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Updated about 6 years ago,
Live in rehab house hack story
Hello BP community,
I would like to share my story about my first investment property. It's a longer post than The strategy I chose is a live-in rehab house hack duplex. My journey into real estate investing has been a wild ride since the start and is very fulfilling. I thought I’d start off with a little background on my personal finance situation coming out of college. I’m an average guy with a good average and high debt.
- Had an above the median income paying engineering job out of college
- $60k in student loan debt
- Purchased a new truck a few months into my new engineering career, putting myself another $25k in debt
- High cost of living out of college – partying, buying toys, eating out, etc.Following the societal norms for how to live life.
- Savings rate was almost 0%
- Retirement contributions of 15%, but I don’t really count that towards my savings rate since it’s locked away
- Paying off ~$1000 per month in student loans
After a year or two out of college, I soon realized that I was spending a majority of my income and wasn’t saving really any money. Something just didn’t seem right since I was making well above the median family income but only supporting myself. Somehow, I stumbled into reading Rich Dad, Poor Dad changed my perspective on life and personal finance.I began to self-reflect on who I wanted to be in life and what activities or aspects of life made me happy. That self reflection led me to stop following the crowd, pursue my passions, and save money for the future.My why is to buy my personal time back.I’ve had jobs that sold my soul, with a high demand of overtime hours. My personal opinion is that it’s not worth selling my time now to hope to live my dream at 65 when I retire and then have time.I want to live my dream today, tomorrow, not in 40 years. My hobbies, family, friends, and persona responsibilities will change as I go through life, but I know that they will take priority over a job and creating someone else’s financial independence.
I had automated my savings into an online external bank account, which allowed the money to be out of sight, out of mind and never missed. It’s amazing how much easier it is to save money when you can’t see it going away or see that you have it. A few years later, my piggy bank had magically grown large enough for a down payment on my first home. Now that buying a home using traditional financing was an option I began to look around for properties.
Finding the deal:
Over my life, I have seen relatives and a few friends use real estate investing to advance their financial success. About the time I had enough saved for an FHA down payment, I started to look into real estate investing. Throughout this self-education I found the Bigger Pockets community and was hooked. After reading and reading, I thought this was for me and began to look for my first deal. I had contacted a few local realtors to view properties listed on the MLS and would call Craigslist landlords to see if they'd sell their vacant property instead of renting it.Calling Craigslist landlords was fairly successful finding landlords that were "open" to selling; however many of the landlords asking prices were not close to cash flowing.After testing out a few various realtors, I had settled on one who specialized in multi-family and is an active real estate investor himself. We developed a good relationship and he developed MLS queries for what fit my criteria.I had made offers on a few off market homes, but none were accepted. It was terrifying making those offers, especially typically well below asking price. I ran the numbers and I knew what the properties were worth. Presenting my offers I talked through comps, home renovation scope and estimated costs. This gave the seller a better understanding than if I just threw out a number. Thankfully I didn't raise my prices and purchase a non- cash flowing property. One morning at work, I saw an automated email from my realtor about a duplex in the area of town I wanted to live in, for a low price, and needed some renovation work. This was exactly what I was looking for! I called my realtor immediately and scheduled a showing for that afternoon.
Walking through the home my first time was exciting for it had many opportunities – smoked in for years, old gross carpet, wood paneling walls, no light fixtures in half the rooms, sloping floors, minor water damage in the ceiling, old smoke stained acoustic ceiling tiles, etc.However the foundation was in good condition, roof was replaced 2 years ago, water heater last year, plumbing and electrical both updated, and a 20 year old furnace.As my realtor described the property – “it needed a lot of lipstick.” After running the numbers a few times with estimated future rents, they showed it would cash flow (historic rents were below market value for the current condition, and it was currently vacant). With a lot of unease for what am I getting myself into – I made an offer $2000 above asking price to make sure I would get this duplex. The offer was accepted the next day and now the fun really began.
Initial numbers:
Funding the deal:
Recommendations from many sources were to use a local community bank instead of the large bank chains. I found success using this strategy as well. I narrowed my selection to 2 different local banks, both easy to work with for my situation and lower fees than the big banks. I eventually chose my lender based on lower closing costs.I had the option to get a lower interest rate with buying points, however I plan to either refi (BRRRR) my renovation costs into my mortgage or sell my home after 2 – 5 years. Both of these options make the higher interest rate and lower down payment favorable.I have enough savings to fund the renovation in cash, but I used a Chase credit card with 0% APR for 15 months. This would make my expense tracking and taxes more organized and a free 15 month loan so I can save my cash for a rainy day, leaking roof, or invest it elsewhere.
