I'm getting started in REI though I currently rent my primary residence, a 5BR 2800 sqft single family home (built in 2006) in a nice neighborhood in Durham NC (Hope Valley Farms) that I split with 3 other roommates. The owner of the home just let me know that he's decided to sell, and has given me the chance to make an offer before putting it on the market.
I estimate that the market value is around $300k (fairly confident in this estimate bc a nearly identical comp nearby just sold for $307 with just a few small improvements). So if he sells to me directly I estimate he saves ~$18k in agent commissions. From there, my guess is that $280k is likely close to the lowest price he would accept from me. At that price, when I run the numbers the result suggests that I'd generally break even:
- Taxes/insurance/HOA: $450
- Reserves for vacancy/repairs/capEx/management: $500 (i'm using 7%/5%/5%/8% for these respectively)
- Mortgage: $1025 (this is based on a 30-year fixed primary-residence loan at 3.625% with 20% down through a credit union I bank with)
- TOTAL expenses: $1975
- Rent: $1985
I just LOVE the idea of house-hacking, and it would be amazing if this proved to be a good move. My main reservations about going through with it are:
- There's a large crack in the flooring shortly after you walk through the door to the house. The wood laminate flooring panels are coming apart for a stretch of around 20ft, and in some places the gap between the panels is over 1/4" and through it you can see a corresponding crack in the slab underneath. The owner has said that he has good insurance and can easily get that taken care of before the sale. I'm not sure it's as simple as that, but he seems very confident… Otherwise, the house is in good shape.
- The market in Durham is super hot right now! It seems like if I buy anything here now, I'm very much likely to over-pay
- I estimate that this would require at least $60k to close on. That's a lot of cash to leave in a break-even deal and not have for other investments!
I would love to hear any thoughts that folks familiar with the Durham market or with large SFR investment properties in general have on this potential deal. Thank you very much!
What is his motivation in selling to you? Saving the commission? Helping someone out? A quicker sale? Before you proceed further, have the house inspected so you really know what he is offering you.
@Mary E Copas - saving the commission and trouble of putting it on the market is definitely a motivation. Additionally, I reached out to him last year to express my interest in purchasing it, and I think he wants to give me the opportunity as a courtesy. I've been a great tenant in the house for 7 years as well and he acknowledged that he appreciates that. I will definitely have it inspected!
Hi @Annchen Knodt -
Is the $1985/mo in rent coming from the three other roommates? If that's the case, it's not really accurate to say this is only breakeven - you'd be living for free at that point - whatever you're currently paying in rent would be your positive cash flow (assuming your numbers are correct).
That's great that the current owner has good insurance, but I wouldn't be quite so quick to assume a cracked slab will be covered. The insurance company will try to determine what caused the crack ... if it was natural soil expansion/compaction, it's unlikely they'll cover it ... if it was, say, from a plumbing leak, there's a much better chance they'll pay for, at least, a part of it; however, that would then pose a different issue for you - I've seen new policies become very expensive when there are prior water damage claims on the property. I'd try to find out the cause of the issue before having the owner fix it - you may decide it's something you're ok just living with.
Another thing to consider ... maybe you don't do 20% down. If you go the 3.5% FHA route, that $60k number for closing will drop down to be closer to $12k. Yes, your loan payment will be a little higher and you'll have MI added to it, but that's not the end of the world ... you may decide that keeping an extra $48k in the bank is worth paying a little more each month for - especially if it's what allows you to pick up another property.
Thanks for your input, @Brian Sparr!! I realized after posting this that I forgot to specify that the $1985 rent includes my share, so I'd be getting ~$1500 from my roommates, and then essentially breaking even when/if I move out and continue to rent it for ~$2k. Right now I'm kind of thinking about it as meaning that instead of paying rent I would be paying into my reserve fund for Maintenace/CapEx/Vacancy/Management, which feels like a better use of my money than paying a landlord.
Appreciate your comments on the crack - those are definitely some new insights for me to consider!
And re FHA, I am keeping this in mind but am not sure yet whether the low money down will be worth the additional cost of the loan. Also, I may move out at some point soon, but could stay at least a year to cover that requirement. I think I will talk to my lender to get some concrete details on exactly what that loan would look like so that I can do a fully-informed analysis on those numbers.
This is a tough call because it doesn't even pass the 1% rule for property cost vs rent as an initial indicator. I think the HOA/taxes/insurance expense hurt this a good amount. RDU is starting to increase exponentially with the property taxes. Explosive growth in the area. BUT that also means you're most certainly going to experience property appreciation to a good degree. Also, factoring in the 8% property management hurts it further. If you would consider doing the property management yourself, that would help alot.
@Aris Mantalvanos thanks for your comments! Good to know about the property taxes. This purchase would be almost entirely counting on appreciation from the explosive growth as you mentioned… I know that's usually not the smartest move, especially on this property since as you pointed out it doesn't even meet the 1% indicator, and as such cash flow and CoC return are not good. I think I've always known that this wouldn't be a good investment but didn't want to admit it since I've enjoyed living in the house. Sinking $60k that could be invested at higher returns elsewhere into a property primarily for appreciation probably isn't what I want to do right now!
@Annchen Knodt This is where I find myself getting stuck with the last few deals I have analyzed in the RDU market. It would solely be based on appreciation, which I am not really looking to do right now.