All Forum Posts by: Vitaliy Volpov

Hey @Shawn C.

I'm not a CPA and I will defer to others on the platform who are who know better.  But, as I understand it, the answer to your question may depend in part on whether the property is "available for rent" (even though not actually being rented) for the other 6 months of the year.  If it's not, and it is 100% personal use during those months, then you would need to factor that into the calculation of the deductions and reduce how much you can deduct proportionately. 

Vitaliy

@Connor McGinnis

Congratulations on starting the buying process of your first house hack! First of all, I think you picked the best strategy to start with. I truly believe that house hacking is how 99% of new real estate investors should start. It’s how I started in 2011 and it has helped me lay the foundation to get to 160 rental units as of the date of this writing. 

With that said, buying a bank owned property is definitely a lengthier process than buying from a private owner. There is really not much you can do to speed it up to be honest. It is 100% a business transaction for the bank and depending on how big the bank is and how many layers of approvals and internal reviews they have, it may take months to close.

The only part of the process that is within your control is how quickly and how thoroughly you respond to any requests the bank has. You and your agent should promptly complete any paperwork, disclosures, and agreements the bank asks you to complete. And, after that, assuming the bank accepts your offer, it is just a waiting game.

You should also get all of your ducks in a row asap as well: get prequalified/preapproved by your lender, find a good attorney to represent you, research and line up contractors, get property insurance quotes and get a policy ready to go, etc.

With regard to your current lease expiring in a few months, I would just speak with your landlord, explain the situation to them and ask to convert to a month-to-month tenancy after your current lease expires if the closing on your house hack takes longer than your current lease. If you have been a good tenant, most landlords will be happy to accommodate. I have been in this situation as a landlord and I’ve always allowed my good tenants to switch to month-to-month. 

Hope this helps! Good luck!

Vitaliy

Thanks @Prince Martinez and @Wencheur Antoin! I’m always happy to help and share some of my experience with new and aspiring real estate investors. 

Vitaliy

Hey @Prince Martinez

I have added units to rental properties this way multiple times inside of my non-owner occupied rental properties in New York.  However, I think it's important to clarify exactly what you're suggesting here before I run through some issues that you may have.  As I understand it, this property has 3 total units in it currently.  Your plan is to occupy one of the 3 existing units and you are wondering if you can split the other two bigger units into two units each to create a total of 5 units, correct?  

If I'm understanding your plan correctly, there are a quite a few issues you are going to face with this.  First, as you mentioned in the title of your post, it's zoning and also the permitted use.  Each municipality in my state has zoning districts and has rules for how different properties can be used within those districts.  I don't know the rules in Dekalb County, GA, but I imagine they are similar.  If your property is located in a district that only permits dwellings of 3 units or fewer, then you would need to first obtain a zoning variance from the local zoning board/department. This is typically a pretty involved process as you'd have to submit an application, provide supporting documentation, and typically provide some good reasons for why they should allow you to get a variance. In New York, there is a pretty high bar that a property owner has to meet before a variance can be granted. 

Assuming that the zoning district in which this property is located allows for a property of 5 units, you would still have to get approval for the use of the property to take it from 3 units to 5 units. In the areas where I invest in New York, this involves getting approval from the planning department of the municipality (which is different than the zoning department). There may be separate rules with regard to planning. One of the biggest factors that the planning departments are concerned about in my area is having off-street parking. But, there are also other considerations and Dekalb County may have their own. Again, this is something you would have to apply for and try to persuade the municipality to allow you to do.

Assuming you got all the necessary zoning and planning approvals, you would then have to go through the building department to ensure that whatever modifications you do to the property are within their requirements and that your units are building and fire code compliant (there may be certain minimum square footage requirements, egress/ingress requirements, natural light, etc.) This would involve additional applications, possibly architectural/engineer drawings, and inspections of the construction work by the building department personnel.  In New York, there are also requirements for contractors that you use. They have to carry liability and workers compensation insurance. I don't know if this is the case in Dekalb County, but it's probably the same or similar. 

Finally, you also may have an issue with financing. All owner-occupied loans (e.g. house hack loans) offered by banks have a limit of 4 units that you can have at the property. Properties of 5 units or more can only be financed with commercial loans. Now, it's possible that you can buy the property as a 3-unit using the owner-occupied financing and then make the modifications to turn it into a 5-unit and, as long as you are making timely payments on your mortgage, the lender wouldn't know or care that you have now changed this property to something that the loan product no longer supports. But, it may be an issue and there may in fact be a clause in your loan and mortgage documents that puts you in technical default if you do this. 

Finally, once you make the modifications, you're going to want to make sure that you revise your insurance policy. The insurance you take out when you initially buy the property as a 3-unit, will no longer be viable once the property becomes a 5-unit. So, you will need to speak with your insurance broker or find a new one who can insure a property like this. There will likely be a higher cost with this upgrade.

