All Forum Posts by: Garrett Tierney

Investment Info:

Small multi-family (2-4 units) buy & hold investment in Joliet.

Purchase price: $245,000
Cash invested: $11,485

As a first time homebuyer, first time investor, my first deal was a bank-owned foreclosure on a 4-unit property in Joliet, IL. The property was uninhabitable and fully vacant at the time of purchase. Being a first time homebuyer with good credit and income, I purchased the property using an FHA 203k loan. The list price was $179,900 and after about a week of negotiating with the seller's agent my offer of $170,000 was accepted. Working with a contractor, we put together a scope of work totaling approximately $85,000 to fully renovate three units, including the addition of one bedroom, and complete necessary CapEx mechanical repairs including updating many plumbing fixtures, and updating electrical fixtures and systems. Despite MANY challenges throughout the construction, and some very comprehensive inspections an re-inspections, the units were completed and fully occupied above market rent approximately 10 months after the closing date. I learned a tremendous amount through this process and consider it to be invaluable to my real estate education. After moving out of my owner-occupied unit, I was able to rent out this 4th unit, and have the buildings fully occupied. My monthly PITI comes in just shy of $2,300 and the gross monthly rent collected is $4,000. This monthly cash flow has now exceeded my initial cash outlay of $11,485 and I officially no longer have any money left in the deal. Re-appraisal of the property in late 2020 did not result in sufficient valuation in order to complete a cash-out refinance, however, I did an FHA streamline refinance which lowered my rate from 4.875% to 3.125%. Despite not full achieving my initial goal to cash-out refinance and eliminate PMI, I consider this deal a great success and will diligently save and re-invest the significant cash flow from the property until my equity position increases to the point where a cash-out refinance will work. Please let me know if you have questions about this particular deal or, in general, how to utilize the FHA 203k loan program to build significant equity by buying distressed property below market value, renovating it with bank money lumped into the mortgage, and renting out for cash flow. This was a life-changing investment for me, and I am eager for the next opportunity to invest in real estate.

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

6 months of listening to the BiggerPockets podcast, and an emphasis on FHA low down financing for first time buyers made alot of sense to me and before I had a chance to get my ducks in a row and have this type of financing set up, this deal came across my email on a HomePath first look notification. Extensive reading on BP forums and blog posts reinforced the powerful nature of the 203k program. I saw this as my first step towards financial freedom by creating passive income through cash flow.

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

HomePath by FannieMae daily email for my area. Contacted an agent through Realtor.com and went to see the property the next day. I was able to secure my pre-approval and put an offer in two days later. I was the first and only offer, and after about a week and the bank calling for highest and best, we submitted our offer for $170k, and it was accepted.

How did you finance this deal?

FHA 203k loan program with LeaderOne Financial. Purchase price was $170,000 and renovation budget was $85,000, for a total loan balance of $245,000. My cash to close, including 3.5% down payment and closing costs was just shy of $12,000.

How did you add value to the deal?

Replaced 24 old, rotted wood windows with new low E vinyl windows, replaced 9 old broken wood exterior doors with new steel security doors w/ master key deadbolt system, added one bedroom w/ lighted closet, and lighted closet to existing bedroom, 2300 SF of new carpet installed, 700 SF of engineered hardwood installed, 3 new water heaters, 2 new exterior electric services, 2 new interior breaker panels, new paint on all walls and trim, 4 new shower surrounds, 4 new countertops, 4 kitchen sinks.

What was the outcome?

After much back and forth, re-appraisal was valued at $310,000. Needed a value of $340,000 to complete a 70% LTV conventional refinance. I was not bale to achieve my desired valuation, as the surrounding market just does not support it here in Joliet. Since the equity piece is not quite where it needs to be, I opted for an FHA streamline refinance to lower my rate from 4.875% to 3.125%, which despite still paying PMI will increase cash flow to just shy of $2,000/month. Great cash flow outcome.

Lessons learned? Challenges?

Scope of work was not specific enough regarding finishes, specific products, and timelines. My contractor had not done a 203k loan before, and was not familiar with the inspectors in Joliet. This lead to extensive change orders and changes in scope, due to unforeseen code issues with electric and plumbing. HUGE learning experience. Contractor was using unlicensed subs without informing me and it put me in some tough spots with the City inspectors, as I was unaware. The renovation took 10 months!

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

Unfortunately, I had quite a bad experience with my agent, the seller's agent, my contractor, and my lender. My one ally throughout the project seemingly was my 203k consultant, Dean Cushing. He was genuine and always willing to answer my questions and go above and beyond to handle all the change orders and complicated draws to the contractor. Dean was a professional throughout and helped instill confidence in me during the toughest times. His company is Home Inspection Pros, Inc., contact him!

@Brian Geiger I have 4 units in the Cunningham Neighborhood, west of the river, and adjacent to the Cathedral Area. Rents are solid in this area, creating very reasonable cash flow given the relatively low purchase price barrier to entry (at least in direct comparison with the suburbs to the NW such as Downers, Naperville, Lemont, Wheaton, etc.). I had no shortage of applicants for my 4 listings, however, you will likely need to be flexible with prospective tenants in regards to credit scores (600+ was very rare amongst a pool of 50+ applicants in the area). With patience and diligent tenant screening, you can find reliable tenants, as you likely can in any area. Things to be prepared for in Joliet are issues with old knob and tube electrical, leaky/unstable old limestone foundations, and many radiant heating systems with galvanized water pipe and boiler systems that can be very expensive to maintain, or replace. Sewer service lines in many areas throughout the City can also be an issue given their old age, however, the City performs FREE sewer scopes https://www.joliet.gov/residen... 

