Newbie in need of some advice!

Chicago, Illinois
House Hacking
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Newbie in need of some advice!

John Hall
Member since 2022 · 5 posts · 0 votes

Hey BP

Need some advice for a newbie who's just getting started. I recently closed, this friday!, and will be house hacking a 2 unit building in Chicago in a B/A+ area. The purchase price is right around a fair market value for the area. The loan product is 100% LTV so I'm fully leveraged on the deal.

It is cashing flowing day 1 with room to increase gross rents by about 200-400 a month. Going into the deal I knew it had some capex expenses off the bat and it will be about 30-40k in capex total. Capex needed is a new roof which is near the end of its life, some exterior maintenance, and some other issues.

One reason why the capex is so expensive rather than in previous years is obliviously inflation and labor shortages. According to the contractors it would be about 5k cheaper if before the pandemic.

My question is that with the recession incoming, if we aren't already in one, and the softening of the housing market and maybe a 5-10% dip in housing prices nation wide would you spend the money on the capex now or wait it out?

I plan to be a Long term buy and hold investor. So would you pay the high inflation cost now to fix what needs to be fixed and not have to worry about it for 20-30 years OR wait till after the recession/inflation maybe the capex prices drop a little in price and do the projects then? Would you hold off on investing that much money into the building with little to no equity into the deal but still cash flowing off the start just in case the house prices take a deeper dive that what many think?

My fear is spending all this upfront capex expenses now and then being under water on the deal, but then again since I want to hold the building the life of the loan and need a place to live that even if I'm underwater if the market takes a deeper dive than expected I'm still cashing flowing strong and can wait for the equity to eventually come 5,10,15,20 years from now.

Thanks BP community!

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  • Allan Smith
    Contractor · Nashville, TN · Member since 2014 · 1k+ posts · 1k+ votes
    4y

    Do not wait. This is an excuse made when fear is doing the talking. Take action and adjust course as you go.

    0Reply
  • Paul De Luca
    Real Estate Agent · Chicago, IL · Member since 2018 · 1k+ posts · 1k+ votes
    4y

    @John Hall

    You're cash flowing with a 100% LTV loan while house hacking a duplex?

    If you knew that you were going to need to spend the money on capex, you have the money, and you plan on holding the property for the long term, why would you care about the short term fluctuations in value? I don't think inflation is going anywhere in the short term, and truthfully nobody knows.

    How old is the roof, and what other capex needs to be done? It depends on what the issues are and it may not be necessary to do everything all at once. Maybe you could spread the cost out over time.

    0Reply
  • Crystal SmithPro Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
    4y
    Quote from @John Hall:

    Hey BP

    Need some advice for a newbie who's just getting started. I recently closed, this friday!, and will be house hacking a 2 unit building in Chicago in a B/A+ area. The purchase price is right around a fair market value for the area. The loan product is 100% LTV so I'm fully leveraged on the deal.

    It is cashing flowing day 1 with room to increase gross rents by about 200-400 a month. Going into the deal I knew it had some capex expenses off the bat and it will be about 30-40k in capex total. Capex needed is a new roof which is near the end of its life, some exterior maintenance, and some other issues.

    One reason why the capex is so expensive rather than in previous years is obliviously inflation and labor shortages. According to the contractors it would be about 5k cheaper if before the pandemic.

    My question is that with the recession incoming, if we aren't already in one, and the softening of the housing market and maybe a 5-10% dip in housing prices nation wide would you spend the money on the capex now or wait it out?

    I plan to be a Long term buy and hold investor. So would you pay the high inflation cost now to fix what needs to be fixed and not have to worry about it for 20-30 years OR wait till after the recession/inflation maybe the capex prices drop a little in price and do the projects then? Would you hold off on investing that much money into the building with little to no equity into the deal but still cash flowing off the start just in case the house prices take a deeper dive that what many think?

