4-unit, First-time, Fixer-upper, House-Hack!

[Garrett Tierney]

Investment Info:

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

Purchase price: $245,000
Cash invested: $11,485

As a first time homebuyer, first time investor, my first deal was a bank-owned foreclosure on a 4-unit property in Joliet, IL. The property was uninhabitable and fully vacant at the time of purchase. Being a first time homebuyer with good credit and income, I purchased the property using an FHA 203k loan. The list price was $179,900 and after about a week of negotiating with the seller's agent my offer of $170,000 was accepted. Working with a contractor, we put together a scope of work totaling approximately $85,000 to fully renovate three units, including the addition of one bedroom, and complete necessary CapEx mechanical repairs including updating many plumbing fixtures, and updating electrical fixtures and systems. Despite MANY challenges throughout the construction, and some very comprehensive inspections an re-inspections, the units were completed and fully occupied above market rent approximately 10 months after the closing date. I learned a tremendous amount through this process and consider it to be invaluable to my real estate education. After moving out of my owner-occupied unit, I was able to rent out this 4th unit, and have the buildings fully occupied. My monthly PITI comes in just shy of $2,300 and the gross monthly rent collected is $4,000. This monthly cash flow has now exceeded my initial cash outlay of $11,485 and I officially no longer have any money left in the deal. Re-appraisal of the property in late 2020 did not result in sufficient valuation in order to complete a cash-out refinance, however, I did an FHA streamline refinance which lowered my rate from 4.875% to 3.125%. Despite not full achieving my initial goal to cash-out refinance and eliminate PMI, I consider this deal a great success and will diligently save and re-invest the significant cash flow from the property until my equity position increases to the point where a cash-out refinance will work. Please let me know if you have questions about this particular deal or, in general, how to utilize the FHA 203k loan program to build significant equity by buying distressed property below market value, renovating it with bank money lumped into the mortgage, and renting out for cash flow. This was a life-changing investment for me, and I am eager for the next opportunity to invest in real estate.

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

6 months of listening to the BiggerPockets podcast, and an emphasis on FHA low down financing for first time buyers made alot of sense to me and before I had a chance to get my ducks in a row and have this type of financing set up, this deal came across my email on a HomePath first look notification. Extensive reading on BP forums and blog posts reinforced the powerful nature of the 203k program. I saw this as my first step towards financial freedom by creating passive income through cash flow.

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

HomePath by FannieMae daily email for my area. Contacted an agent through Realtor.com and went to see the property the next day. I was able to secure my pre-approval and put an offer in two days later. I was the first and only offer, and after about a week and the bank calling for highest and best, we submitted our offer for $170k, and it was accepted.

How did you finance this deal?

FHA 203k loan program with LeaderOne Financial. Purchase price was $170,000 and renovation budget was $85,000, for a total loan balance of $245,000. My cash to close, including 3.5% down payment and closing costs was just shy of $12,000.

How did you add value to the deal?

Replaced 24 old, rotted wood windows with new low E vinyl windows, replaced 9 old broken wood exterior doors with new steel security doors w/ master key deadbolt system, added one bedroom w/ lighted closet, and lighted closet to existing bedroom, 2300 SF of new carpet installed, 700 SF of engineered hardwood installed, 3 new water heaters, 2 new exterior electric services, 2 new interior breaker panels, new paint on all walls and trim, 4 new shower surrounds, 4 new countertops, 4 kitchen sinks.

What was the outcome?

After much back and forth, re-appraisal was valued at $310,000. Needed a value of $340,000 to complete a 70% LTV conventional refinance. I was not bale to achieve my desired valuation, as the surrounding market just does not support it here in Joliet. Since the equity piece is not quite where it needs to be, I opted for an FHA streamline refinance to lower my rate from 4.875% to 3.125%, which despite still paying PMI will increase cash flow to just shy of $2,000/month. Great cash flow outcome.

Lessons learned? Challenges?

Scope of work was not specific enough regarding finishes, specific products, and timelines. My contractor had not done a 203k loan before, and was not familiar with the inspectors in Joliet. This lead to extensive change orders and changes in scope, due to unforeseen code issues with electric and plumbing. HUGE learning experience. Contractor was using unlicensed subs without informing me and it put me in some tough spots with the City inspectors, as I was unaware. The renovation took 10 months!

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

Unfortunately, I had quite a bad experience with my agent, the seller's agent, my contractor, and my lender. My one ally throughout the project seemingly was my 203k consultant, Dean Cushing. He was genuine and always willing to answer my questions and go above and beyond to handle all the change orders and complicated draws to the contractor. Dean was a professional throughout and helped instill confidence in me during the toughest times. His company is Home Inspection Pros, Inc., contact him!