Potential First Deal

[Justin Bioc]

Just looking to get some second, third, and fourth opinions before I blow it on my first deal. Buying a 2-family rehab deal to house hack in a highly competitive and highly sought after town.

About the property:

It a 2-family with two 1bd/1br units, ~1450 sqft total living space. Looking to convert one of the units to a two bedroom. Rents in the local area go from 1450 for a 1bd/1br to 1800 2bd/1br. It's old and needs a lot of repair. The pros are that it's in Melrose, MA, a very sought after town for its distance to Boston, easy access to public transportation and major highways, and school system. Major con is the house needs major repair including de-leading, removing asbestos siding, water damage, and redoing the electrical panels. I'll be self-managing the property. This home only got a few offers despite other homes in similar condition the area getting a ton, and selling for tens of thousands over asking.

The breakdown:

Price: 395,000*

Rehab estimate: 100,000

ARV: 500,000-550,000 (no good comps in area)

PITI monthly: 3,413 (financing with a 203k loan, and hoping to refinance after rehab)

Cash to close: 25,165

Rental Income: 1700 (estimated based on someone I have already willing to rent contingent on a successful conversion of the one unit to a 2bd), renters pays all utilities except water.

Monthly payment: $1713

* after home inspection, I'm wanting to negotiate this down to 365,000 based on some serious negligence by the seller

I'm kind of stuck on how to look at a house hack. On one hand, I'm paying quite a bit of the mortgage still, but nothing in my area is going to be able to fix that. It doesn't fit very well into the rules of thumb, but I do have the potential to build some initial equity. Criticism wholeheartedly welcome as I'm trying to avoid a major financial mistake. I'm having major doubts, but I'm also a total noob. Would it make a difference if I was able to refinance out in 6 months (only way this would happen would be if the property appraised to 563,000) and rent out (1700 + 1450 = 3150) for the estimate refinanced mortgage payment of 3078?

[Justin Bioc]

Originally posted by @Christopher Goldie:

Here's my opinion;

First is it worth living in a 1bd 1 ba unit for $1713 a month? Taking into account vacancy, repairs, property management ( I believe in being paid for any work I do), or capital expenses ( roof, hvac, water heater) you are probably closer to paying $2500 a month for a 1bd 1 ba. If a 2 bd unit brings only $1700, I have to assume the 1 bd unit brings considerably less, meaning even if you rented both sides it wouldn't even cover the PITI. Are you willing to pay for someone else to have a place to stay?

Second you're speculating that an appraisal will be higher in 6 months than the comps you're having trouble justifying now. Not a good idea. Also most cash out refinances are limited to 75% ltv, so you'd be lacking there for quite a while.

Hate to be the bearer of bad news, but I say pass on this. You were already having doubts and for good reason. To me house hacking is having the second unit cover or come very close to covering your expense of ownership, which this far from does.

 Thanks for the input! You're definitely taking the words out of my mind.