All Forum Posts by: Luke Stewart

Been discussing this topic on the forums for awhile now but just landed my first house hack, closing on 2/24 and I wanted to share details! Not closed yet but as I'll explain there is a low chance things don't work out.

Property: 

Duplex in Aurora CO. Each unit is turnkey, has 4br/2ba, full basement with laundry room, separate fenced in yards, with a semi detached 2 car garage (attached to the building but inaccessible from inside the units), separate HVAC, AC and sewer lines. Potential for improved kitchens and bathrooms. 

Loan: 

FHA 3.5% down

5.65% rate - buying down to 5.25% for $2000 - saves $149 a month, break even in 13 months. 

Cash to close: $33,914

Monthly Payment: $4396 (close estimate from lender, unsure total home and mortgage insurance)

Purchasing Story: Found the unit on the MLS, realtor reached out 48 hours after it was listed and we were told they had multiple offers. This is close to my limit of comfortable purchase price so I decided to not give an offer since I didn't want to join a bidding war. The home when through inspection, appraisal and was cleared to close when the buyer had to terminate due to personal reasons. My agent had stayed in contact with the sellers agent about the property and how I was interested if anything fell through. The morning they heard of a potential termination she contacted my agent about it and we drafted our offer. We decided that the best plan was to offer list as we already knew it had multiple offers the first time on the market. Our goal was to get the property before they decided to relist it. It worked out and we had an accepted offer that evening. We are doing our own inspection this week and close on 2/24. The best part here was I got to see the other buyers inspection, improvements and appraisal after having my offer accepted, they replaced water heaters and fixed all the big issues. So I am confident as we move forward.

Househack strategy:

The long term average market rent in the area is $2700 for this size home. I will rent one unit out as an LTR. The other unit will be my primary residence and I will rent out 1-2 of the bedrooms month to month while I live there. The home is near 2 major hospitals and the air force base so it should be an easy rental for those who want to be near work. MTR rates for a single bedroom is approx: $900-1200 (I have an MTR rental in the area and bring in $3000 for a 2br - I feel confident I can get $2000 for 2brs). The garage will be half for the LTR, and half for myself. So MTR renters will park on street (free parking) or in the driveway. 

Finances: (using lower numbers)

Monthly payment: $4396

LTR: $2700

MTR: $1800

Utilities/CapX: LTR pays own utilities. Primary unit estimating $600 (will reassess after year 1).

Long Term Plan:

The first year I will break even, maybe owe a few hundred each month. But after 12-18 months the plan will be to buy a new duplex and continue renting this duplex. Whether I rent it LTR/MTR or both LTR will depend on how well it does as an MTR. The best part of that is a 4br/2ba MTR unit in this area is averaging over $4000 a month according to Airdna and that would bring monthly cashflow to over $2000 a month. If the MTR isn't working out I will LTR both sides with a cashflow around $800-$1000 a month. For a 3.5% down duplex in denver I think this could be a home run. Personally I think rates below 4% are years away, so I am planning to refinance in 5-7 years (if earlier great and hopefully to a conventional) to drop off the mortgage insurance. The one thing I need to figure out is if redoing bathrooms and kitchen down the line will create enough equity for the refinance or if I will need to put some of the cashflow back into the principal to achieve that goal. If we jump ahead 10 years and my plan works out I am hoping this property could potentially cashflow $3000 a month!

REI Summary:

Property #1 MTR : Total expenses: $2100 - average rent last year $3000 = $900 CF

Property #2 New Duplex: Potential CF after 1 year (low estimate) = $800

Total Monthly Cashflow: $1700/m

This is obviously early in the process of knowing how it will work as a rental, I am aware a lot can happen and it might not even close if something unforeseen comes up. But this is the layout of my plan and I feel confident in the numbers I have listed. Happy to answer all questions and would love people to poke holes in my plan as its a great learning opportunity. This will put me at 3 doors and I am so STOKED!

This is excellent, it has to feel good getting everything up and going after Covid set you back. I am curious. What was your rehab costs and furnishing costs? Love the fixtures and furnishings you chose, NICE WORK!

I am gonna repeat what @Lawrence Potts has said here. If you have run the numbers and they work base on your goals, even with PMI, go for it. Personally, I would rather put 5% down, pay the $250 a month in PMI (especially if the property cashflows), and keep the 15% in my pocket to go buy another one a year later (if you're buying it as a primary then you have to wait a year with FHA). Compared to refinancing your current spot and doubling the interest rate, getting a heloc that is a variable rate (what's the difference between this interest payment and your PMI?) or spending so much time saving for 20%.

