My First Potential House Hack In Sacramento

[Lionel Quiambao]

Hi all, I recently created a post about wanting to house hack in San Diego. However, an opportunity came up for me in Sacramento that I'm finding incredibly hard to pass up. I would really appreciate some advice as I underwrite this potential house hack!

The Situation

A family friend of ours wants to sell their 3/2 townhome for $150k. Utilizing PropStream (PS), a similar renovated townhome nearby sold for $365k, so I immediately started questioning what's wrong with it. I'll be walking the property Mar 20th or 21st. She had it rented before, and an unfortunate thing happened where she had left all of her late husband's things in one room, and she recently discovered that all of his stuff is now gone. I'm thinking that could be her motivation for wanting to sell and just be done with the property. She also overheard from my mom that I'm in the market for a home, so that unfortunate incident plus our familial ties combined could be why it's at a good price? But it doesn't hurt to be cautious.

The Expenses

I was planning to finance my first house through an FHA 203k loan. 3.5% of $150k is $5,250. FHA rates today appear to be 6.19%. After researching the 203k loan, I could use that to fund the rehab, inspection fees, title fees, etc. According to PS, this property also has an HOA fee of $410 (yikes). Property Taxes appear to be approaching $1,250 this year, so I'm estimating $104 monthly. To estimate insurance, I'm using an investor rule of thumb I heard (ARV / $1,000 * 3.5%) which equals $1,277 or $107 monthly.

For repairs & maintenance, I'm not quite sure what to allocate here. I plan to rehab the property, modernize the kitchens and bathrooms, new flooring and paint, exterior paint (if the HOA will let me). It's all hard to tell right now, but once I walk the property, and get an inspection, and contractor bids, I can give a more accurate estimate. This is my first time even talking about getting an inspection or bids so I'm quite nervous haha. Conservatively, I would typically do 10% for R&M, but If I do the rehab, I heard people will allocate less, like 5% since everything is updated? Please correct me if I'm wrong.

Vacancy (5%). CapEx (10%). Management (10%), although, for this first one, we'll probably manage it ourselves, so we'll get to save on that for now. Just adding it here since I don't want to be managing forever.

Not sure how to estimate utilities other than making some calls to utility companies on Monday. If anyone has guidance on this, I'd love to know!

The Income

As a traditional rental, according to Trulia, it looks like my 3/2 could rent for on average $2,000 per month. I was curious as to other strategies profitabilities. Checking Craigslist, it appears renting by the room should be able to get me $600-$900. That's what I would have to do my first year of living there. Short-term rental also doesn't appear that great in the property's area, as data.rabbu.com shows the average going rate for a single room in that area would be $880 per month.

This doesn't look all that great from a cash flow perspective, but maybe I can utilize the live-in flip strategy. Purchase for ~$150k, put $X into it, cash out refi or 1031 out of it in a year, or sell in 2 years to avoid capital gains? Assuming my ARV is correct with $365k, that might be worth the negative cash flow for a bit? What do y'all think?

[Dan H.]

Quote from @Lionel Quiambao:

@Dan Heuschele If off market properties are not subject to a valuation based on PP, what are they based off of?

Also, another question I had was I'm not currently working with an agent on this as it was just brought to my attention via family ties. Is an agent necessary/recommended or just an added expense to this kind of transaction? I'm assuming if I wanted to have this listed on the MLS to benefit from what you were saying earlier, then I'd have to work with an agent to do that?

 >If off market properties are not subject to a valuation based on PP, what are they based off of?

On market comps which is terrible because most off market properties are either in poor condition or have a risk item.  By the time I got the valuation from the city, I had already had 2 people work the property for over 1.5 months each.  It was move in ready.  In additon, It has a risk item that I did not want to advertise to the city, so I took the valuation but did not like it.

>I'm not currently working with an agent on this as it was just brought to my attention via family ties. Is an agent necessary/recommended or just an added expense to this kind of transaction? I'm assuming if I wanted to have this listed on the MLS to benefit from what you were saying earlier, then I'd have to work with an agent to do that?

I have purchased 4 times without a RE agent but I have a fair amount of experience.  An agent can provide value to less experienced purchasers.  If you chose to use an agent, pay the agent a fixed fee for their expertise because you have already found the property so there is no way I would pay 2.5% to 3%.  A fixed fee for them to provide the offer contract and consulting on what the various parts of the contract mean and the implications could provide peace of mind and everyone deserves to be compensated for their knowledge/expertise in a professional relationship.  I do not really know what is fair because in addition to their knowledge, they also take on some liability.  Maybe some RE agents can respond with what is fair.  I do expect it would be less than an hour of their time so I am hoping it would not be more than a few hundred dollars.

Note the seller would be the one to place on the MLS. There used to be a local broker to San Diego on BP (seems to no longer have an account) named @Jon Minerick that did flat rate MLS listings.  I am sure there are others.  The idea is to have it under contract, have seller use a flat fee broker to place on the MLS (buyer paying the fee) and hope this does not result in an evaluation from the city.  I think the easier approach could be to document the poor condition of the property if that justifies the below market price of the transaction.

Good luck