Of course, you can (and some people do) make the modifications and turn the property into a 5-unit without getting any approvals or making sure you are doing it in compliance with the various requirements. But, you may be in a very risky place if you do it that way because if, at some point in the future, the municipalities find out that you did it, you may be prevented from renting out the new units. You may also be fined and they may even require you to turn the property back into a 3-unit at your own expense. 

Bottom line is you should look into all of the aspects, rules, and regulations involved and speak with someone (or several people) who are knowledgeable in zoning, planning, and construction conversions like this. Good luck!

Vitaliy

@Dylan Greytak

As others have mentioned, it is unlikely that if the market rents for your apartment are $1,500-1,700 that Section 8 would pay more than that.  Out of 160 units that we own, we probably have 5-6 Section 8 tenants. For these tenants Section 8 only pays a fraction of the total rent. I have not heard of Section 8 covering all of the rent for any of the properties in our area. Maybe they do, but I just haven't seen it personally.

In general, we would never deny an applicant who is interested in one of our apartments based on their source of income. But, we also don't affirmatively seek them out.  And we definitely screen them the same way as any other applicant. It is very important to maintain a consistent standard (e.g. set minimum credit score, positive prior landlord references, eviciton history if your state allows it -- my State of NY no longer allows landlords to deny based on prior evicitons, so we can't use that as a criteria any more). 

The biggest issue with Section 8 tenants, in my opinion, is that because they don't have much skin in the game since they are not paying most of their rent, the incentive isn't there to take care of the apartment the way someone else might. I know people will say that they do care because they don't want to lose their subsidy, but I think it's pretty hard for that to happen and you'd have to go through a lot of rigmarole with the agency trying to prove that the tenant did this or that. 

The last point is that you're going to be living at the property. You want to rent to tenants that share a similar mindset to you about finances and presonal responsibility because that translates into other things they do as well. I think you will find that, on average, people who are eligible for Section 8 subsidy will not have that same mindset and that may make it a lot harder on you living in the same building with them.

Vitaliy 

Agree 100%, Andrew! So many new rental property owners/"investors" do this.  I also see agents do this a lot! (I own a real estate brokerage so we deal with agents all the time).  They put a property up on the market, put the taxes, insurance, and utilities on there, subtract an estimate for the mortgage and then say this property is a "cash cow!" or that it has $xxxxx net operating income... No, it doesn't. 🤦‍♂️

Hey @Kieran Dowling

You are correct. The guidelines permit both FHA and FHA 203k loans to be used to finance mixed use properteis as long as they are at least 51 percent residential (determined by the appraiser and calculated based on floor space). FHA 203k guidelines allow you to use the loan funds to renovate the residential portions, but not the commercial portions, of the mixed use property. Additionally, if the commercial portion of the mixed use property is in disrepair, that may disqualify the purchase from being FHA eligible, similar to how any property may be disqualified for a regular FHA loan if it is in disrepair.

As I understand it, your specific question/situation involves converting the commercial portion of the mixed use building into residential apartment(s) to make the space 100% residential. You should definitely consult with a qualified lender to answre that question, but my hunch based on the above is that this type of use of the funds will not be allowed. Additionally, you will also have the hurdle of getting the municipality to approve this type of conversion. 

My business partner and I have attempted to buy some mixed use deals (not house hacking scenarios but still applicable here) where we wanted to convert the restaurant/shop space on the first floor to an apartment and we got significant push back from the building and planning departments. The main issue typically is that the municipalities believe that it is more beneficial to the neighborhood to keep the commercial space commercial as they are hoping that the owner/commercial tenant that occupies that space will bring jobs into the area. They often see it as on overarching conern, especially where the area doesn't really have a residential housing shortage.   

This of course varies case-by-case, as many different factors will affect how building and planning departments will look at your project in the area where the property is located. But, I'm just mentioning it here as someone who has actually tried it and did not get the most welcome reception.  

Also, if this is going to be your first house hack and first investment property, it may be a bit much to handle as you are adding many layers of complexity to the situation. Not only are you trying to use an FHA 203k loan (which has many aspects to manage and compliance requirements to meet), but you are also intending to change the existing use of the building too. Managing a rehab and a mixed use to a residential conversion while adhering to the "red tape" involved with a 203k loan and the local planning/building department is an advanced investor level project.

I'm not saying that it can't be done or that after you finish it might not be more profitable than a run of the mill house hack of an existing multi-family. But, it will likely be a lot more difficult and therefore also a lot more risky than you think. As long as you are going into it with that understanding in mind, go for it! 

