House Hack with Red Flags - Need Advice

[Joe Black]

Hi All!

I am one year into my first successful house hack and I just viewed a very promising potential house hack that has some red flags that may cause issues with renting the units long term. I plan to live in one unit for a year then move out. The question: Should I pursue this deal or do the home features create too much risk with finding and retaining tenants?

Key features about the house are outlined below:

Home Details: Single Family house separated into 3 units (2 meters) (1-5bd/2ba; 1-2bd/1ba; 1-1bd/1ba - non conforming)

1) The location: the house is located in front of a freeway on-ramp that has nearby homeless encampment. There are also breweries and expensive condos within 2/3 blocks so its not a terrible location just some nearby sketchiness.

2) Home function: The house has no front yard, no outdoor storage, and almost no backyard for tenants of the 3 units to enjoy. 

3) Parking: Only 2 parking spots for 3 units (8 beds total). Also street parking is pretty bad, you'd likely have to find a lot to pay for parking if you have extra cars

4) Home function pt 2: The home has 3 units but only 2 meters and one unit in the backyard is not permitted by the city. 

5) Main Unit: It's 5bd/2ba and newly updated but I would consider opening up the kitchen to the living room so there is a larger open space which would require losing one room (estimate $20k reno)

Positives:

The home is newly renovated in a walkable urban area close to bars and restaurants with multiple high prices condos in the area. Also, it is within 3 blocks to a train station (BART).

The Deal:

Purchase Price: $775K

Cash to Close + Reno: $70K 

Total Monthly Rental Income (per rentometer): $7K (conservative)

Total Monthly Expenses + PITI: $5,500

Annual Cash Flow: $18K

Cash on Cash Return: 26%

[Matthew Brill]

The question is what will the house ultimately rent for given the quarks? Those are things rentometer and other data services won't take into effect. If there is a nonconforming unit there is also a potential issue with the that may come up with title. Or will it be grandfathered in? It's not a no for me but it I would be taking a real close look and be extra conservative in my underwriting.