House Hacking at $1,050,000! - Only $5,000 (net) out of pocket! - San Diego

[Mathew Deines]

Hello BP!

For my friends out there I am little late in writing this post considering that we closed on our first 4-plex July 10th. I have collected 3 out of the 4 rents due and I am expecting the last payment in my po box today, I will let you know how that goes.

So.... After a 5 month search for a multifamily property in San Diego that my wife and I can afford, if we only had one income. Ironically enough, that has become a reality. I was laid off the day that we were supposed to close escrow.

Now, about the deal. 4 unit building listed for $1,250,000 in a great part of San Diego, 100% rented (this is good and bad). Each unit is renting for $1,700 with room to raise the rents to $1,950. All units are 3/2, 1130 sqft. All recently updated with new carpet and paint, except for one unit. Both car ports were completely rebuilt from the ground up, new fencing, new coin operated laundry room and washer and dryer.

After a month with no action on the building, the price gets dropped to $1,125,000. I took this as a sign that the seller was really motivated, and they came back to reality. Since we were using a zero down VA loan, I had already ran the numbers and calculated the max purchase price for us including vacancies of $1,050,000. So we submitted our offer and prayed that the seller would love a low VA offer.

Two days later the seller responded with, "We regret to inform you that we have accepted another offer that better suites our needs." What does that mean??? We took it as though they accepted a lower offer with less money down. We had only offered $5,000 earnest money.

Three weeks go by, my wife and I had all but given up on the multifamily property and submitted an offer on a single family home that we could do a live in flip, and then move on and hopefully start our multifamily portfolio down the road. Our offer was accepted on the single family on a Wednesday. GREAT! Friday we get a call back from the listing agent on the multifamily, "our buyer is backing out. Are you still interested? We need $10,000 earnest money" OF COURSE!

We canceled the single family, and placed all our eggs in the multifamily. Ordered the appraisal and inspection ($900) immediately. We had final loan approval in 5 days, thanks to our awesome loan originator. The VA appraisal took 28 days!!!!! Held everything up, it turns out the appraiser took a week long family vacation in the middle and then struggled to find comps. He ended up coming in at value.

We closed Friday July 10th! After our $10,000 earnest money, we received a check for $5920 from escrow for prorated rents and security deposits, making our out of pocket expenses $4,100 in closing costs and appraisal plus the $900 inspection fee.

Sunday, July 12, we get our first maintenance/service call from the previous PM, we hadn't even had time to notify the tenants of the change in ownership. "There is a homeless guy that has locked himself in the laundry room and thrown the dead bolt." So my wife and I drive about an hour down there and he is gone by that time. The next day I change the laundry room locks and give a new key to all the tenants. Problem solved for now...

Now I am sure there are naysayers out there that will say this isn't a great investment but all the numbers worked for my wife and I in our situation. We are only 33 years old and once this building is paid off in approximately 25 years, we will be collecting between 9 and 10 thousand dollars a month in rent. And that is why we did it, plus once we move in to the building our rent will only be $750 per month :-) and that is dirt cheap in San Diego. Within the next year we are planning on saving enough to be able to buy another 4-plex on the same street using either a VA loan and refinance out of this one, but with a 4% interest rate, we will probably go with an FHA 3.5% down.

Sorry if that got long winded. Please let me know if you have any thoughts or questions.

[Cody Ray]

Originally posted by @Karl Kyler:

Matt,

I shop lenders all the time for my clients. When you align yourself with a great lender or agent with a great lender it will make a world of difference. I have a lender now that is doing 5% down with no PMI and with very little DTI restrictions.

@Karl Kyler is this a local CA-only lender? I'm in Chicago but would love to know their contact info if they're willing to lend here.

[Jimmy Watson]

Originally posted by @J.M. M.:

@Mathew Deines & @Nathaniel Johnson

Hey guys... looks like I just hit the same roadblock! Lender is telling me VA Limit is SFR column only.

Glad you guys benefitted... guess I'll have to let the O'Side Triplex idea go... bummer : (

They now also have the following disclaimer on the website:

PLEASE NOTE: For purposes of determining the VA guaranty, lenders are instructed to reference only the One-Unit Limit column in the FHFA Table “Fannie Mae and Freddie Mac Maximum Loan Limits for Mortgages Acquired in Calendar year 2015 and Originated after 10/1/2011 or before 7/1/2007”.

Please let me know if you find a way to work this out... I'm thinking of doing the exact same thing, and the only way I could is with a VA loan. @Mathew Deines ... Thank you for sharing such an awesome story. I learned a lot

[Mathew Deines]

*6 month UPDATE*

After owning, renovating and occupying this 4-plex for 6 months now, I certainly feel as though our plan is working. 

