Duplex House Hack with only $6500 out of pocket!!

[Haylie Roggenbuck]

Investment Info:

Small multi-family (2-4 units) buy & hold investment in Spokane.

Purchase price: $288,000
Cash invested: $6,500

This is a 3 BR 2 BA side by side duplex with the potential to add another bedroom per unit. The goal is to kick out the current tenants in one unit, renovate the place, live in the upstairs, and rent out the downstairs to friends. Then do the same thing on the other unit when their lease is over.

$1800 (mortgage) - $1600 + $800 (rents) = $600 cash flow while living for free.

Then in one year (ish) we will refinance out of FHA into a conventional loan, move out, and do the process again!

What made you interested in investing in this type of deal?

This is apart of your 5 year plan, to buy a multifamily unit, live in it for around 1 year, fix it up while living there, move out, rent, and repeat the process each year.

How did you find this deal and how did you negotiate it?

This deal was listed on the MLS and we made an FHA offer... denied, then put in a backup offer and it was accepted!

How did you finance this deal?

Owner occupied FHA loan, 3.5% down.
After all prorated rent, security deposits, etc, we only had to come up with $6500 out of pocket!

How did you add value to the deal?

We will add value by adding an extra bedroom per unit, and "modernize" the place a bit!

What was the outcome?

The outcome hasn't been achieved yet, but we plan to cash flow around $1400/month, add equity through improvements, and have a nice money maker for the years to come.

Lessons learned? Challenges?

Back up offers can work AND if your low on funds, ask for sellers to pay closing costs!!! We made a strong offer which was not accepted. We were really bummed so we tried putting in a backup offer which was still not accepted or even signed for weeks... we thought we lost the place. Then out of the blue, the sellers signed our backup offer and the next day their first buyers fell through. 3 WEEKS LATER AND WE GOT IT! A huge bonus was in our offer, we asked the sellers to pay closing costs! YAY!

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

YES! We always work with the same agent and lender and it is always a GREAT experience! I highly recommend them.

[Dan H.]

I want to say congrats for taking action, having a plan, acting on the plan.

Now for the constructive criticism: It appears you need to better understand rental expenses.  I suspect your formula needs some parenthesis but what I believe is mortgage is $1800, one unit rents for $1600 and your friends are renting your unit for $800.

income (rents) are $2400 and mortgage is $1800 for a $600 difference. $600 is not the expected cash flow. I will assume the mortgage is the full PITI. There are other expenses such as maintenance, capital expenses, vacancy, PM (even if self managing you should include PM in the numbers). This property is likely negative cash flow with you living in it. However, if you did not live in it you would need to pay rent elsewhere.

If you were renting out both units $3200/month rent with $1800 mortgage, the 50% rule would not have this having much positive cash flow.  With the small investment amount, the return could be good/great even with a small amount of positive cash flow.

I am not saying this to be discouraging but to educate not only you, but anyone reading this who may think the difference between PITI (mortgage + taxes + insurance) and rent is the expected cash flow.

You did not invest much.  You have a value add.  Your rents are likely to increase.  The property value is likely to increase.  It is likely a good investment, but it does not currently have positive cash flow with you living in it.

I am a fan of house hacking.  I am a fan of value adds.  I think you probably have a good investment even if the cash flow is not what you indicated.

Good luck