First House Hack: 7 Lessons Learned

My wife and I started our real estate investment journey in late August of 2018 with a 4 flat house hack in one of Chicago's up and coming neighborhoods. We are in our early 20's and hope to obtain financial freedom by our early 30's. We have rehabbed 2 units, with a terrible contractor experience on the first one, raised rents on existing tenants, lost a tenant during the worst time of the year, and more. I wanted to share 7 lessons I have learned so far for those who are in a similar position or for those who are thinking about house hacking and are hesitant to take the plunge

1. Do not rush into a deal if you have time to find a good one:

This does NOT mean to go into analysis paralysis and never do a deal. As Brandon Turner always says, the first deal will not make you rich. However, that does not mean buy a bad deal. In our situation, we had a finite amount of time before our lease was over and we wanted to buy before it ended. We could have tried to find a month to month, but we wanted to get started. We did not get a deal on our property, but we really like the area, and we really like the building. Once we finish rehabbing all the units, we should break even while living in it, and will cashflow nicely once we are out. However, if we could have waited for a better deal, that would have been a better alternative. So if you can wait and try to find someone more motivated to sell/a place that does not have multiple offers, I recommend you do that.

2. Escalation Riders: IF you use it, only go to a price you are happy with:

In both offers we made, we were forced into highest and best situations. Of course this frustrated me and is one of my biggest issues with the real estate agent business, but I digress. In both situations, our agent recommended using an escalation rider. She explained how they worked, but in the end, I was disappointed with the results in both scenarios. For both properties, we were taken to the highest price on our rider, which also made me doubt the benefit of these at all. On our property that we purchased, the selling agent did not even accept the rider, and instead, told us that the seller would accept the highest price listed on our rider. This is why I believe escalation riders simply show your cards to the seller. However, if you want to use one, I highly recommend only going to a price that you are comfortable with. I was very frustrated with the price that was accepted, which was well above the asking price, and was pretty confident that the closest offer was more than $40k lower than ours. But, maybe we would have lost the property, and we likely would have been disappointed, so who knows really. 

3. In older buildings, have the sewer line scoped:

This was a recommendation given to us by our agent, and it was a good one. The camera scope showed the sewer line was potentially collapsed. We went back to the seller and received a closing cost credit for this. The sewer line actually does not seem to be collapsed, but we do need to rod the line (which is also something I recommend doing at least once a year, especially in an area that may flood). But making sure the sewer line is not collapsed or that you will have major issues with it is a wise thing to do before purchasing a property.

4. Never be afraid to ask for credits, even after the inspection period:

We received a decent amount of closing credits, which alleviated some of my frustration over paying too much. We even went back with 5 days left before closing as we found something else that was not as expected, and received an additional credit. All they can do is say no, and the risk to them of you backing out may be enough for them to concede a little. And if your earnest money is not substantial, you have even less to lose, especially if it is a bigger issue

5. Determine early on if you want to do rehabs in any capacity, yourself or with contractors:

Going through rehabs is not for everyone. Whether you are doing some of the work yourself, hiring a contractor, or a little of both, managing and going through the process is a lot, especially if you are working a full time job (we both are). We had a contractor for one unit (that went terribly and I will discuss next) and rehabbed our unit ourselves for the most part. We had overlap between the two at one point, and it was exhausting. We had no kitchen at all in our unit as we had demoed everything, and simultaneously fired our contractor working on the other unit for missing numerous deadlines and having poor quality work. So we were finishing a handful of items in that unit, while also trying to get through our unit. If this is not something that sounds appealing to you, you might want to look at something that is already rehabbed and turnkey. You may not experience the forced appreciation from rehabbing, but you can still live for a lot less. I would still make sure the numbers look decent while you are in it or out of it, but this is a viable alternative for some.

6. Always get multiple referrals for your contractor, even if they are referred to you by someone you trust:

This was probably one of the most aggravating aspects of this journey so far, but a good learning lesson. One of the units was vacant and in very poor shape when we acquired the property. We were referred to a general contractor by a colleague, and were told that we would have to stay on top of him, but that he would do good work. I should have seen the red flag early on when he missed his start date 3 times, and wished I would have asked for references before agreeing to work with him. We stayed on top of him everyday requesting updates and timelines. He was terrible at communication, would not sign anything or put anything in writing, and would make decisions without consulting us first. The quality was terrible, and he missed every deadline he set for himself. Another side lesson I learned here, never be afraid to fire your contractor, sooner rather than later, if they do not keep their word or continue to disappoint you. It was such a relief once we fired him, but we learned a lot because of it and I ultimately do not regret going through it. Now, I will only work with contractors who put details in writing and I know how much I am paying for each part of the job. I also will not pay a contractor the first payment until after demo has been completed and I see work being done. And then together, we will define what the payment schedule looks like for when the next payment will be.

7. When you open up walls, make sure you check everything inside, take pictures, and prep it for the future:

This was a lesson I did not learn early enough, and am hoping to not learn a painful lesson this winter as I am literally writing this in the worst cold Chicago has experienced in a few decades. I can only speak for colder areas, but I am sure there are things that can be done in warmer areas as well. When you open up walls, it is a really good idea to prep everything as much as possible for the future. This means insulating the walls, insulating the pipes, checking for leaks, checking for mold, checking the electrical, etc... For us, insulating pipes and walls is critical, as we experience frigid temperatures in the winter. If a pipe freezes and bursts, it can cause severe damage and be very expensive. On top of this, we pay for water for our building, so insulating the pipes will hopefully save us money in the long run as it will not take as much time to warm the water. (Also, as another side lesson, be careful when you are opening walls and make sure you do not accidentally cut a water pipe or electric wiring, this is not fun!)

I hope this is helpful for those that are thinking about house hacking. We do not regret anything and know we would not have learned any of this without going through it first hand and deciding to take the plunge. We are still learning more everyday and know the learning will never stop. Do not be afraid to start your own journey, and always reach out to this community if you need help.

Paul