Potential First Deal

Real Estate Deal Analysis & Advice
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Potential First Deal

Justin Bioc
MA · Member since 2015 · 11 posts · 4 votes

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?

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  • Christopher Goldie
    Contractor · Columbia, SC · Member since 2014 · 241 posts · 68 votes
    10y

    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.

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  • Nicole Jones
    Fresno, CA · Member since 2015 · 145 posts · 59 votes
    10y
    Justin Bioc Hey, first... Congrats on even getting this far into a possible investment! I know Boston area is a tough market. Second, I'm interested in some other opinions regarding this deal. And just out of my own curiosity, are you rolling the projected rehab costs with the loan? If not how is this being financed?
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  • Justin Bioc
    OP
    MA · Member since 2015 · 11 posts · 4 votes
    10y

    @Nicole Jones

    I'm rolling the rehab into my mortgage with a 203k loan. I've been looking for almost 2 years now on and off. Boston area is crazy. If this doesn't work out, I'm thinking of considering a different strategy. 

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  • Justin Bioc
    OP
    MA · Member since 2015 · 11 posts · 4 votes
    10y
    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. 

    1Reply
  • Derreck WellsPro Member
    Specialist · Pelham, NH · Member since 2013 · 544 posts · 269 votes
    10y

    Hey Justin, something to think about, you wrote "Major con is the house needs major repair including de-leading, removing asbestos siding, water damage, and redoing the electrical panels." Well, as the building sits with 2 one bedroom units, you will probably never have to delead it. As of right now, the law says that you only have to delead if there's a family with kids under 7 living there. Where it's a one bedroom, there will probably never be a family with kids moving in. You can't discriminate against a family, but I'm pretty sure that you can not rent to a family based on it being a one bedroom and the local occupancy laws. It should be pretty easy to find a better suited tenant for the unit then a family. 

    Also, if the unit has never had an Initial Lead Inspection done, during the remodel it's legal to replace windows, doors, door jambs, and anything else that you're remodeling. Even if it has lead paint on it, if you're remodeling, you can remove it. If you're specifically trying to delead the unit, you cross the line into Unauthorized Deleading and that's illegal. If you happen to remodel all or most of the lead paint right out of the unit, then when you get an inspection done for your Lead Cert, it would be a lot cheaper to delead if there's any left. If the unit has had and inspection and it hasn't been deleaded yet, you're stuck. You'd need to get it deleaded before you can remodel. If it has a Lead Cert, you can legally remodel to your heart's content. Clear as mud, right?

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  • Christopher Richardson
    Lender · Haverhill, MA · Member since 2016 · 60 posts · 21 votes
    10y

    Justin,

    I have clients that have been buying up some 3 family's down there. The 3 families numbers look much better than a 2 family down there. One client, a single guy, purchased a 680,000/3 unit (Loan is around 660,000), and the rents are 2,300 each, the piti is around 4k. He purchased it with the other units already under lease and he is living in one unit.

    What's your thoughts on something like that? 

    I have another option that might suit you, purchase something farther away. A 3 or 4 family, then after a year, do another FHA closer to your work, that is nicer, has more square footage, and more convenient location. Then you can go for a 2 family or 3 family, (you rent the unit your living in) and with the positive cash flow from the at a distance property, you can cover your out of pocket spread on your home near your work.

    I should mention to anyone reading this, you need to prove that there are substantial reasons on an FHA to go purchase a second home like this.

    Always with my best,

    Chris

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  • Justin Bioc
    OP
    MA · Member since 2015 · 11 posts · 4 votes
    10y

    @Christopher Richardson

    Hi Christopher! The idea of a 3-family definitely sounds better, and the investment looks way better. I like the idea, but after analyzing this "deal" and really reflecting on how it's been so far, I'm not so sure multifamily is the way to go for someone like me.

    You mention purchasing farther away, and I'm already looking into getting into turnkey. If you have any suggestions, please let me know. Would love to connect.

    0Reply
  • Kyle Myers
    Investor · Manitou Springs, CO · Member since 2016 · 57 posts · 25 votes
    10y

    @Justin Bioc 

    I decided on the turnkey route, due to our constant moves, deployment possibilities, and overall workload. Check out my two blog posts about why I chose that and how I chose the company and let me know if I can help you out at all. 

    https://www.biggerpockets.com/blogs/8313/49711-par...

    https://www.biggerpockets.com/blogs/8313/49783-par...

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  • Matt Lefebvre
    Real Estate Broker · Manchester, NH · Member since 2014 · 630 posts · 420 votes
    10y

    The numbers here don't look too good. If you're evaluating a deal, you should always err to the conservative side of your numbers. If it costs $385,000 to purchase the property, put in $100,000 in rehab costs, and end up with an ARV of $500,000, you're going to have very little equity in the property. Most banks only allow refinance loan for up to 75% LTV... so being able to refinance probably won't work to pull cash out.

    Looking at it from a cash flow perspective, it still doesn't look good. If you're projecting $1700/mo and $1450/mo in rent (a total of $3150/mo) and you have a PITI of $3413/mo, you're already cash flow negative. Even if you managed to refinance and got the PITI down to $3083/mo, the margin between profit and loss is so tight, that it only would take a single month of vacancy to erase an entire year's worth of positive cash flow.

    In my experience, its been difficult to find cash flowing two-families in higher priced markets... definitely should consider three or four families.  

    0Reply
  • Mike HurneyPro Member
    Real Estate Investor · Boston, MA · Member since 2009 · 2k+ posts · 542 votes
    10y

    @Justin Bioc Welcome.

    Just looking to get some second, third, and fourth opinions before I blow it on my first deal.

    Let's try this again with a little more positive attitude... Man this is DOA;-)

    How would you describe this to your girlfriend/wife/little brother/mother?

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