First time house hack-pay full price?

Question

Hey everyone-been reading a lot on this site lately and would like to get your opinion on a potential house hack. This would be my first RE purchase, it's a duplex with 8 bedrooms and 4 bathrooms. Pretty much all renovated and the property looks great! The current owners are selling and moving to Florida. There probably wouldn't be too many updates to it once I moved in and it's listed for $232k. There's not many duplexes in the area to compare it to, but after seeing what duplexes are going for in the metro area just north of this city, I'd say this price seems very fair. It's just outside a major city in Nebraska and less than 10 minutes away from an Air Force Base that provides great opportunity for future tenants. I'd use my VA loan and could avoid putting any money down. The mortgage would be $1,100/mon. The current tenants are coincidentally paying $1,100. I'd live in the other unit and still pay close to $600u/mon for utilities, taxes, insurance, repairs and capex. But that is still $500 less than what I pay for rent now. The goal would be to purchase this property, live on my income, use 90% my wife's income to save, invest and purchase our next investment in 5-7 years. We'd keep this property as a long term buy and hold property. My question to all you experts is how do you feel about purchasing a duplex at full cost instead of at 80% value? Is there not enough meat on the bone here or do you see opportunity? Would love to hear some of your thoughts.

Craig Curelop · Answer

@Matt Smith - I'm not sure of your age. Assuming you're in your 20's or 30's you do not need to worry about getting the BEST deal. Just get a deal that works. You never know when the best deal is going to come and you're going to be kicking yourself later for not taking action.

It sounds like the deal you pitched works for you. Saving $500 on rent is the same thing as cash flowing $500.

If you're willing to house hack your next property and do not mind moving around, I would think you will be able to purchase another one in much less than 5-7 years. Likely 1-2 years as  long as you are frugal and continue to sustain a solid savings rate.

Logan Allec · Answer

@Matt Smith If you've done your due diligence and it cash flows and you're young and have income and cash reserves and can get 90%+ leverage, I say go for it.  Better than kicking the can around forever.

Matt Smith · Answer

@Ola Dantis I had a good laugh from your comments. Those are some true words of wisdom. Thank you.

@Jim Adrian-I've run the numbers so many times I think you're right. I'm getting a little of that paralysis by analysis going on. I just spoke to a Property Manager and he even said I could get $1300-$1400/mon for it. Which is even more pudding for me.

With that being said, I spoke to the owner of the property today and they're going to accept my offer once I put it in. The contract is being put together today/tomorrow. Hopefully it passes inspection and nothing crazy pops up. But I think we're going to go through with the purchase and begin our journey in not only homeownership but also landlording. I'll keep you guys posted on what happens. The positive feedback and your outside perspective really helped solidify the decision. Y'all are rockstars. Thank you!

Jeff Kehl · Answer

@Matt Smith on your first investment property you should not be expecting to get a 10-20% discount to retail value. That is just unrealistic. I purchased many, many properties at retail until I was lucky enough to get one below retail value.

For a first property, house hack in a desirable area near a major city, 1% rent to value is pretty good these days and that seems like where you are. So, do plenty of due diligence, but it sounds reasonable.

But, I will suggest one additional thing you should investigate. I have some recent experience in a similar situation.

My daughter is 24 and has started a new job in the outskirts of Washington D.C.  She has helped me rehab properties since she was like 5 years old so we're looking for a house-hack for her.

I told her she needs to buy a 4-plex for ultimate house-hacking, but in the area she's in there is nothing for sale for under $800k. So what we're doing is looking at land to build a brand-new 4-plex.

So, that's my challenge to you. In the are you are in in Nebraska, look at land for sale in the area and get some contractors to quote you construction costs on a brand new duplex.

If nothing else, it's an interesting intellectual exercise. But you might find you can get exactly what you want built for less and you will have almost no capex for 5-10 years.

Ola Dantis · Answer

@Matt Smith I try my absolute best to add some humour whenever I can lol

I'm glad I made you laugh!

Jim Adrian · Answer

@Matt Smith

I would buy.  This works deal works for me w/ no money down at $150 monthly cash flow with both rented.  ~22% cash on cash return.  The $500 + $150 = $650 monthly cash flow when you include your savings.  This includes putting $3600 in to reserves for Cap Ex and Repair and maintenance.  If you put more money down the numbers work even better.

Ola Dantis · Answer

@Matt Smith Hey Matt,

A few items here:

• You can always offer the 80% of the listed price
• There is already meat on the beat, it is the $500 less than what you're paying right now, and YOU (no, sorry TENANT) is paying down your mortgage
• Duplexes are hard to come buy in your area [you found one of the unicorns-this is a sign lol] 
• One item to watch is the number of rooms and bathrooms, which could increase your ongoing maintenance expenses, but you already have some capital set aside so you've got that covered too-you're rock n rollin! 😎
• And, your partner is on board?!!

You've got some meat on the bones on this deal, sir.

Hope this helps a little. Goodluck. Thanks! - Ola

Jared Viernes · Answer

@Matt Smith as long as the property cash flows assuming you have both sides rented out it doesn't matter what price you pay.  It's definitely not necessary to come in at 80% if the numbers work above that.  Those are just rules of thumb.

But if you can purchase for a little less than full price I would do that.  Its easy enough for the realtor to find the average asking price to purchase price ratio and then offer what it would be based on that; especially if there is no other interest.

Matt Smith · Answer

@Ryan Mahoney-I'm waiting on some feedback from a realtor I'm working with but it's tough to get comps when it's the only duplex in the area. As for the price, the owners have said their bottom dollar is 232k. It's already down from 249k. Thanks for the advice and go Skers!

@Logan Allen it'd be next to 100% leverage. Although that kind of worries me, it does allow me to keep my reserves and use them for more investments. I don't want to get caught in that paralysis by analysis either or like you mentioned, kick the can down the road. Thanks

@Jared Viernes That's exactly what it would produce if both sides were rented out. Both units would rent for a combined $2200/mon when I decide to move out. As for the tenants, they have both been long term renters. One is a 6 year lease and the other a 3 year lease. They're both up in the next couple of months. I'm not sure about the meters but that's something I need to look into. But based off the layout and design, I think they would be separate. You gave me some great info on the VA loan that I didn't know and gave me more to think about. Thank you!

@Craig Curelop ya I think we could definitely move to another hack sooner than 5-7 years, but I think the wife might be looking at using the money saved and purchasing that forever home. We're pretty frugal and saving/investing is a priority in our life.  Not sure I'm quite on board with her plan bc that forever home isn't bringing me monthly cash flow, but we have 5 years to show the benefits of hacking 😄.

Does anyone see purchasing the duplex at full value instead of at the suggested 10%-20% discount a big draw back?

Jared Viernes · Answer

@Matt Smith are you saying that the current tenants are in just one side of the duplex?  Because you should evaluate the deal as if both sides are occupied with tenants.  If both units are occupied would the income be $2200?  If so it sounds like there is plenty of meat on the bone for when you move out.  Additionally, you are not hitting anywhere near your total VA benefits so if this is your first VA loan you can use your second tier benefits on your next place.  After that you can refinance your VA loan and apply for your benefits to be reinstated (this can only be done once); then use your VA loan benefits two more times if you'd like!

A few more things you might want to think about.  Are the units individually metered for electricity and utilities - can they be?  How long have the current tenants been in the unit, what is the turnover rate for properties like yours in the area?  If you are expecting 1 month vacancy per year you need to input a 8% vacancy rate making a $2,200 rent actually about 2025; if 2 week vacancy per year your rent will be around $2,100.

Best of luck to you!

First time house hack-pay full price?

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