All Forum Posts by: Evan Kraljic

May I ask why you're going with an LLC right off the bat? We're all biased to our path to a certain extent, but I don't see how utilizing an LLC outweighs the benefits of getting into your first property with a lower interest rate, 30 year fixed mortgage, and much lower down payment. I took out a 1 million dollar umbrella policy which costs about $150/yr and probably nets out to around $100 or less when considering the small savings on my auto insurance plan that goes with it.

If you're deadset on the LLC/commercial route, I've heard good things about Bridgewater Bank and Community Resource Bank - have yet to work with either of them though.

Here's what I would do, keeping in mind that I am not a mortgage lender and they should 100% be the person you contact in this situation. I know a few good ones including @Tim Swierczek who can lay out the plan best for you. With that being said, and sorry for going out of order here.

Question #3: If you're buying the home that you're renting from your parents that should be an FHA loan. Why? Lowest down payment required (3.5%) and lower credit score requirements. This article says you need minimum 580 to get eligibility for 3.5% down, but obviously you should shoot for higher than that as it can probably help your interest rate. I'll drop the link that I found the info.

https://gustancho.com/debt-to-....

Question #1: Back end debt to income limit of 50% max on conventional mortgages. It's actually 45% but can be raised to 50% with other compensating factors like a high credit score, which you don't have unfortunately.

https://mymortgageinsider.com/....

So if you buy your first mortgage as an owner occupant and you want to buy an investment property, then all your debts combined should not exceed 50% of gross income. What's nice about this is, I believe you can use 75% of rents to count as income. So as long as 75% of rents is higher than the PITI to the bank ($2000 rents on a $1500 mortgage), you should be fine at least from a DTI ratio. From an investor point of view, I'd want my debt coverage service ratio to be higher than 1.333 (1/0.75) anyways, but I digress.

Question #2: If you use a conventional loan it will have a minimum 6 month seasoning period where you cannot refi during that time. Unless you add significant equity it probably wouldn't make sense anyways, because a lot of cash out refis will be limited at 75% LTV (so 25% equity) and may have higher closing costs or interest rates on them (not sure on that as I haven't done one myself and am not in the mortgage biz, again talk to a lender). So you'd want to pull out a lot of cash to make it worth if you were on a conventional loan.

With that being said, the title of your post was BRRRR, which you typically aren't going to finance conventionally anyways. But that is totally counter to your question here where you mention putting down 20%, so I'm a little confused. Anyhow, I haven't done a BRRRR but based on my knowledge of it you'd typically finance the purchase with a hard money loan where all you are paying up front is closing costs on the loan (points and appraisal) to minimize your cash in the deal. They will lend based on after repair value and typically around 70% of that, so you want purchase and rehab to be all in at under 70% otherwise you're coming out of pocket to fund some repairs.

Terms will vary but I've heard 9 months before, so you'd want all renovations done and to refinance by that point to pay off the hard money loan. The downside to these is that you will be paying much higher interests rates (normally >10%) so you want to get in and out with the rehab as fast as possible, which I'd imagine can be difficult during COVID where supply chains are all sorts of messed up. 

I think you'll want to hammer down on the fundamentals before doing a higher risk deal like a BRRRR, especially in this market. Sorry for the novel, but I hope that helps some.

My personal opinion is that in our market I would rather househack with a 2-4 unit if you can make the numbers work. Renting by the room for a single family home is a pretty awesome way to get some extra money and live with buddies, but as a long term investment strategy I'm not a fan. 

To me, it sounds like more turnover, more potential for drama since when you move out the people living there may not know each other, and more work. Everyone's goals are different, but one thing I like about real estate investing is that if you manage your systems correctly, you can frontload the work for a relatively easy payout later on. 

In the Twin Cities I think you could still make more money buying a duplex and renting by the room than a single family. Also, if/when you get sick of renting by the room you could rent out the units individually for maybe 30-50% more than if you rent out the whole single family residence. 