    My fear is spending all this upfront capex expenses now and then being under water on the deal, but then again since I want to hold the building the life of the loan and need a place to live that even if I'm underwater if the market takes a deeper dive than expected I'm still cashing flowing strong and can wait for the equity to eventually come 5,10,15,20 years from now.

    Thanks BP community!


    Spend the money and fix the problems before it piles up. If you're a buy and hold investor and you purchased at 100% LTV (Really like to know your lender) then your current ROI is infinite if you exclude closing costs. Spending 30-40K in CAPEX is nothing. Regarding a housing price dip- So what? Every-time there's a dip it eventually comes back and you're in it for the long hall.

    312-681-7487
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  • John Hall
    OP
    Member since 2022 · 5 posts · 0 votes
    4y
    Quote from @Allan Smith:

    Do not wait. This is an excuse made when fear is doing the talking. Take action and adjust course as you go.

    Thank you Allan! You are right and I might as well spend the money now. 
    0Reply
  • John Hall
    OP
    Member since 2022 · 5 posts · 0 votes
    4y
    Quote from @Paul De Luca:

    @John Hall

    You're cash flowing with a 100% LTV loan while house hacking a duplex?

    If you knew that you were going to need to spend the money on capex, you have the money, and you plan on holding the property for the long term, why would you care about the short term fluctuations in value? I don't think inflation is going anywhere in the short term, and truthfully nobody knows.

    How old is the roof, and what other capex needs to be done? It depends on what the issues are and it may not be necessary to do everything all at once. Maybe you could spread the cost out over time.

    Thank you Paul! I should have mentioned that it's a military loan for veterans with 0% down. It also has no PMI which gives me the ability to cash flow. 

    it's a 2 flat on the north east side and needs a new roof, tuck point, and some repairs to the garage. I've been leaning on the side of just spending the money now but I wanted to get some more advice from some experienced people just to make sure I was making the right choices. 
    0Reply
  • John Hall
    OP
    Member since 2022 · 5 posts · 0 votes
    4y
    Quote from @Crystal Smith:
    Quote from @John Hall:

    Hey BP

    Need some advice for a newbie who's just getting started. I recently closed, this friday!, and will be house hacking a 2 unit building in Chicago in a B/A+ area. The purchase price is right around a fair market value for the area. The loan product is 100% LTV so I'm fully leveraged on the deal.

    It is cashing flowing day 1 with room to increase gross rents by about 200-400 a month. Going into the deal I knew it had some capex expenses off the bat and it will be about 30-40k in capex total. Capex needed is a new roof which is near the end of its life, some exterior maintenance, and some other issues.

    One reason why the capex is so expensive rather than in previous years is obliviously inflation and labor shortages. According to the contractors it would be about 5k cheaper if before the pandemic.

    My question is that with the recession incoming, if we aren't already in one, and the softening of the housing market and maybe a 5-10% dip in housing prices nation wide would you spend the money on the capex now or wait it out?

    I plan to be a Long term buy and hold investor. So would you pay the high inflation cost now to fix what needs to be fixed and not have to worry about it for 20-30 years OR wait till after the recession/inflation maybe the capex prices drop a little in price and do the projects then? Would you hold off on investing that much money into the building with little to no equity into the deal but still cash flowing off the start just in case the house prices take a deeper dive that what many think?

    My fear is spending all this upfront capex expenses now and then being under water on the deal, but then again since I want to hold the building the life of the loan and need a place to live that even if I'm underwater if the market takes a deeper dive than expected I'm still cashing flowing strong and can wait for the equity to eventually come 5,10,15,20 years from now.

    Thanks BP community!


    Spend the money and fix the problems before it piles up. If you're a buy and hold investor and you purchased at 100% LTV (Really like to know your lender) then your current ROI is infinite if you exclude closing costs. Spending 30-40K in CAPEX is nothing. Regarding a housing price dip- So what? Every-time there's a dip it eventually comes back and you're in it for the long hall.