We spent on average $6,000 per unit to renovate 3 out of the 4 units. The 4th unit is still occupied by the AMAZING tenant that we inherited. And we were able to raise their rent as of January 1 from $1700 to $1775 and added a portion of the water bill to their rent.

All tenants are paying a portion of the water bill using R.U.B.S. We take 25% off the top of the bill to cover the laundry room and minimal landscaping and then breakout the remaining 75% over all the tenants in the building (ourselves included). The water bill has dropped from $1100 every two months to $550'ish.

The current numbers are:

Unit 1: Owners Unit

Unit 2: $1900/mo

Unit 3: $1775/mo

Unit 4: $1925/mo

Laundry room income = $200 (approx/mo)

Income = $5800

Mortgage = $6272 (including taxes)

Owners portion = ($472), this is as pretty close to living for free in San Diego as I think anyone could hope for.

There is a approximately $100 more that we have to cover in the gas & electric bill for the water heater and exterior lighting. 

Once we move out of our unit in July the numbers should look like this:

Unit 1: $1925/mo

Unit 2: $1900/mo

Unit 3: $1775/mo

Unit 4: $1925/mo

Laundry room income = $200 (approx/mo)

Income = $7725

Mortgage = $6272 (including taxes and insurance)

Cash flow = $1500 (excluding any maintenance expenses which have been minimized by renovations, I think)

It hasn't been all great. We had a slab leak that set us back almost $1500 in repairs. Thankfully we had extra flooring that we were able to put down in place of the water logged carpet in the freshly finished nursery in our unit. The leak showed itself in the tenants room on the other side of a common wall with our unit. I gave them a $75 credit for the hassle.

Thanks for reading! Please let me know if you have questions or comments!

[Kevin Fox]

Hey @Mathew Deines

Congrats on the purchase!  If you don't mind me asking, what part of San Diego is the property located in?

[Justin R.]

@Mathew Deines Very cool. For those who have access to VA loans, this type of thing is a very solid way to go and shows the benefit of being able to put so little capital in. Big advantage new investors have compared to "seasoned" ones!

By my calculations, you're going to be break even monthly from a cash flow perspective in the long run (unless rents continue to rise as they have - let's hope they do!), but this is still a very attractive investment simply because of that crazy financing.  A very good example of how cash flow isn't always the best part of a good investment.

Very cool to see you made it happen, and looking forward to seeing how it grows for you in the years to come!

[Daniel Diaz]

Dude, you have really inspired me fellow San Diegan. 

I'm a nurse with a decent paying job and a ton of free time d/t working 3 12-hour shifts a week.  I've always thought that real estate in SD was a pipe dream d/t the insane housing prices, but I never spent time actually looking. 

I'm glad I read your post and I look forward to your updates.  Couple of questions: 

1) Do you / other BP members think that $1500 a month is enough to cover maintenance / upgrades / vacancies?  

2) What kind of emergency fund would you recommend for a property of this size?

3) What area of SD is this?  You don't have to say exactly where, but i'm just wondering if it's in the downtown/hillcrest/northpark area or if it's way further out like lakeside/santee/etc.? 

4) Lastly, have you considered taking the 4th unit and doing a vacation rental through AirBnB?  I've always felt that a pet friendly AirBnB location in San Diego would crush it, and you might be able to churn out some better cash flow

[Mathew Deines]

@Daniel Diaz

1) No, I do not think $1,500 is enough monthly cash flow period. I am not sure if it mentioned in this post but our main reason for this buy was house hacking. We wanted to be able to live off of one income in case something happened to one of our jobs or health.

2) We have a reserve fund close to 6 months of the mortgage. All the renovations that we did was from funds other than our reserves.

3) The property is located in Serra Mesa, just south of Montgomery Field. Cross streets are Hurlbut and Sandrock.

4) I don't think this property is located close enough to the beach or other attractions that could justify the Air BnB. Plus, that sounds like a headache to me.

Let me know if you have any other questions.

[Kelli Ford]

Thanks Matthew for this story, it's so cool to see it done and I really am grateful that you broke it down.  Thank you for your service as well :)

[Don Konipol]

Three takeaways from this OPs story

1. With today's historically low interest rates, net cash flow is possible even paying significantly above the old 50 times monthly rent rule

2. Youth can be used by way of paying off a mortgage in 25 or 30 years and then owning the income producing property mortgage free and providing significant cash flow for another 30 years of life

3. Owner occupying a unit of a multi family or part time occupying a single unit that you rent out when you are not there changes the equation significantly. While the market rental value of the unit you occupy is correctly considered when figuring the property's cash flow, the number to use when figuring the total effect on your economic well being is the cost of housing you would be paying otherwise.