House hacking in "yesterday's news" Southside a bad idea?

Question

Hey BP,

So you may have seen some of my other posts on here recently but I'm currently close to a deal with my current landlord to purchase my single-family house in the Southside of Pittsburgh.  This is an extremely strong rental area, my properties has many additional high end amenities that comparable properties do not and I do not foresee the rental landscape changing much after I move in the coming years.  Myself and my roommates will definitely be there for the next 12-18 months and I will be using their rent as income to cover the mortgage etc.

I have put together many models, all of which cash flow in this scenario but aren't the eye popping number you may sometimes see on a stellar deal.  I continue to rationalize pulling the trigger to myself because of the area that this property is and should be relatively safe for that fact.  The University of Pittsburgh, Duquesne, and Carnegie Mellon are not going anytime soon and I feel more comfortable getting my hands on a turnkey property in a proven area for a premium rather than rolling the dice in a risky up and coming community.

That said, I'm still looking for experienced investors to shoot holes in my plans.  In my current models, counting my current rent as income I'd reinvest in the property, I would cashflow at least $150/month when conservatively escrowing 10% for vacancy, 10% for CapEx, and 10% for a future property management company.  In many cases, if you were to reduce or eliminate those figures, the monthly cash flow could be anywhere upwards of $600 monthly.

This would be my first deal and there are obvious advantages to house hacking a place I currently live in and can guarantee occupancy for the next 18 months.  That said, the cash flow numbers are not phenomenal but I am confident that I would be getting the property around 10% below what it would currently sell for on the market (based on my MLS sold comps within the last 3 months) and would be able to play landlord in a few years if need be.  The idea of jumping in for a turnkey property around 300k in a great area still scares me a little but based on all of my numbers I think it will be profitable going forward.

Any thoughts or suggestions from the BP family as it relates to calming my fears for not solely looking at cash flow numbers and evaluating a deal in other respects.  Thanks!

Cam

Jay Belcher · Answer

Can I suggest you have someone independent run comps for you? Just make sure you really are buying under market. Since you're emotionally invested in the deal, it's good to have someone with no interest do comps & see if they come out the same.

What I'm saying is if you aren't buying below market a decent amount, you erase your exit strategy of putting it back on the market. Don't forget transfer taxes, title insurance, doc fees, recordation, etc. are all real costs. If I buy I house for $X & sell only 5-10% higher I would lose money.

Anthony Angotti · Answer

Hey @Cameron Crossley I think that the millage rate for school, municipality, and county in Pittsburgh is right around 22. If you buy this for 290 and the assessment is at 117.....I would think the assessment will go up sometimes in the next 5 years and potentially sooner. Especially because the market value of most nice houses in South Side Flats sits in the mid to high 200s. I agree with you that the area is at a risk for a tax hike.

At the very worst though I again am confident that you could resell it for something similar to what you'd be buying it for. It's a nice place in a desirable area. So you always have a good second exit strategy.

Cameron C. · Answer

Hey Guys,

The input is much appreciated and is great food for thought.

@Christopher J D'Angelo I will certainly shoot you a PM.  To add some more context to the situation and to address some of your questions:

1) I will be applying for a first time home buyers conventional loan for 3% down and will try to roll some of the closing costs into the mortgage via the sellers assist option.

2) He purchased the property in 2006 for 50k and it was all but condemned.  According to him, he has over 150k in materials in the property as all labor was performed by him and his business partner.

3) At those conservative numbers of $150 monthly cash flow my cash on cash return would be 12% assuming down payment and closing costs equated to $15,000 on the $285,000 purchase, which based on my lender estimates might be less than that anyways.

4) According to county records, the house is not part of an abatement program, however, I am worried that a re-assessment would result in a dramatic increase in taxes.  The current assessment value is $117,000.

@Anthony Angotti and I have had several discussions to date about this property so once again I cannot thank you enough for the help.

Anthony Angotti · Answer

Hey Cam,

We've talked about this a lot lately, but I will reiterate that at least if you buy this and the cashflow doesn't work it's a SFH and you can resell fairly quickly and for a bit more than you bought it for.

I second @Chris Pasternak. You got started. Good job!

Christopher J D'Angelo · Answer

What does your cash on cash return look like?  Assuming you're a first time home buyer and owner-occupying you should be eligible for a mortgage at 3.5% down with (hopefully) favorable rates.  It looks as if the probability of a FED interest rate hike in December is 100%, so if you haven't done so get an interest rate lock agreement in place with a lender.  Since you can afford a $300k house I assume that you have a good job and good credit.  Although the rate increase will be on the order of 12.5 to 50 bps you still want to take advantage of this great time to get access to cheap money (although debt will still be "cheap" after this hike, we are still at a 60 year low).  I like to put down as little as possible on properties, provided they cash flow, so that I can use my remaining cash in other ways to generate returns (stocks, bonds, downpayment on another property, etc.)

So, when counting your rent payment as income you'll speculatively receive from a tenant, find your cash on cash return using this conservative cash-flow ($150/month*12 months).  That is, divide this number by your down-payment (and include closing costs that you cannot recoup) to figure out your rate of return.

Generally-speaking, I compare this annualized return to what I would expect to make by investing in an index fund (so if I can do better than 8%, on average, I am happy).  I prefer real estate investing (as do many on this forum) since it is more "active" - we get to be our own CEOs, in essence.

On the tax front:

There is a homestead exclusion in Allegheny County, as well, where we get a slight break (I cannot recall the percentage) on county taxes by owner-occupying. As soon as you move out you lose this exclusion and your taxes increase. Not a huge hit, but it still eats into your margin. For example, I think that I save $600/yr on my county taxes by owner-occupying my property.

Something I would caution you about is this: if your property was "updated" what is your tax situation like?  Did your landlord opt into a 10-year graduated tax abatement program?  Allegheny County conducted a county-wide reassessment in 2013 - was the property already reassessed before being renovated?  What was the last purchase price?  Your margin could be eaten up very quickly if a reassessment occurs after your purchase.  And if your property is currently under a tax abatement program, be aware of the expiration date.

Having the universities here is great - I agree with you.  I own property in the East End in a neighborhood that primarily attracts graduate students.  I benefit from our proximity to Pitt/CMU as well.  I think it's good to include that "conservative" CapEx reduction, since your property will undergo more wear-and-tear due to tenant turnover and since you will likely have 2-4 young adults occupying your property, assuming you plan on targeting undergraduate students.  Definitely something to be prepared for as you move forward.

I think you're off to a great start.  Turn-key isn't always a bad thing.  I tend to gravitate toward C+/B-  properties so that I can get a good deal, add value to bring the property up to a B+/A-/A, and multiply rental income.  I get great cash-on-cash returns this way, but it involves higher capital expenditures up front and labor (since I do a lot of the renovations myself) to realize these gains.

Feel free to PM me with any other questions.

Chris Pasternak · Answer

You started, good job

House hacking in "yesterday's news" Southside a bad idea?

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