First House Hack Success Story with Numbers!

[Sam Levine]

Hello BP!

Three months ago, I set out to find a purchase a small multi-unit apartment in the St Louis area because my girlfriend and I are moving there in early August. We have been living in California this whole time, so I knew networking would be key to having everything move-in ready. Over the last 3 months, I spent hours networking with people on the BP forums, analyzing the rental markets and neighborhoods, and asking lots of dumb questions. Fortunately, I was able to get a great agent and lender through the recommendations and referrals on BP. We were able to find a fourplex in a great neighborhood (looks like it will appreciate but don't need it to) and close through an FHA loan. Thank you @Alicia Sierra for helping through the whole process!

Onto the deal!

To be honest, the property immediately caught my eye. Great photos, excellent neighborhood, and the price kept being lowered. However, the rents were way too low to fit my initial criteria (1% rule). However, after analyzing the market rents through Padmapper, Rentometer.com, and Zillow, I discovered the units themselves were underpriced for the area. We put in an offer, and after some haggling, decided on $251,000 with the seller contributing $7000 to closing costs. After the inspection, we were able to get $2,500 in additional repair completed. 

The units themselves are all 1 BD 1 BA and currently being rented for $525. The plan is to increase the rents to $700 (slightly below market rate) when the leases expire in the Spring. To fit my criteria, I analyzed the numbers with the increase rental rates as though I was not living there. I want this investment to make sense if we choose to move out after the 1 year FHA requirement. All numbers are on a monthly basis:

Gross Income: $2800

Vacancy: 8.33%

Adjusted Gross: $2566.67

Repair: $256.67

CapEx: $256.67

Management: $256.67

Taxes: $197.29

Sewer: $9.33

Water: $63.14

NOI: $1343.40

Mortgage Payment: $1138.98 (financed at 3.875% with 3.5% down)

Mortgage Insurance: 157.66

Cashflow: $46.76

Downpayment: $8785

Cost to Break Lease: $2000 (all leases ended in the Spring)

Pro-rated Rent: (651.13)

Total Cash Required to Close: $10,134

Cash-on-Cash Return: 5.54%

IRR over 5 Years Due to Loan Paydown: 52.08%

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The big takeaway for me is that networking is essential to making these kinds of purchases sight unseen. St Louis is known for having neighborhoods that vary greatly block-by-block. I was fortunate enough to find people I could trust and really knew the market. All thanks to BP! 

Other takeaways are try to avoid being in a time crunch when making a purchase! My original goal was to have the property cashflow at a much higher rate, but as the moving date became closer, it was harder to find deals off the MLS in areas we would want to live in. Probably could have found a better rate of return cashflow-wise if we were more patient or were willing to do rehabbing upfront.

Try to get lease information upfront if doing a house hack. We got the lease information later in the process. Buying the tenants out of the lease definitely made a big impact to the total rate of return. 

Going forward, I am going to be sticking more closely to the cashflow goals. That will probably require doing some flips, so networking with other successful flippers in the area will be key. 

Looking forward to everyone's feedback. For now, we expect to be paying much less than we would otherwise for rent, so we can put these lessons learned and the money saved through this experience towards our future deals.

[Sam Levine]

@Gregory A. I've always heard 10% as an estimate for CapEx and Repair expenses over the long run. Given that I'll be doing the repairs and management myself, I certainly expect the numbers to lower, but I want to be safe should I turn it over the management at a later point. Have you found 5-6% as more realistic?

We had to pay one of the tenants cash to move out of a unit because the lease was expiring in the spring and FHA requires an owner occupancy.

At closing, we are collecting pro-rated rent because of the closing occurring part way through the month. This helped offset the cash we had to put into the deal.