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Updated almost 9 years ago, 02/04/2016
House Hacking at $1,050,000! - Only $5,000 (net) out of pocket! - San Diego
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.
Thanks for the clarification. I spoke to a few more people in the business and I believe he did not understand the question, even thought I specifically said multi-family purchase. Time to dive in deeper. Thanks again Albert.
@Albert: We may or may not refinance this VA loan in a year or so. However, after our intended 12 month stay, purchase another 4 plex going tge FHA route with only the 3.5% down and then we would have to move into that building.
It will probably be several years before we have a 25% equity position in thus property to refinance into a conventional loan. But chances are that by that time, rates will be much higher and it won't make sense.
Congrats @Mathew Deines! I remember seeing posts and exchanging a few messages that you had been looking for a good 4-unit for some time. I'm glad it worked out for you!
I realize that there are other investments out there that probably have a higher ROI but considering it is cash flowing now, I have minimal out of pocket cash and room to grow rents to about $8,000 per month within 12 months. It works for us and hopefully in a year or 2 we can rinse and repeat.
Thanks!
Thanks @John Steele, We did talk about 6 months ago I believe.
I am so inspired by this deal keep up the great work. Truly inspirational.
Originally posted by @Barbara G.:
I wish you could spell this out. It does not meet the 1% rule? Correct? It does not meet the 50? rule?
You don't need a Property Manager because you are right there managing so that is good!!!
So is this all based on apprecition?
How much rent will you be collecting a month including your own rent and what are your expenses every month. How much is the insurance? How much are the taxes. ow much does it cost to keep the halls clean and the water? and the Garbage?
You are an accountant so I am sure you can spell this our so even I can understand it. Where will the negative cash flow be coming from? What are the comps?
1% Rule - Nah, well not yet. I do not know the 50 rule. I am doing to property management for now.
It is not appreciation based, but that is what takes most of the risk of the buying decision here for me.
The monthly expenses that I am calculating are:
Gas & Electric: $100, for exterior lights and water heater.
Water: Individually metered units, tenants responsibility
Garbage is taken care of by the city out of the property taxes
Maintenance: $250 because of the condition of the property and warranties in place. There is almost no landscaping to maintain.
The mortgage payment has taxes and insurance included at $6,100/month. Taxes are close to $1,000 per month and insurance accounts for $189 of that payment, thanks to USAA.
Current rental income = $6,800
Laundry income = $200
Total (current income) = $7,000
Total expenses = $6100+100+300 = $6,500
Current Cash Flow = $500
1 year plan:
Rental Income = $8,000
Expenses = $6,500 (should remain about the same)
Cash flow = $1500 or $300 per door
We are planning on upgrading flooring, bathroom vanities and kitchens for about $6,000 per unit to help justify the rental increase from $1,700 per unit to $2,000+
Now again, I realize these numbers are a lot slimmer than most on BP would be okay with but they work for us and our plan for retirement. The multifamily/rental market in San Diego is crazy right now with no signs of slowing down or rents peaking. We think we are pretty fortunate to be able to buy a 4-plex in a great neighborhood, centrally located in San Diego. I am so glad that we were able to get out of analysis paralysis and make a move.
If everything fails and we have to walk away for some unforeseen reason, we are out $5,000. ;-/ That would suck but it wouldn't be the end of the world and we should have enough time left to recover and learn from our mistakes.
Please let me know if you have any other questions or comments.
Thanks @Mel Jeffrey!
Allow me to clarify: We are in the process of raising rents on the other 2 units to $1850. 2*1850=$3700 + 1700 (1 unit in a lease) = $5400 - $6100 (PITI) = $700. I am planning on covering the monthly maintenance expenses as I would if I owned my own home.
Congrats! I hope it all works out for you. Good luck on the next deal!
Well it seems to work. The first year you will make $6,000.
You will be investing $24,000 in renovation bringing your cash out lay to $29,000 and that will bring the cost of the property up to + $29,000
I guess you can add your fair market rent ( $1,700 ?) to the $5,400 so your income can be figured at approx $7,100 a month -6,100 so you will be making $12,000 in about one year. I guess there"s nothing wrong there and it looks like there"s plenty right.
Good luck to you
Congratulations! That is amazing! We are fellow VA'er!! After the VA loan we have found the 5% personals to be amazing!