My first property I purchased FHA, refinanced to conventional and have around $200k in equity with a 2.25% rate which I refuse to touch, its basically free money. I am currently buying a duplex and I am doing it FHA because I can keep more money in my pocket for rainy day problems, slight remodel and buying my next duplex. You should know, cashflowing at 3.5% down can be tricky so you have to do more due diligence, I am looking for $300-$500 a month.

For me it all comes down to security, I will happily pay the PMI to I have money for emergencies and/or buy more properties. Lawrence nailed it when he said your thinking isnt wrong, its just slow. If you're okay with slow, or even looking for slow (some people LOVE slow) then stick to it. But if your goals are acquiring more properties and growing your portfolio, saving for 20% or messing with your current mortgage seem like the wrong path to me. People would kill for a 3.5% mortgage these days!

I want to start off by saying I have never done rent by the room, not sure how that impacts house hacks. OR if he will continue doing rent by the room after he moves out. That being said, I think $633/year is tight. You are basically breaking even, and if something big happens he could be in the negative. If the goal is cashflow its not the best property, but if the goal is equity to use a 1031 down the road then I think $633/year is acceptable. I personally would need more than $633/year to feel good about it unless I had a specific plan for the place. As someone who also invests in Denver, one could say any cash flow is good cash flow.

@Derek Brickley is absolutely correct. You should definitely call them back, however, if they are already telling you its not possible you may want to find a more investory friendly lender. I had a lender tell me all the reasons why house hacking doesn't work with FHA, then another lender was like "this is what we do" and things went much smoother. Lenders have their specialties just like any other profession and you want one that has done this many times before. The more experienced they are with house hacking, the smoother the whole process will go.

Thanks for everyone's help, update on my question. I ended up finally speaking with a GC, the conversation went well, while he never went to the property he was willing to do the 3D walkthrough on zillow. We had a good conversation about what I envisioned and he told me the bare minimum (without walking the actual building) he would estimate it is 125k with low level finishes but he thinks its more in the 175ish range as long as nothing goes wrong based on the quality I wanted. I have decided to wait on this big of a project at the moment. Thank you for your responses, I felt much better prepared for that phone call. 

I hear everything you're saying, yes this would be my first BRRR if I take it on, and I'm not one with the ego to say I know everything because I read a book. I am being careful, that's literally the purpose of this post. I've definitely seen those posts about huge losses and I am doing my best to learn about this process before deciding if its what i want to do with this next purchase. I'm simply asking questions about part of the process I am unfamiliar with. I do appreciate your advice.

Question about the total equity, I think we are thinking the same thing but said differently. It would still be more than 250k unless youre talking after refinance and pulling out. Once refinanced at 950k I would only owe 505k on the original loan. Which would put the "total equity" at 445k, I would refinance at 30% so id have 285k in the property and take back the remaining 160k. I think we were thinking the same thing but I wanted to lay this out in case we arent. 

and to be honest I might leave all the equity in with the intention of 1031 5-7 years later into a multifamily LTR.

You seem to think I am going into this completely blind, I have been in RE for over a year, taken multiple classes. For this specific deal I have my realtor who is an REI helping me, my dad who owns 200 doors and a management company consulting with me (he has employees, doesnt use GCs) and I have two friends who are REI who have gone over the numbers with me. DO NOTHING is not the greatest advice, I understand what you're trying to say but you have to get started somewhere.. which is what I have been doing for a 3 months since the possiblity of a BRRR came up. I think its better to learn all I can prior to talking to a GC compared to going in blind. One of the steps to learning is to learn what I should know about working with GCs prior to talking to them.

Here are the numbers

Purchase Price $535,000

Est. Rehab $150,000 (This is simply based on the BP Rehab Estimator tool)

ARV: Low end $900,000 (3-4br, 2ba duplexes in the neighborhood from 900k-1,050,000)

Final Equity: $391750 after refinance including initial downpayment.

I have sufficient funds for a 30% increase in expenses to be safe, budgeted for 6 months no renters. This is a house hack, I wont be refinancing for 12-18 months. Again, this isn't certain, i am just doing my due diligence if come end of January when I am making offers it ends up a potential purchase.

I know that, I never said I was looking for a specific BRRR contractor, im looking for a GC for a BRRR. Good questions, thanks.

 This is excellent, thank you. Now I can look into all these questions as my own personal homework.