Advice on a potential house hack with a 5BR SFR in Durham NC

[Annchen Knodt]

Hi everyone,

I'm getting started in REI though I currently rent my primary residence, a 5BR 2800 sqft single family home (built in 2006) in a nice neighborhood in Durham NC (Hope Valley Farms) that I split with 3 other roommates. The owner of the home just let me know that he's decided to sell, and has given me the chance to make an offer before putting it on the market.

I estimate that the market value is around $300k (fairly confident in this estimate bc a nearly identical comp nearby just sold for $307 with just a few small improvements).  So if he sells to me directly I estimate he saves ~$18k in agent commissions. From there, my guess is that $280k is likely close to the lowest price he would accept from me.  At that price, when I run the numbers the result suggests that I'd generally break even:

• Taxes/insurance/HOA: $450
• Reserves for vacancy/repairs/capEx/management: $500 (i'm using 7%/5%/5%/8% for these respectively)
• Mortgage: $1025 (this is based on a 30-year fixed primary-residence loan at 3.625% with 20% down through a credit union I bank with)
• TOTAL expenses: $1975
• Rent: $1985

I just LOVE the idea of house-hacking, and it would be amazing if this proved to be a good move.  My main reservations about going through with it are:

1. There's a large crack in the flooring shortly after you walk through the door to the house. The wood laminate flooring panels are coming apart for a stretch of around 20ft, and in some places the gap between the panels is over 1/4" and through it you can see a corresponding crack in the slab underneath. The owner has said that he has good insurance and can easily get that taken care of before the sale.  I'm not sure it's as simple as that, but he seems very confident…  Otherwise, the house is in good shape.
2. The market in Durham is super hot right now! It seems like if I buy anything here now, I'm very much likely to over-pay
3. I estimate that this would require at least $60k to close on.  That's a lot of cash to leave in a break-even deal and not have for other investments!

I would love to hear any thoughts that folks familiar with the Durham market or with large SFR investment properties in general have on this potential deal. Thank you very much!

Annchen

[Brian Sparr]

Hi @Annchen Knodt -

Is the $1985/mo in rent coming from the three other roommates?  If that's the case, it's not really accurate to say this is only breakeven - you'd be living for free at that point - whatever you're currently paying in rent would be your positive cash flow (assuming your numbers are correct).

That's great that the current owner has good insurance, but I wouldn't be quite so quick to assume a cracked slab will be covered.  The insurance company will try to determine what caused the crack ... if it was natural soil expansion/compaction, it's unlikely they'll cover it ... if it was, say, from a plumbing leak, there's a much better chance they'll pay for, at least, a part of it; however, that would then pose a different issue for you - I've seen new policies become very expensive when there are prior water damage claims on the property.  I'd try to find out the cause of the issue before having the owner fix it - you may decide it's something you're ok just living with.

Another thing to consider ... maybe you don't do 20% down. If you go the 3.5% FHA route, that $60k number for closing will drop down to be closer to $12k. Yes, your loan payment will be a little higher and you'll have MI added to it, but that's not the end of the world ... you may decide that keeping an extra $48k in the bank is worth paying a little more each month for - especially if it's what allows you to pick up another property.

Good luck!