First House Hack - Help Spot the Fatal Flaw

[Brandon Turman]

Bigger Pockets community, my partner and I are hoping for your advice. We are looking for a "base hit" as we get started. Huge thanks to Brandon and crew for enlightening us as to what's possible.

After an extended search, we found and went under contract on what we believe to be a house-hackable home. If all continues well, it will be our first home purchase and our first investment property. The goal is to house-hack for a few years before turning it into a two-unit rental.

Viewed in that light, here are the results of the deal analysis when financing 95% of the $381,000 purchase price: 

If the appraisal comes up short (which is likely), here are the results considering the max $25,000 cash over appraisal it took to win the bid: 

Rent-to-price: 0.58%

Property details:

• Single-family home with mother-in-law in basement
• 2 bed, 1 bath, 1 kitchen up and down
• 2 car garage
• Shared utilities
• Shared heating, cooling, and water heater
• Shared foyer at rear entrance, no front-entrance for downstairs
• Single mailbox
• R-2 zone (multi-family)
• Built in 1933
• Nice upstairs with loads of historic charm, livable downstairs
• Needs ~$5,000 in updates
• Inspection found no glaring issues, but it does have a mixture of new wiring and some ungrounded knob-and-tube (added insurance costs)
• New roof, furnace, and a/c in last 5 years
• Water heater 14 years old
• 5 off-street parking spots (only really usable by one unit)

Not ideal, but workable and a decent return which we're grateful for in this market.

My biggest concern is being unable to use it as we intend. While in a multi-family zone that allows duplexes, the mother-in-law is likely considered an illegal ADU and is unlikely to be approved by the city. How have you dealt with this? Is this the deal-breaker? From what I've gathered, leasing an illegal unit could lead to issues.

This article tells me it's possible to go for it, but we're timid as first-time investors and buyers: https://www.redoakrealty.com/p...

In addition, it has relatively small windows for egress in the basement. It's also on a busy street.

Open to your thoughts and advice. It's been a long search to find something where the numbers worked and amenities matched. Would you close on this one?

Thanks in advance!