ventura, CA 路 Member since 2017 路 29 posts 路 11 votes
7y
@Julia Rockwell it sounds like this is not just an investment to you but also a true home that you love and happens to bring in some extra cash. I think a lot of people here are in it for financial freedom and we forget that there is more to life than rules of thumb and CoC return. Congrats again on the purchase and I hope it works out. It would be great if you updated us in 6 months to a year for those of us possibly trying to copy this model.
Durham, NC 路 Member since 2017 路 74 posts 路 38 votes
7y
@Tyler Barker Thanks! Don't get me wrong, I'm all about CoC return and profitability too though. I'll also point out that there are business reasons as to why I want to focus on aesthetics/permaculture etc as well. I'm taking into consideration marketing to my target demographic. I'll keep track of progress but I have a theory that psychographics, angling for a particular niche demographic, charitable business models & aesthetics etc go a long way and are underutilized in REI (if even utilized at all). There's plenty of data on how my target demographic is a very different type of consumer, and it's not by chance that I'm in an area where they're the majority population. I haven't posted my entire business model because I just wanted to share that I purchased something, but this is the beta test and if it does well it's scalable. It's marketing aimed at reducing occupancy rates, increasing rental rates, beating the competition and yielding the maximum amount of positive externalities. Every decision I am making is completely calculated.