Highly recommend using the crime filter on Realtor.com if you are searching what's available on the MLS, as it is a good indicator of some of the high crime areas to avoid. Joliet has its pros and cons but is certainly a viable rental market if you are willing to be thorough with tenant screening and preventative maintenance.

"realestaterocks" still working. 20% off annual subscription, and according to others it is working for monthly subscriptions as well.

Steel City Real Estate and Property Management Services is located on Ruby Street very close to the Cunningham and Cathedral Area neighborhoods. I met with Maria before putting my 4 listings on the MLS for rent, and she took the time to come out, walk through the units, give me suggestions, advice on working with the city, and approximate rental values. I let Maria know that I plan to self-manage the property for at least the first year or two of owning in order to get some property management experience under my belt. When I do move to hiring out property management, she will be my first call.

Civil Engineer working in the SW suburbs of Chicago. I am going on year 3 of working full-time as a design engineer working in land development. I currently own just 4 doors, but am already beginning to prioritize sharpening my skills as an investor rather than as an engineer because it allows for thinking outside of the box and the ability to create wealth much more rapidly and tangibly than in the civil career path. I’m actually actively considering and speaking with a career coach about making the transition full time into Real Estate as a broker or other sales position. If there are any other engineers that have made this transition or have considered this transition I would love to chat about your experience and see if there are any opinions we can bounce off one another. Cheers Engineers!

I drive my 2002 Chevy Malibu to the property when I go to do maintenance and/or visit. This is actually my daily driver, so I don't currently have a choice except to drive this car. I have found, however, that I feel very comfortable parking this vehicle at the property and showing my tenants that I am not scrooge mcduck, I am a hard worker who is pursuing financial freedom. I like to show my tenants that I am just like them, and I respect them.

Many times, if I have alot of material to bring to the property I will be unloading my trunk and floorboards with bags of stone to put down in the driveway, or will have 12 foot pieces of trim or 2x4 sticking out the back window of my car and I hope this shows my tenants that you can make things happen with what you've got. It's not always sexy, but if you put your head down, don't let others perceived judgements of you affect your behavior, and do the work you can make great things happen!

@Moisei Scutaru Yes, we managed to close the 203k with that same lender but it was a very difficult process due to the inexperience of both myself and the lender. Feel free to shoot me a DM, I'd be happy to answer some questions.

@Moisei Scutaru Hey! Great job starting your journey into real estate investing. I am fresh off of a 203k deal that I am currently refinancing out of to a conventional, to hopefully pursue another!

What I can tell you is that I had a similar experience my first time. I read some forums online, chose one lender from a recommendation in a forum and I instructed them that I wanted to move forward with a Fannie Mae Homestyle Renovation Loan (very similar product to a 203k). Although initially hesitant my loan officer agreed to do it and said that he and his team had experience (long story short, he did not have experience and ended up losing his job in the middle of the closing process, which was a mystery to me and almost killed the deal). Once he was removed from the picture, I moved focus onto the 203k loan with another officer in the company. Immediately I was encouraged to just go with a conventional loan. Turns out this lender did not have any experience with 203k or HomeStyle loans and steered me in the direction of conventional as a result.

So, while I cannot guarantee this is the case with your lender, I would ask what their experience is with lending 203k's and what were some of the difficulties that they have overcome on previous transactions. You'll have to begin having these direct conversations with lenders to understand if they truly will be a valuable partner in the process or if they will drag you through the mud just to sell something. Hopefully, your lender has a solid history of 203k's under their belt and you feel encouraged to move forward with them. If not, there is absolutely nothing wrong with taking your business elsewhere until you find someone you feel comfortable and confident working with to get the deal done. There are alot of moving pieces on 203k's so an experienced and supportive lender is key in making one happen. Best of luck!

@Chris Mason this is great. Thank you for your quick response and honest feedback. I'm currently working as a civil engineer and am working on getting my broker license and notary commission for that transition to self-employment. So, as you mention, not the same line of work so I understand this would almost certainly require at least 2 years. Despite being pretty unhappy with my current line of work, I think the best plan of action would be to stick it out and maintain my current employment situation through that future FHA purchase closing.

Hello BP Community, I am currently working on wrapping up a refinance on my first investment property. I was able to purchase the 4-unit foreclosure by utilizing an FHA 203k loan for purchase of $170k, plus $85k renovation. In order to find and purchase another multi-unit property by utilizing FHA financing, I am refinancing into a conventional loan. Once the refinance is complete, I am setting up for a career change which would change my income position from solely W-2 earnings to solely 1099 earnings.

My questions is this: If I do not maintain my W2 income, and make a career change to become self-employed prior to my next FHA purchase, will I have likely created a scenario for myself in which getting another FHA loan on a multi-unit would become significantly more difficult? From researching this topic, I am optimistic that clear financial records documenting the history of each type of income will still make me a suitable candidate for this source of financing. I have nearly 3 years of continuous W2 earnings from a very stable, well-paying job.

If anyone has experience making this transition and still being approved for FHA financing, or experience underwriting any similar cases, your feedback is greatly appreciated and I thank you in advance for seeking to help out others in the community. Thanks!