Good investment for a house hack?

Question

Hi there,I am struggling a little bit with analyzing my current deal (I think I'm having slight analysis paralysis, or I just don't know where to start). I'm currently renting this house, and am looking at buying the house from my landlords through FHA. It is not on the market. It is a duplex (upstairs and downstairs unit). Both units with 2 bedroom, 1 bath. Built in 1968. The house is located in Farwell, Michigan which is near central/northern Michigan. The owners have expressed an interest in selling the house for what they owe on it which is $38,000. In the end I wouldn't doubt if they wanted a little more, maybe $45k?Currently each unit brings in $350 a month, I would shoot for around $500 after making updates. The house is located right in town, very close to the school. There is also a detached garage which I have thought about renting to tenants as storage for a small monthly charge, ($30?). It doesn't make sense to use it as an actual garage the way it is set up. As far as expenses go, the owners estimate water and trash to be $65 per month, the current mortgage payment is $565 (with an interest rate of 5.75%), and taxes were $1,433 last year. I am estimating that rehab will cost around $15,000 They don't remember what the property was appraised for the last time it was appraised, but the current SEV is $30,450. Can this number help me calculate ARV? I can't seem to find any comps to this house in the area.I haven't looked into qualifying for an FHA loan yet, and at this point I simply want to see if this is potentially a good enough deal to call an inspector. If anyone could weigh in on whether they think this is a good deal, or could give me any guidance of something I'm missing. It seems to me that this will be a decent investment for house hacking.

Tanya H. · Answer

Hi Lauren,I think I would take a look at the rehab you are planning. I've seen your work, and you guys are doing cool stuff in the unit you are living in. So you already have a great start on the rehab. But you want to be careful to not over-rehab. What do you have in mind for $15K? That just seems like an awful lot of money to put into the house, especially since you've already done quite a bit on the unit you are in. Besides that, though, I think the place sounds like a great deal. I question the current mortgage payment - seems high, but maybe they've refinanced some money out of the place? Are they underwater at the price(s) you are considering? But I think your mortgage payment would be lower than that. I would play with some mortgage calculators to get a better idea of the payment for you.And reaching out to your realtor friend to find some comps or to come up with a market value is a great idea.Keep us posted!Tanya

Lauren Baker · Answer

@Bill Richard I am currently living in one unit of this house, so I do have some insight on the condition already, but I would definitely have an inspector look at it before jumping on it. 1) It has been 15+ years since the roof has been replaced, and I am already factoring that cost into my rehab budget. The water heater in the upstairs unit has been replaced within the past two years, and the downstairs unit (the one I live in) has the element replaced yearly (a $10 fix), but it will probably need to be replaced in the next couple of years. The windows are old, and I'm a little worried something might come up with the electrical. Again, if any major expenses come up with the inspection that would likely deter me from buying.2) Technically the garage would be fine to park in, but the way it is situated it would only make sense for the tenant in the lower unit to use it to park. It faces a weird direction so it would actually limit the amount of parking for that tenant because they would be backing out into their other parking spaces. The house has very limited storage, so I think that would be a valuable feature to tenants. I know I would love to use it as storage, but the owners have their own things in there.3) Good point about the FHA loan, I was concerned about that and was wondering if it would work doing the 203B, but I am planning on doing the work myself because I have a lot of very talented family members that would be willing to help. I already talked to the landlords about a land contract, but their lawyer advised them not to go that route. 4) I have been having a very difficult time finding comps because of the very limited amounts of multi family homes for sale/recently sold. I may have a connection with a realtor that I could ask for comps or what they think the ARV is. I think the margins will be low until I move out, and am renting both units. From what I have learned here on BP, this was an acceptable approach when hacking a multi-family. I just have to be sure that the house will make a profit when selling. It also won't be just me paying the bills, my boyfriend will also be living there.

Bill Richard · Answer

I see some potential problems with your deal. 1. Lack of experience. Nothing personal, you're young and starting out. This place is 48 years old. The initial systems that were put in when new are at the end of their lifespan unless they have been replaced already. You'll need to check all this. Roof, electrics, water pipes coming in as well as sewer pipes going out. Heat system. Windows and doors. All of it. It could be ok but it might all need work or replacement. 2. Need more info about garage. One or two car? Condition? Why can't anyone park in it?3. Getting a FHA loan is not real hard if you have verifiable income. Thing is, FHA likes niece fixed up places. If you look at the FHA 203B loans, these are for people who have fixers and they roll the repairs into the loan. Also, work must be done by regular contractors so that drives up the price. You might be better looking at a farmers/rural home loan. I think the whole northern half of lower MI is considered rural and they have special programs. 4.I'm also thinking that there's too much money involved for the return. I'd have to crunch the numbers more to be sure but first glance looks marginal to me. Lots would depend on realistic cash flow. Also, I'd check carefully for comparable. I just don't think that prices are that much higher so if that's true you would not gain significant equity by buying this and fixing it.

Terrance Givhan · Answer

considering the cost of property and the cost of rehab at $350 or $500 a month(in rent) it would be at least 6-7 years before you would begin to turn a profit if you were planning to live there. That would not be a good deal. Gain ownership do the rehab, sell it for $100-$125,000 and make you some $$$

Lauren Baker · Answer

Thanks for your input, John. Gas and electric are metered separately for each unit, and the tenants are responsible. Water and trash is a combined expense that the owner pays, which I would keep it as is.

John Hill · Answer

I'd do it and not think twice! I'm assuming you know the demographics of the area and what type of clients would rent the units. If you feel comfortable with that. Other than that sounds like a good deal. What are the costs to you every month? Are the gas, water and electric separate and the responsibility of the tenants?