Very nice investments
Pretty positive reading this post was a miraculous sign that I need to copy exactly what you did to get approved for what I want to do. I wanted to use the VA loan to occupy a multi but in my situation, my loan fell through due to my wife's business write-offs. Apparently using Turbo Tax doesn't really mean it's worth using even if it's free for service members but you can't complain about free.
If you wouldn't mind, could you walk me through how you convinced them? I had no idea you could even do that! I can put together a nice package for them to review. But want to be sure to put the right stuff together. Your help would be most appreciated!
@Justin Fernandez - The biggest kicker for us getting our loan was our debt-to-income ratio. We had just sold our primary residence which had turned into a live in flip, also with a VA loan. After we sold that house we paid off all of our debt. Our only debt now is our mortgage. We pushed the limits beyond where our loan originator thought we could. All said and done, due to low rents projected by the appraiser, our dti was at 56.8%.
Our originator did say that if were to have had any child care deductions on our 2014 taxes the VA might not have accepted that ratio. Furthermore my wife and I have excellent credit which only helped our documents skim across the underwriters desk.
@Mathew Deines when I first read your post, I thought you were lying. Low and behold you are spot on, and helped educate me further on VA loans. I have a VA currently on my primary home, but had no idea that VA limits went a lot higher on multi-unit property. Always good to know. Wish you the very best on your new multi-family endeavor. Your story is amazing, and unique, buying your first investment at over $1-million.
For others on here, the VA posts the conforming loan limits on their website as an Excel and PDF document. It lists every state and limits by county, broken down by 1,2,3 and 4 unit limits. It also has the loan limits from previous years as well.
Someone mentioned the VA funding fee, as an FYI, for those disabled veterans the VA funding fee is waived, just another way to save even more money using VA loans.
Originally posted by @Elizabeth Colegrove:
Congratulations! That is amazing! We are fellow VA'er!! After the VA loan we have found the 5% personals to be amazing!
As a fellow VA'er myself, what do mean by 5% personals?
Thank you @Paul Santos! I am a disabled vet so my funding fee was waived too!
I'm working on clearing that credit hurdle! I'm doing a DM campaign for seller financing for a Norcross multi subdivision. I'm hoping to get at least one hit from a tired landlord! I'm even trying to partner with a family member to give her the net cash flow(everyone would be mad reading this, but to pay 0 in rent from 600-800 a month for the past 8 years is still good for my situation which can go back into debt elimination and get me completely debt free). I'd love to do a live in flip, but my wife is very neutral to RE which is better than her being negative, with a 2yr old and her being pregnant, I don't think she could take it.
Originally posted by @Mathew Deines:
Thank you @Paul Santos! I am a disabled vet so my funding fee was waived too!
I read your profile, Semper Fi, I was an MP 86'-91' at the former El Toro/Tustin/Okinawa/Pendleton/LeJuene. Disabled vet as well (some say in more ways than one).
The conventional 5% down personal property. You have to pay pmi or pay a slightly higher interest rate and not have pmi. We like that
Congratulations! I've been starting to read success stories like this lately and I am getting motivated to start myself. I also want to start with a house hack, preferably in a multiplex like the one you got as l By as the numbers work out. Having never bought a house before I can hopefully get approved for an FHA loan which is probably the best I can do since I am not a veteran. In any case, thank you for sharing!
Originally posted by @Dennis Williams:
He also said you have to qualify for the loan on your own income. They cannot use the income of the property, UNLESS you can show that you have collect rents sometime in the past.
I think you might need to find another mortgage broker or something Dennis. But I could be wrong... I'm no expert.
Originally posted by @Randy (RL) Williams:
Originally posted by @Dennis Williams:
He also said you have to qualify for the loan on your own income. They cannot use the income of the property, UNLESS you can show that you have collect rents sometime in the past.
I think you might need to find another mortgage broker or something Dennis. But I could be wrong... I'm no expert.
But oh wait! It all depends on property values in your area! For instance, property values in San Diego are very expensive so the property values in your own area may be well below that.
You could buy a 4Plex in Oklahoma for WAY less than $1,000,000! so the VA limits would be much less there! So it all depends on your area as to the limits of the VA loan. I'm not that familiar with your market but many FL markets are WAY below the San Diego market. This could be the factor... LMK.
RL
Don't you have to be a veteran for a VA loan? My husband and I were going to use an FHA loan for a duplex in Austin. We found that MANY people don't accept FHA for these investment properties and our choices were limited. Did you find the same true for VA loans due to the time needed to get inspections and close?