Did I blunder my first home purchase?

[Troy Parker]

Hello BiggerPockets community.

I bought my first home about two months ago. I purchased a 1500sqft 3/2 wood home about two months ago. The property was REO. I purchased the property with 5% down at 225k and it appraised at 240k. I budgeted about 45k in cash to renovate the master bathroom, kitchen, guest bathroom, and painting the interior. With my down payment, closing costs, and renovations, I will have put down around 70k (down payment and renovations). I expect the home to be worth 300-315k after renovations. The home is in a B class neighborhood inside of a good school district. One of the major draws was that the property appeals to small families and is in a better area.

The home is in a great neighborhood, and I expect it to appreciate greatly based on new development and being centrally located within the town. I am not factoring appreciation in my cash flow analysis, but it was a major thought when I purchased the property. I could not have normally afforded to buy in this neighborhood without purchasing a distressed property.

My plan was to house hack one room for a year. After the tenant’s year lease is up, I plan to move out and rent the entire building. I was planning to rent the room for around $800 and after I move out, rent the entire home out for $2,500 monthly.

My current monthly payment is about $2,300. I have taken steps to reduce the mortgage payment that may take time to go into effect: filed homestead, I plan to reappraise the property after renovations are complete to eliminate my monthly $66 paid towards PMI, and I am currently negotiating different insurance policies. Due to the initial condition of the home, I had to get a construction insurance policy, pay a larger amount up front in an escrow account, and insurance is pulling monthly from that escrow account. My agent told me once the renovations are complete, I can get a different policy and use the remainder in escrow towards the next policy.

Assuming I can get my mortgage payment to around 2,150, there is almost no cash flow after I calculate for vacancies, property management, cap ex, etc. I do plan to self manage since its in my hometown; however, I am planning for property management as an expense in the event I move to a bigger city for better employment.

Questions for the community:

• Did I make a mistake in my purchase?
• Should I consider a 1031 after one year to “cut my losses”?
• How should I determine what to charge rent for a guest bedroom?
• How can I make sure that I do not rent the home out under market value?

[Julie Muse]

Hey Troy,

First off, congrats on your first home purchase! 🎉 You’re already doing an awesome job by diving in and getting your hands dirty with renovations. It’s a huge step, and it sounds like you’ve put a lot of thought into your plan.

Let’s tackle your questions one by one:

Did I Make a Mistake in My Purchase?

It sounds like you’ve made a solid investment. You bought in a good area, you’re adding value with renovations, and you have a clear plan. The fact that you’re budgeting for vacancies, property management, and cap ex shows you’re thinking ahead. Mistakes happen, but from what you’ve shared, it seems like you’ve made a smart move.

Should I Consider a 1031 After One Year to “Cut My Losses”?

A 1031 exchange can be a great tool, but it’s typically used to defer capital gains taxes when you’re selling one investment property to buy another. Since you’re just starting out and haven’t even seen how the property performs post-renovation, I’d say give it some time. You might find that it works out better than you expect.

How Should I Determine What to Charge Rent for a Guest Bedroom?

Check out local listings for similar properties and see what others are charging for rooms. Sites like Craigslist, Facebook Marketplace, and Roommates.com can give you a good idea. You want to be competitive but also make sure you’re covering your costs and hitting your financial goals.

How Can I Make Sure That I Do Not Rent the Home Out Under Market Value?

Look at comparables in your neighborhood. Zillow, Rentometer, and local property management companies can give you rental comps. Keeping an eye on the local rental market will help ensure you’re charging a fair market rate.

Remember, you’re doing great! This is a learning process, and you’ve already taken some big steps. Keep going, trust your instincts, and don’t be afraid to adjust your plan as you learn more.

You’ve got this!

Best, Julie Muse