- Conventional mortgage
- 15% down
- Owner occupied for 1 year
- 4.75% interest
Closing:
This was my first closing process so I don’t have anything to compare it too, but wow was it a battle to close on a fixer upper. Learned a lot of lessons the hard way and hopefully some of you can learn from my mistakes.
Inspection – The home is 125 years old and in need of a good amount of renovation – what did I really expect to hear from the home inspector.Luckily my inspector was fairly good at avoiding the sky is falling stories when waking through my duplex and thought there was potential in the property.
My inspector had found a couple good catches in my home which lead me to reducing the sales prices of the home by $2000. However, a couple of wording choices on my inspection report caused concern with the mortgage underwriters and we had a couple back and forth sessions to fine tune the wording and myself making the repairs on a home I didn’t own. I paid for and did labor to tear down a rotting shed, install an interior stairway handrail, and cleaned up around a leaking chimney flue cap. Many people (non RE investors) told me that I should force the seller to pay for and fix these repairs, but they were total < $50 and took me about 4 hours. I wanted to make the seller happy and keep myself in this deal.I was determined that this duplex was going to be mine, regardless of who tried to stop me. Strong determination to respectfully handle any and all problems with closing on a fixer upper is necessary from my experience. My bank did not want me to close on a property needing major renovation, and I assume this is common for the higher risk to the banks. Sadly the banks prefer to sell me a million dollar mansion that I couldn’t afford than a home well within my means that needs some TLC.
One of the findings with my home was water damage in a ceiling with possible asbestos containing insulation above it. At first many of my family (non-investors) freaked out hearing the word asbestos and maybe the water damage caused mold growth!? I knew this problem had been solved by other before me from my engineering career and Bigger Pockets education. There’s few problems out there, especially in a house that haven’t been solved 1000 times before. Calling around to local asbestos mitigation contractors – I had this quoted and could pay to have this professionally done for $1200. It was shocking to me that some people would completely throw a potential home or investment property out the window over a $1200 fix. This gave me a huge piece of mind that worst case I’d have to spend $1200. This additional cost (which the seller deducted $2000 off the purchase price for) was not close to ruining the numbers for me. Having access to the proper PPE equipment, I chose to do the work myself. I “earned” $2000 in about 4 hours of work and even didn’t find asbestos containing insulation.
My appraisal came in $8k above my purchase price, however there were a few asterisks in the report “valued at X in it’s current condition”. It was hard for my appraiser to find true comps on the property in its fixer upper state. My mortgage underwriters did not like to see these comments, so I had some additional back and forth sessions to fine tune wording. The underwriters do a lot of interpretation because they’re not walking through the property. When my reports says sloping floors the underwriter thinks I need to jack up the house and redo the foundation. It’s a 125 year old house that has settled in a few locations and required manageable DIY repairs.
Being the newbie home purchaser that I was – when looking for insurance they commonly want to know about the current condition of the home. I thought that was a fair request and what better way to accurately describe the property then give them my home inspection report. DO NOT DO THIS! Rookie mistake on my part.All of the insurance companies denied me after reading the report since the 125 year old house isn’t all nice and updated and perfect.I quickly (re) learned that banks or insurance companies do not want to insure or sell fixer upper homes. I then changed my strategy on describing the house in a more summarized version without pictures. Finally, I was able to secure insurance for a reasonable price.
The final mortgage underwriting process had a couple speed bumps as well. Thankfully my mortgage loan officer was a Rockstar at helping me through the closing process and stayed persistent with me. I learned that banks do not want the risk of selling fixer upper homes; they seem to feel more secure with someone overleveraging themselves on a huge home they barely can (can’t) afford.
After a long closing process, I was officially a home owner. The only tools I owned were a corded drill and a skill saw. I had no home renovation experience with something as basic as painting a wall. Luckily I’m great at searching YouTube, purchase the Home Depot How to Fix It book, and have some family members that are well experienced in our type of fun.