Look at the price per bedroom for listings and compare SF to MF and it will bear that out many times, at least it did when I was trying to find my first purchase and wasn't sure what to buy. On top of that, you're competing with a hell of a lot more people when it comes to buying SFHs, so even if you see a 5 bedroom place go up for <300 K it will likely get snapped up real fast. 

These are just my opinions, and like most others I am probably biased based on what has worked for me. I think the idea of living in a SFR and renting to all my buddies sounds sweet, but I think trying to manage that once I've moved out and onto my next househack would be a pain in the ***.

Are you planning on continuing to rent by the room once you move out or convert to one rental unit?

Hey Sam, welcome to Minnesota!

There are no shortage of great investor friendly agents in the twin cities. Two good agents who are on BP are @Daniel Anshus and @Adam Tafel. There are some investor focused agent groups too, Side by Side Realty and The Duplex Doctors being two of them. I've worked with the Duplex Doctors personally and have heard great things about Side by Side Realty too. So there ya go, I probably just gave you way to many agents to talk to lol. I told you there were a lot of good ones, and that was still leaving some out. Good luck!

Also if you have any questions feel free to PM me too. I won't be as plugged in as the agents overall but as an local investor I'm perusing the small multifamily listings daily still, so I'm pretty confident in knowing what is decent value for a duplex in Mpls, for example. 

Thanks @John Woodrich , @Corey Hawkinson , and @Jay Lohn !

@Dylan Walsh - Yeah I feel you on that. If you want to you can PM me and I might be able to give some tips. Do you have an agent you're working with already?

Originally didn't want to post this because it felt a little self-congratulatory, but I like hearing other people talk about their wins and getting inspired by them. If anyone wants to reach out, especially those in the Twin Cities market about how to get started house hacking feel free to connect with me and maybe I can help you out in some way!

Investment Info:

Buy and hold duplex in Minneapolis, MN

Purchase price: $236,000
Cash invested: $60,000 (~14k for down payment and closing costs, the rest for renovations).
Monthly cash flow: $1300

What made you interested in investing in this type of deal?

This was my first rental property which I ended up house hacking to utilize the low down payment. Also it felt like landlording on easy mode since living at the property made it easier to take care of snow removal and lawn care, other maintenance requests, and familiarize myself with the typical quirks of a 1907 built home.

How did you find this deal and how did you negotiate it?

My agent found this deal off market and we just offered what the seller was asking. Ended up bumping from 235 to 236k because the city mandated inspection (TISH) brought up some repairs that the seller had to take care of before the sale.

How did you finance this deal?

5% down conventional HomePossible loan. $1500 BorrowSmart grant applied towards closing costs as well.

How did you add value to the deal?

Oh geez, where to begin. All new plumbing and electrical, full gut renovation for kitchens and bathrooms on all 3 floors. New vinyl siding, garage doors, and concrete out back for additional parking. Framed in entryway to create 3rd bedroom on second floor.

Finished off ~800 sq ft on 3rd floor which was previously uninhabitable by running new plumbing, electrical, and HVAC up to 3rd floor, scraped all wallpaper and skimcoated over walls, painted. Overall conversion was from a 4 bed, 2 bath duplex to 7 bed, 3 bath triplex.

What was the outcome?

Currently living in this property and will be cashflowing ~$1300/month with all expenses accounted for. Granted, I am renting out the second floor to a business which is paying extra due to additional occupants and risk involved, but even if I was renting at market value I'd be over 1k/month with no housing costs for myself.

Was able to tap into ~100k of equity with a HELOC, although 33k had to be used to pay back a loan I took out through the city to fund some renovations that was hired out to contractors. Will be using the remaining HELOC funds to purchase a 2nd duplex for 25% down which I currently am under contract on.

Lessons learned? Challenges?

Do these posts have a character limit? Haha but honestly with this being my first deal and having absolutely no handyman experience before starting my rehabs it was a constant learning experience. I'll hit the main ones though.

