Would you hack this home? 1st house hack and we want to succeed.

[Sinnard Michael Scott]

Hi Chicago BP peeps, this is my first post here so I’m still getting my bearings straight haha. Here’s our key question; is this a purchase and rehab you’d do or are we crazy for trying to take this on?

Im attempting to purchase a legal 2 unit building two blocks from the intersection of California and North Ave. for about $500Kusing a 203K loan with a 3.5% down payment and the seller is covering the closing costs. The building has an unfinished attic and a 3rd non-conforrming garden unit. To make the unit conforming, we’d have to dig 6 inches deep and also add a stairwell to the front, and to use the 203K loan, we have to bring the property up to code. In total we’d need to pay about $90K in cost simply to have the opportunity to create the 3rd unit (digging, front stairwell, meeting code). We’d incur about another $30K to actually furnish the 3rd unit. So, $120K rehab costs in total. We would also need to change zoning on the property so a 3rd unit is allowed. 

Potential mortgage is $5K and rents in the area are $2K on average so total monthly rent for 2 units is about $4K. The rent for a garden unit is roughly $1.3K. All in all, after we move out, total rent we would collect is about $5.3K with a $5K mortgage, this doesn’t include expenses like vacancies, etc.

Given all of the above, would you do this? I feel like we could get it all done, but is this even a good deal to begin with paying $500K for that area? We’re not even sure our rent estimate is accurate. Our goal is to house hack and live-in flip 1 property every 2 years and have the properties cash flow after we move out. Should we move on from this deal and find another? Should we try to negotiate the seller down?

Thanks so much for any help and advice for the newbie here. Really hoping to become a great member of the BP community since we’re so new to all of this!

[Hemang S.]

I am a first time house hacker that just finished a 203K rehab on a Pilsen 3-flat. Given the amount of work for your proposed deal, it doesn't seem to be worth the work and effort you will have to put in. We had no zoning changes and the project still took six months longer than we planned because the city is backed up on inspections, permitting speed, etc. During that process, the HUD consultant said no one could live in the building (which means no rent), so the holding costs were a killer. If you can rent your units out while rehab is happening, that would at least make it a little more possible. I would only do the deal if almost all of the following are true:
1) have plenty of cash for the unexpected costs that will certainly arise
2) have a great GC or subcontractors that you trust to do the work
3) the ARV is sufficient for the time and effort
4) the building will cash flow when I leave
5) my housing costs will be significantly lower while I live there
6) have the time and energy over the next 12 months to deal with the stress and headaches that will surely come up

We are still happy because our location is fantastic, our living quality went up as a result of our renovations, our value add absorbed the killer holding costs, and we now have a building that will cash flow after we leave.

The duplex up and down idea that Mark Ainley mentioned is definitely worth looking into. Alternatively, why not keep it as is? Many landlords have non-conforming units and are fine with them. Whatever you decide, feel free to DM me if you want to talk further about 203K loan stuff. I learned a lot through the process and would be happy to share. Good luck with your search! Many investors and economists are forecasting the housing market to drop over the next 1-2 years, so if that's true, you certainly will have more opportunities to find an easier and more profitable deal.