What Prices Should I Look For When House Hacking A Turnkey

Question

So we’re planning on house hacking and getting into a 2 BR1BA duplex it’s currently priced at 160K the property is pretty much already rehabbed other than a few minor things (which is important to the wife for our first deal) and it’s just waiting for someone to move in, ARVs in the area are about 160-$175K we’d be using an FHA Loan and putting 3.5% down. Rents in the area are 750-800 for a rehabbed property. The Cash on Cash ROI is 23% because of the Low down payment cash flow would be 200/month after we moved out refinance and started managing it ourselves. I would love your opinions and suggestions maybe even what you’d offer on the property? Thanks again!

John Warren · Answer

@Mike D'Arrigo perhaps this is market specific, but in my market here in Chicago I have yet to see any properties that make sense that are fixed up, at least not in the current market climate. Every investment property I have sold in the past year has needed either some rehab. I think for the average investor, the "BRRR" strategy is one of the most incredible ways to build wealth as it allows them to get their capital back through the refinance or sale of the asset to redeploy over and over again.

The other side to this is that if an investor purchases a fixed up property in the Chicago market today, they are most likely going to see a big jump in the real estate taxes in a year. I have worked with several investors recently who failed to underwrite for this big jump in taxes on a more fixed up property, and the taxes ended up wiping out the "cash flow" more or less.

Mike D'Arrigo · Answer

@DeMonte Hester FHA is still considered conventional financing. With only 3.5% down payment required it can be a great choice. The downside is you have mortgage insurance.

DeMonte Hester · Answer

@Mike D'Arrigo @Alex Doce I really appreciate the discussion guys! In your opinions do you feel like FHA would then make it a better deal than traditional financing would?

Mike D'Arrigo · Answer

John, why do you say that it is better to buy something that needs some paint and carpet than one that it already done? Generally small cosmetic update like that have little to no effect on value so there is not much opportunity to force equity. Without  the opportunity to add value, where's the advantage? It's true that every property will eventually have things that have to be fixed, that doesn't mean that there is no such thing as a turn key. A well rehabbed turn key should not require anything other than the typical maintenance items that come up for several years.

Alex Doce · Answer

I’ll say even at full price it would be a sweet deal. Assuming you are buying in the Columbus area, your PITI should to be below $1300/m, even at a high 5% interest rate for a low 600 FICO score, just to prove the point. Net PITI after IRS income tax deductions should be below $1000/m. If Congress extends the MIP/PMI deduction this year, it will be even lower. (See bottom of this comment) I

If AFTER buying your home you ever decide to rent both units, you should have a $500/m+ positive cashflow, before maintenance expenses andante after income tax deductions. As a friendly note, since the FBI monitors sites like this one, FHA defines a transaction to be fraudulent when the buyer may have had different intentions that those stated on the 1003, when first financing the property. If you are buying this unit as a primary residence, they require you to not have present intentions of renting both units in the future. :-)

For your future reference, unknown to many Loan Officers, the FHLMC Home Possible program from Freddie Mac allows you to buy 2-4 unit primary residences, with only 5% down and as low as a 620 FICO, or no score at all,  (One unit w only 3%). They also allow a seller’s credit or concession of up to 3% of the sales price to be used towards closing costs and prepaids. This is a pretty amazing product. On one unit properties, the full downpayment can come from a blood related family member, which includes uncles and cousins. On 2-4 units, a minimum contribution of 3% must come from your own funds. PMI under this program is substantially cheaper than others.

For tax year 2018, the PMI deduction is currently unavailable. At this time we don't know when, or if, Congress will approve this deduction for tax year 2018. If the deduction is approved after your file your 2018 return, you can file an amendment to claim the deduction. Alternatively, you can postpone filing your return until Congress definitively approves or denies the deduction for 2018.

However, once your adjusted gross income (AGI) exceeds $100,000 ($50,000 for married filing separately) the deduction is reduced.

The above tax assumptions are provided for reference only. A licensed tax consultant, tax lawyer or CPA, would be a more competent person to ask tax related questions to.

Best of lucks with your home purchase!

John Warren · Answer

@DeMonte Hester this is a tough question as I don't know the area. There are many other considerations when house hacking that go beyond your cash flow. You are mixing your primary residence with your investing, and to some extent your quality of life is more important. Do you love the location? Do you see yourself living there for quite a while? Will the property appreciate (this creates wealth in addition to the cash flow).

Many friends of mine in Chicago have house hacked for years in the same place. They might accept that $200 per month as it is cheaper than renting. If house hacking is not cheaper than renting, I think you should look for a better deal.

Jonathan Dempsey · Answer

@DeMonte Hester

The cashflow is negative $600 while you are living there then?   And you could rent else where for $750/$800?   From a cashflow perspective this is a razor thin difference given you must lay down 3.5% and closing costs and commit to homeownership/landlording.   While these are not things to be afraid of, they do require more time out of your schedule than renting.   The cost of your time should factor in as well.

I would look into conventional financing with a low down payment if you can find a lender who offers it.  That way PMI will drop off and help your cashflow.

DeMonte Hester · Answer

@John Warren if you don’t mind me asking then what would you offer on it to get the cash flow you want?

John Warren · Answer

@DeMonte Hester I often work with first time investors here in the Chicago market, and I generally try to steer them away from "turn key" properties. The reality is, there is not such thing as turn key. You will eventually fix things in the rental business, and it is normally better to buy something that needs some paint and carpet than to buy one that is already done. Don't let the COC with the low down payment fool you. $200 per month is a pretty thin profit margin for a duplex, and that "profit" can disappear in a flash.