Renovating:
I had decided to renovate the 3 bed, 1 bath, 1200 sq ft side of the duplex first. I knew I wanted to live in that side and would rent out the 1 bedroom side. The 3 bedroom side had larger areas to repair; however the scope of repairs were less than the 1 bedroom side.
I spent the first 2 weeks scrubbing the walls and ceiling with TSP to get the Nicotine and Tar out. It's amazing how much of that soaks into the walls and how easily the TSP pulls it back out. It's a dirty job for sure; however it's not nearly as "scary" as most home buyers may think when touring a property that's been smoked in. I'd recommend you go buy a couple Tyvex suits, download good podcasts, and enjoy the sweat equity growing.
My next phase was demo: ripping out the old carpeting, smoke stained acoustic ceiling tiles, and prepping the kitchen for a remodel. I had someone try to convince me to contract out ripping out the old carpet. I single handed ripped the carpet out of 1200 sq ft in about 30 min, it blew me away that my lack of experience almost paid someone for this.
The kitchen and living room ceilings had old 12" stapled acoustic ceiling tiles with smoke staining and/ or water damage. Reading BP forums about painting acoustic ceiling tiles not even worth doing I chose to rip these out and sheetrock my kitchen and living room ceilings. Hanging sheetrock on ceilings and mud/ taping by myself was better to contract out for my situation. After paying a local recommended contractor to perform this work, I was shocked at the labor cost. I made the decision that for the rest of my home renovation, I would not contract out any additional work that I was capable of doing. My new sheetrock ceilings drastically improved the look in the kitchen and living rooms, 2 of the largest and probably the most influential rooms. I choose to hold off on replacing my laundry room ceiling with the 12" ceiling tiles. Coming back, I had TSP scrubbed these water damaged tiles (with minimal water) and successfully painted them with 2 coats of Ceiling flat white paint. For a rental property, it looks good enough and I'd recommend others trying it. I'm still glad that I replaced the living room and kitchen ceilings; but don't plan to replace the laundry room.
Now that demo was complete and the sheetrock had been completed, the ball was back in my court.I’ve always described my pre-investment home renovation skills as “never have painted a wall before”. People would often look at me with confusion and amazement as to why I would think I could rehab a house without the skills and experience. If you have a willingness to learn and try new things, there is nothing you cannot accomplish.
Contracting out some of the work was a constant devil sitting on my shoulder. My next investment will have a lot more contracted work - working on my business vs in my business, but I had to learn what each job was worth to myself. There was always someone providing input about contracting out the dirty or labor intensive jobs. Luckily, I had mentally dedicated my future time to learning new skills and had a limited budget for this renovation. For painting my home, I went back and forth between spraying it or rolling the paint on. I thought that eventually I would need to re-paint a wall and need a rolling setup, I decided to purchase an 18” roller to save time. I rolled 2 coats of Kilz Original Primer on all the walls and ceilings.Looking back, 2 primer coats was probably unneeded on many of the walls and ceiling other than the dark wood paneling in my living room. My inexperience was unsure if the top coat(s) of Paint + Primer would cover some of the dark spots on the wall. I choose to go with Behr Premium white eggshell paint for the walls, Semi-gloss for the trim, and flat white for the ceilings.I ended up using basic paint calculator for square footage and number of coats, which lead to me purchasing (1) 5 gallon bucket of semi-gloss, 1 bucket of ceiling flat, and 5 of the eggshell. After completing the painting phase, I found out I purchased about double the paint I needed. Having all this leftover paint is a good incentive to purchase my next investment property to get more space in my laundry room closet!