    You're right Crystal, it is a military loan for veterans so it's no money down and no PMI which make air cash flow. I'll bite the bullet now and make the capex improvements and save up money for my next deal. Thank you. 
    0Reply
  • Garrett CrosbyPro Member
    Real Estate Agent · Los Angeles, United States · Member since 2021 · 392 posts · 162 votes
    4y
    Quote from @John Hall:
    Quote from @Paul De Luca:

    @John Hall

    You're cash flowing with a 100% LTV loan while house hacking a duplex?

    If you knew that you were going to need to spend the money on capex, you have the money, and you plan on holding the property for the long term, why would you care about the short term fluctuations in value? I don't think inflation is going anywhere in the short term, and truthfully nobody knows.

    How old is the roof, and what other capex needs to be done? It depends on what the issues are and it may not be necessary to do everything all at once. Maybe you could spread the cost out over time.

    Thank you Paul! I should have mentioned that it's a military loan for veterans with 0% down. It also has no PMI which gives me the ability to cash flow. 

    it's a 2 flat on the north east side and needs a new roof, tuck point, and some repairs to the garage. I've been leaning on the side of just spending the money now but I wanted to get some more advice from some experienced people just to make sure I was making the right choices. 

    So this is a VA loan? Are you living in one of the units and house hacking? If not, I'm just curious about how this loan works from an investment property perspective. :)

    Other than that, I'm absolutely all for renting this out if the capex checks out. Have you tried running these numbers in a calculator with extremely conservative numbers? Always worth the time and energy in my opinion. 

    [email protected]
    0Reply
  • John Hall
    OP
    Member since 2022 · 5 posts · 0 votes
    4y

    Yes it's a VA loan. I'll be moving into the vacant unit this week. Once I get passed the 1 year residency requirement I can move out and buy another multi.

    Since it is my first deal I was conservative in my underwriting, but I definitely learned a ton from this deal so far. I'm starting to get a true understanding of capex and monthly bills. 

    0Reply
  • John Warren
    Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
    4y

    @John Hall I am going to be the contrarian here. Is this a flat roof? If so, see if you can patch that thing for another few years. I can't tell you how many flat roofs I own that are "end of life". You can normally add a layer, patch a section, or otherwise extend the life a few years. 

    What are the other issues? I am curious what else you are doing that will add up to 40k. This is part of the game as an investor... yes sometimes you can't avoid CapEx, but normally you can soften the downstroke a LOT if you do some homework.

    0Reply
  • Matthew Irvine
    Real Estate Investor · Stamford, CT · Member since 2015 · 39 posts · 17 votes
    4y

    @John Hall I agree with @John Warren about waiting/repairing instead of replacing.  If you had a water heater that was old but wasn't leaking or showing signs of failure, my guess is, you wouldn't change it.  In this case we are speaking about a roof, roofs scare people and usually the catalyst of that fear is the "home inspector".  Home inspectors for all they help, tend to speak in language that covers them for liability purposes(in turn raising concern where it may not be immediately warranted).  Very few things on a house have complete and immediate failure, what I mean by this is a roof will have a minor leak before a major leak.

    Why put off the inevitable? Because you are replacing a functioning piece of a building before it is necessary i.e wasting the resource(roof) you already have.  This is why I site the water heater, or better yet, a stove(you often don't replace these until they break).  Alternatively, if you are not good at keeping your reserves as reserves, I have dipped into my capex reserves more than I'd like to admit, then fix the roof while you have the money.  Otherwise, tuck it away and let that existing roof do its job.

    0Reply
  • Drew SygitBusiness Member
    Property Manager · Royal Oak, MI · Member since 2012 · 13k+ posts · 9k+ votes
    4y

    With new construction market slowing, there will be a LOT of contractors looking for work next spring - and compeition will continue to drive down labor prices.

    So, waiting may not be a bad thing.

    [email protected]248-209-6824
    Logical Property Management4.9465 Reviews
    WebsiteView Page
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