First Investment House Hack 203k Loan

[David Rogers]

Investment Info:

Small multi-family (2-4 units) buy & hold investment in Lakewood.

Purchase price: $100,000
Cash invested: $20,000

This is my first house hack deal. My fiance and I bought the house in October 2016 and lived here until August 2019. During those three years we reinvested the first floor tenant's rent back into home repairs and other buy-and-hold properties.

What made you interested in investing in this type of deal?

I was living in Chicago splitting $1400 rent with no laundry in building. Duplexes in my neighborhood, where l'd hear gunshots every two weeks or so, were going for $200,000 and needed at least $100,000 of work. I was a teacher with hardly any savings so I looked at moving back home to Cleveland where I could get started house hacking at a more affordable price point.

How did you find this deal and how did you negotiate it?

Found this on the MLS through a real estate agent. No negotiation. I liked the price and the neighborhood was very hot so we offered asking price.

How did you finance this deal?

203k rehab, 3.5% down, owner occupant loan. I took an early withdrawal from my 401k for the down payment and closing costs.

How did you add value to the deal?

Refinished the hardwood floors upstairs and downstairs, installed groutable vinyl tile in first floor kitchen and shared hallway, new cabinets, faucet, sink, and stove in first floor kitchen, repainted entire interior, reinforced upstairs porch, replaced some support joists for upstairs porch, painted both porch floors, built new upstairs porch railing, installed new vanity, medicine cabinet, and toilet in first floor bathroom.

What was the outcome?

We rented out the top floor for $795 and the bottom floor for $750. PITI is $1,040, water is ~$80-90, capex/maintenance is $309 (20% of gross rents), which leaves monthly cash flow of $109. PITI will be adjusted down to about $970 because I contested the county's tax appraisal to reflect our purchase price of $100,000.

Lessons learned? Challenges?

This house was a great set of training wheels for real estate investing. We inherited a tenant who was very easy to deal with, had a few quirks, and a few problems that weren't crazy enough to sour me on investing. Initially, it was helpful to not have to screen a tenant and to just collect the rent every month. I was able to do most of the improvements myself, on my own time, because I lived on site. I learned the power of real estate to build wealth.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Lori Forester of Howard Hanna was my real estate agent and great to work with. Natural Choice Floors refinished our hardwoods. Very professional, excellent quality, and easy to work with. They're easily one of the top 3 hardwood floor specialists in the area.

[David Rogers]

Great questions @Eric Harnden. I'd wholly support house hacking as your first venture. 

During my first year in the property, it helped me to picture my expenses as being the same as if I were renting, except now I had a bonus $525 income stream that I could put into savings each month. I never considered the duplex as cash flowing anything while I lived there because my mortgage was $900+ and the tenant was paying $525. Now that I've moved out, the combined rent of both units covers the mortgage, 10% capex put away, 10% repairs put away, water payment, and leaves just over $100 as legitimate free cash flow. 

Treating my duplex mortgage as the same as my prior rent expense kept my weekly and monthly budget close to what it had always been, except every month I'd see this magic cash that was coming from the tenant stacking up in another bank account. I also deposited the rent into a different bank than my usual and shredded the debit card so I couldn't spend the money except with great effort. A year later when I went to update the tenant's kitchen, I had about $6000 sitting in savings that I used to pay for the repairs.

Thus, I considered the tenant's rent as an extra savings or bonus income stream that I wouldn't have if I were renting or living in a single family home. For the first year, I paid the mortgage out of my usual earnings and saved her rent which I then re-invested in the house by renovating the kitchen and, later, doing the other repairs I laid out in the post. There were a couple of months where I was changing jobs and during those months I would directly apply my tenant's rent to the mortgage versus saving it.

The $20,000 was the combined down payment, closing costs, and capex/repairs expenditures over the three years that I lived there. Total capex for repairs, renovation, paint, etc. was approximately $13,000 while the other $7,000 was my initial down payment and closing costs for the loan.

This duplex allowed me to save enough capital to be able to buy other rental properties cash from the auction, take care of all repairs up front, refinance and collect cash flow within the first 3-4 months after purchase. 

Let me know if that clears things up. I'm not an accountant so there may be a clearer way to segregate or explain the income/expenses than the way I did.

Best of luck with the house hack or whatever you choose to do.