Ripping up the old gross carpet unveiled nice hardwood floor underneath. This subfloor had potential for refinishing but there was enough unevenness and squeaky boards, and it’s a future rental property to deter me. I wanted to choose a flooring that is durable for years of renting to a standard tenant. I remember calling some family members for input on what to do with my squeaky boards and was recommended not to cause damage for a future someday hardwood floor refinish.It was difficult to analyze recommendations from people who didn’t understand real estate investing. I found enjoyment in placing 2-1/2” sheetrock screws into the loose hardwood floors. There weren’t going to squeak anymore!Was there a better way? Maybe, probably, but you can’t see the screws through the new flooring. There’s a many types and sizes to choose from for the luxury vinyl flooring. Many of the luxury vinyl plank flooring doesn’t require using a foam underlayment. I followed this recommendation for my first 2 bedrooms that had a plywood subfloor.Minor unevenness was manageable with the 6” x 48” planks; however it was a waste of time to deal with them (when compared to using the underlayment and not having to deal with minor unevenness). I ended up purchasing the underlayment for going over my uneven hardwood flooring and this was one of my best decisions with my home. It drastically sped up the flooring installations process greatly, creating a ~smooth and flat subfloor to install the vinyl planks over. Installing the vinyl click to together planks is a very quick and easy DIY activity.You’re able to score and snap them with basic tools. After slicing my hand open once using a dull utility knife blade, I chose to purchase a vinyl plank cutter off Amazon. Increasing my personal safety, making every cut square and a one handed quick operations, this was one of my best tool purchases. Between some of the rooms, there were a few uneven floor transitions between rooms or other slightly angled spots in my old home. It’s easy to find people that recommend jacking the home up to fix these issues, but there’s a couple tricks I learned to go over these. Troweling in floor patch (up to ¾” deep!) in a few locations and you’d never know the subfloor was that bad. LVP flooring needs to be over an even (not level) subfloor so I didn’t want to use the very liquid leveling compound and end up with 2” thick concrete in places. Would all that weight cause my house foundation to settle more and cause more damage? After a couple weeks and a couple sets of knee pads, I had finished the flooring and my home was starting to come together and look really like a home.
Previous to my live-in flip, I was renting nearby. My state and lease required a 30 day notice to my previous landlord.Having done none of this work before, it was challenging to know when I was 30 days away from livable conditions in my house. I knew that I didn’t want to pay my mortgage and rent for the same month, so I took an ambitious guess at 30 days out from completion.
Being unexperienced with a major home renovation, I often referred to the Bigger Pockets Order of Operations. It was easy to find a different small project to distract me or find an excuse to drive to Home Depot or start some other small project. Staying disciplined with my current project phase and refusing to go to Home Depot 2 days in a row allowed me to make faster progress.
Next came the scary projects to me – plumbing, electrical, replacing a window, and trim.Thankfully I had a close family member come to help me finish my side of the rental for 10 days. I leaned heavily on his experience and the strong work ethic he has taught me over the years. We have a great relationship and were able to work 12-16 hour days for a week to finish my half of the duplex. Without his knowledge, support, and assistance my 30 day timeline would’ve been closer to 60 days. After painting my house mainly by headlamp, it was a great time to replace some of the light fixtures.
I remember moving into my house and my first night sleeping in it. My house smelled like a new construction home and sleeping in it made it feel official. I now felt like a home owner and a real estate investor.
My side of the duplex was livable, it was now time to begin the renovation of the lower unit. My strategy was to get my side 90% complete, get the other half renovated and rented, then come back and finish up my side over time. This unit needed a major renovation – full new kitchen, new bathroom, ceilings, water leaks, and HVAC work. Now that I had a little experience under my belt so there were YouTube how to ____ mornings and more grab the tools and get to work for this side. This project took about 4 months to complete by myself with no experience beforehand.I had 10 days of help from a family member that was experienced in house renovations. I didn’t track my hours, but it was 12+ hours every weekend day and 3-5 hours every week night for 4 months straight. My goal was to get this house project done as quickly as possible doing most of the work myself.My next project will probably be either more work contracted out or a longer timeline to find more of a balance in life. My why is to get more of my free time back so it doesn’t make sense to give all of my time (even though I really enjoy it!) on the path towards FI.
I now have the other half rented and am back to my side working on small finishing touches and enjoying a more free time. Here are my updated numbers from the duplex. I’ll be writing follow up posts with more details on the various stages of my house hack. What materials, tools, and installation methods I used for various projects and why.As well as how I screened my tenants and the start of my land lording career. I did a fair amount of research on BP and other sources, so I feel indebted to give back to the community. I’d like to help other new investors know what worked and didn’t work for my applications.
Updated numbers with actual 1 bedroom rent price and estimated 3 bedroom rent price, I'm occupying the 3 bedroom side currently. Estimated ARV is $180k to $200k, possibly higher based on some other comps. It's rewarding to see the potential cash flow of this property and receive my first rent checks. Currently I'm house hacking the larger side so the other side is basically just paying my mortgage. After the major renovation, I hope to see lower than average CapEx and Maintenance costs these first couple of years. This real estate investing does work and I'd recommend it to anyone. Merry Christmas BP community.