1. Take care of all your mechanicals (electrical, plumbing, HVAC) at once. 

- This mostly applies to plumbing for me but since I was living in this property and wanted to have a functional bathroom and kitchen I starting with renovating the first floor (while living on second floor), finishing that, then started the process over with the second floor. I could have probably cut a month or two off my timeline if I was willing to do all the demo and plumbing rough-in at once, including having both sets of cabinets/counters installed with one trip. Granted I would have had to live at my parents and commute an hour+ to work each way, which I had just got done doing when I moved into this property and did NOT want to go back to that, lol.

2. Expect the unexpected and always be ready to pivot.

- I was pretty deadset on converting this building from a duplex to a triplex until I realized all the complications in going from residential to commercial building code. So I ended up doing most of the same work but just including it with the upper unit as a massive 2 floor, 5 bed/2 bath unit. On a more microlevel, pretty much any first time renovation project will likely have hiccups so be ready for that and don't get discouraged. If you're getting super frustrated, maybe call it a day early and get back after it tomorrow when you have a clear head and time to think about it. This helped me reduce burnout. 

3. "Set a goal so big that you can’t achieve it until you grow into the person who can."

- This is a little cheesy but I first heard this quote before purchasing this property and it has stuck with me since. I did not plan on buying a fixer upper for my first deal given my complete lack of experience with any home improvement projects, but couldn't pass up this deal when I saw it.

I planned on hiring out most of the renovations to a GC or contractor who specializes in bath/kitchen remodels, but after getting my first bids back I realized that I couldn't afford it. So it ended up turning into hiring subcontractors for some of the specialty trades and bridging most of the other gaps myself and with my incredibly helpful parents. 

I looked at every project as the opportunity to learn a new skill and figuring out what I liked and didn't like. I figure that in the future when I have more capital and less time I can focus on the fun stuff (cabinets, flooring, tile) and hire out the obnoxious tasks like drywall.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Agent: Kent Hranicka with the Duplex Doctors

Lender: Conor Hesch with Bell Bank

Contractors: PM me, I don't want them to blow up too much and not return my calls for future projects :)

@Justin Woodford Have you heard of the book Lifeonaire? I'm actually reading it right now, and they're doing a promo where they will send you the E-book for free. www.lifeonaire.com/freebook (Hopefully I can post that link without getting reported). Anyhow, I'm not the person to be giving life advice, but that book may be beneficial for you to read. Or I can email you the PDF if you're interested.

@Justin Woodford it doesn't sound like investing in real estate makes sense for you then. And guess what, that's 100% okay. I think one BP podcast guest said that the one thing that holds real estate investors back from getting started is a good life, which I thought was a pretty good point. If you're happy with your current life and don't really want to rock the boat, what is your "why?" behind getting into real estate investing? It's all about self-awareness

Personally I think a 50% expense ratio is too conservative, but since you are including 10% for management and taxes and insurance in there then maybe it makes sense. 15% vacancy is kind of ridiculous, but some of your others may be too low and will balance that out... but I'm not going to nitpick all those numbers.

I don't think leaving 30k in is an instant dealbreaker here since it's not a traditional BRRRR and you aren't taking on the risk profile of using hard money, doing a massive rehab, etc. If your numbers are correct you are all in for 10% (which is approx your rehab costs) so that isn't terrible. And at $500/month cash flow that's a little under 20% COC return which is pretty good.

Anyhow, it seems like an okay deal, but with you being a rookie I'm not sure I'd take on a deal like this given the margin may not be worth the work that will go into it. What I mean by that is, I'd want to be pretty confident on those rehab numbers because while it is doable, kitchens, bathrooms, and moving plumbing can get expensive so if you're planning on just hiring everything out you might blow over that budget. 

@Ryan Flanagan Oh wow, thanks for the heads up but also man that really sucks. I saw @Tim Swierczek had mentioned there was industry update that would impact people wanting to house hack duplexes so this is definitely what he was referring too. That's too bad because it was a good loan product