Deal help: Hack my housing with this deal?

Question

Hey all. I'm looking for a place to live in a new location, and am considering purchasing a duplex I've found that's FSBO. I originally looked for a property to buy for several months, then resolved to renting, but found this property and am thinking I can make it work as an owner occupied home and therefore low money down.

List: $295k
Desired Purchase Price: $270k (5% down with VA loan)
Rehab: $2k (paint only)

Monthly:
Rent: $3700 ($1850x2 after I leave)
PIT: $1637
Insurance: Estimating $225
Vacancy: $370
Management: $370
Maintenance/CapEx: $370
Utilities: $400
Snow removal: ?? May be able to pass to tenants

Total Expenses: $3,370
Est. profit: $330

Cash on Cash: 21% (Total out of pocket costs about $19,500)

Up front it looks like a no-brainer, but here's my slight hesitation. If I were to purchase this an investment property, with 25% down, it doesn't meet my criteria of 20% CoC returns (10.3% CoC). One of the tenants is also moving out soon and I don't need it to live in for 3 months, so I will have 3 months of one-sided vacancy immediately until I move in.

My alternative housing option would be to rent something slightly larger for about $2,000/mo. Since I will manage this property myself while I am living in one side, and do much of the maintenance myself, my costs will be significantly lower than what is mentioned above. I'm estimating that this house will save me about $1400/mo vs renting.

I'm also concerned my Maint/CapEx number of 10% is not going to be sufficient. The good thing is that all of the appliances are new within the last 5 years, laminate flooring and carpet within that same time frame, and a new boiler last year.

Thoughts?

Troy Sheets · Answer

Here's the thing, an investment you'll live in isn't necessarily the same as an investment you'd purchase strictly to rent out. If you're going to live in it, in many markets it's not going to cash flow...and that's OK. What's the alternative? Purchase a SFH that you bear the full brunt of paying for every month? If it comes down to it, I'd much rather buy a mediocre cash flowing (or possibly break even) property to live in and have tenants help pay for. It frees up a ton of your cash monthly to reinvest, pay down principal, save, etc. I'm not saying THIS house is the best deal in AK because I have no idea about the market there. What I am saying is, if you're hung up on getting an OOC duplex that will have one side of the house cover all expenses and possibly even cash flow, it's not going to happen in many markets, especially in an area you'd actually want to raise your kids in.

Connor Dunham · Answer

Going from the list price and adding $7500 for closing costs (just in case - this is an FSBO) you come in at 1.2% monthly income / purchase price. They talk about the 2% rule on BP all the time, but I don't see it on AK MLS properties that I would actually live in. When you are in the 1-2% range, people have said they find it hard to cashflow or have the property pay for CapEx. People in larger cities often have a hard time finding 1% deals, but at 1.2% in FBX, its worth a closer look.Looking closer: definitely not going to have one side cover all expenses here, but it really comes down to living for (using your numbers) $1150 per month, learning to manage the property (assuming you aren't going to hire a property manager), and making sure the property cashflows $100 minimum per door after you leave (looks like it does). Make sure to have multiple exit strategies.Also, you might want to get some quotes from local property managers to verify your stand-in number for management. I've heard 12% from some people down here. At the same time you can get their estimate of what the unit should rent for and their vacancy rate (as a check against your numbers). Long answer short, it's worth pursuing if you think you would like living in the property. I wouldn't compromise my living standards at that price / cashflow. I would call the utility companies and triple check those utility numbers. If they won't give you the history, you can show that you have an accepted offer and they are supposed to show the history. Good Luck!

Evan R. · Answer

Airbnb/VRBO might not work all too well. Vacation Renters tend tend to be tourists. The turn over is more frequent, and there is the upfront cost of providing furniture and linens. Looking at the 26 airbnb listings for Fairbanks, the average price per night is $121.93, and the average vacancy rate is 71.9%. These numbers aren't that great. :/

Matt Slykhuis · Answer

@Connor Dunham Thanks for the response! The property has an oil-fired boiler that is shared amongst both units. There are separate electric meters, but shared water. The boiler was new in March of this year, and the utilities numbers are based on the previous boiler. The house has recent window upgrades as well.Good to know on insurance -- I haven't gotten a quote and was just taking a guess. I haven't considered closing costs at all, as far as who is paying them. I have budgeted $5200 into my CoC return numbers though, so I think that would assume I would pay most of the costs.As far as cash reserves, it won't be an issue. I have the capability of doing an investor loan on the deal (25% down), but that drops the return to 8% and I would prefer not to tie up that much cash if I don't have to. Good suggestion on AirBNB or similar -- I hadn't thought of that, but it could be a good way to get some decent income for a couple of months.To make things even more interesting, it sounds like the tenants that are staying put are not the greatest tenants. What I mean is, fairly loud and have had the police called within the past year for a party they hosted. They are month to month, so I would plan to not renew a lease with them next summer and seek better tenants at that point.Does this deal seem too thin?

Connor Dunham · Answer

Hi Matt,How are the utilities set up? It seems to be light. Is the property on oil or electric? separate meters? shared boiler/furnace? As a comparison, I budget $475 in a duplex I owner occupy in Anchorage (water and gas are shared).Insurance: You are probably $75-$100 higher than you'll get when you owner occupy.Maintenance: snow removal should be included under this item.Appliances and other unknown rehab: I had a fridge go out within a month or two, consider buying a home warranty with the purchase. In retrospect I wish I had - there's a lot of advantages about them when you read up on it.Buyer paid closing costs: Are you splitting? is the seller paying these? PMI: VA loans do not require this, but anytime there is less than 20% LTV, it should be considered in the analysis somehow...Reserve funds: I don't qualify for VA, but for AHFC they require 6 months PITI. Do you have this much? It can be risky when your reserves are too low right after a purchase.3 month vacancy: Have you considered doing a vacation rental (AirBNB) to cover the gap?

Matt Slykhuis · Answer

@Joseph Weisenbloom Thanks for the reply!I wasn't clear in my original post, but the "PIT" was "Principle-Interest-Taxes" which included property taxes. I left off the "Insurance" because it was going to be an estimated number whereas the PIT is fairly reliable.Date-wise, I don't need a place to live until 1 April. So Any time between closing and 1 April is "costing me" as the current tenants are leaving and I don't expect to find a 2-month tenant, nor would I necessarily want one due to the risk of such a short term tenant.I'm looking at eating the cost at this point, in order to lock up the deal. I can even tell the seller that I will close in March for more $...but I know they don't want that because they can't get a loan until this house has sold.

Joseph Weisenbloom · Answer

Damn I didn't know prices/rent was that high in Alaska. One thing I am noticing in your numbers is you forgot property taxes. I'm sort of confused on your explanation on why you are hesitant. I understand that it doesn't hit your goal of 20% CoC. Sort of confused on the 3 month thing. You are hesitant because you will have 3 months of vacancy between when you would buy the property and when you would be able to move in? You do realize that it will take anywhere from 4-6 weeks for the loan paper work to go through before you will actually own the house. Even then you may not be making a mortgage payment until 2 months after your offer is accepted. Or you could just hold off on buying the house for another month. Or you could just eat the potential cost. Hopefully this answers your question.