Vitaliy

Hey @Joshua Smith

What was the unexpected issue in my first house hack? Fleas in the carpets on the day of the closing! 🤦‍♂️

Quick story: In 2011, after several months of searching, I found a decent, brick side-by-side duplex in a B+ neighborhood with a good school district. At the time, both units were occupeid with month-to-month tenants who had lived there for 9+ years each. The tenants weren't particularly clean, their rents were about 30% below market, and they had a bunch of cats. They also had a bunch of stuff in the side yard. 

Needless to say, in order for me to get the owner-occupied financing, I needed at least one of the units vacant. I was not thrilled about either of the tenants that were there. While they seemed nice enough during the walk throughs, I could sense that they were not going to be particularly happy to have a new landlord coming into the picture and kicking one of them out.  

We negotiated with the seller and eventually came to an agreement on a price and also worked into the deal that he was going to sell the property to me vacant. We were under contract for a couple of months while we got through the various contingency periods (attorney approval, inspections, appraisal) and while the tenants were given a sufficient amount of time to move out. 

On the morning of the closing, I met a contractor at the property to do the final walk through. We confirmed that the tenants had moved out and the place was left in decent shape. There weren't much that the tenants left behind. The apartments were going to need new carpets (the old ones were very dirty and worn, which is not unusual), painting throughout, and a thorough cleaning. 

As we walked out the front door and approached our cars, the contractor looked down and noticed that he had multiple black fleas on his pant legs. He immediately jumped and started swiping them off himself with his hands, yelping like a little girl! I would have found his reaction amusing had I not had flees on me as well. 

Apparently, they were living and feeding on the tenant's cats while the tenants were in the building. But, once the tenants moved, some of the fleas must have stayed behind on the carpets.

My contractor and I were able to shake all the fleas off ourselves before we got back in our cars and I was also able to kill one. I put it inside of a tissue and brought it with me to the closing. 

I then laid the napkin on the table and opened it up for everyone to see. Naturally, everybody looked at me like "what the hell is this?" I told them that this is what's in the carpets at the property right now and I said we're not closing today unless the seller gives us a credit. He wasn't too happy about the situation, but it's kind of hard to argue with the visual evidence sitting on the table right in front of him.

He gave us a credit and we closed. I then had the place "bombed" and treated before and after we removed all of the carpets and pads in both apartments. I then went ahead with the light remodel as planned and my wife and I moved into one of the units. She was pretty paranoid about the fleas for a little while after we moved in, but it all worked out in the end. 

I can share dozens of other stories of various real estate related "surprises" and "adventures" that I have been a part of over the last 13 years as I worked to grow my portfolio from that one duplex to just over 160 rental units today, but I think this post is long enough already!  The moral of the story is, with real estate, there are many things that can happen completely unexpectedly. You just have to be flexible enough and willing enough to deal with them as they come and not get discouraged or let relatively small setbacks derail your progress.

Good luck with everything! Feel free to DM me and connect if you have any other questions about house hacking and real estate investing in general. I'm happy to share!

Vitaliy

@Levi Cartwright!

As others have said $20k saved and an $86k per year salary at your job at just 18 years old is extremely impressive already. Congratulations!

Let me ask you one question that I had as I read your post: why only $150k purchase price limit?  Have you spoken with a loan officer/mortgage broker?  Is that the max they told you you can qualify for?

Another question is are you looking only at singe family homes (e.g. planning to follow the rent-by-room strategy)?  

This is just my personal opinion from my own experience, I would much rather buy a duplex, triplex, or fourplex over a single family house as a house hack. However, it is of course location (e.g. maybe there aren't any multi-family properties available in your market?) and price (e.g. maybe 2-4 units are much more expensive and out of your budget?) dependent.  

In my market, in and around Albany, New York, one can buy a decent two-family house for $200,000 or less "on market." Assuming at least 2 bed, 1 bath per unit, they would probably rent for $1,100 - $1,200/unit/mo when updated. Updated 3 bed, 1 bath units can rent for $1,500+/mo.  

Doing a quick Zillow search for multifamily properties in Tacoma, Washington, it seems that there is not much inventory and what is on market is listing for $200,000/unit. That definitely seems pricey by comparison. Zillow doesn't appear to provide rent amounts, so I'm curious what these units are renting for.  Any idea?  If you're not getting over $2k-$2.5k/unit/mo over there at these prices, I would say maybe you should consider looking in nearby areas for your first house hack where the price-to-rent ratios are better.  What are your thoughts?

Vitaliy

Hi Jacob!

I don’t know the Chicago market so I can’t speak to that aspect of it. But, I do want to write to encourage you as house hacking a duplex is exactly how I got started. I bought mine for $230k. Just like this property, mine needed a very light remodel: new carpets, paint, a few minor other fixes. At the time I bought it, both units were renting for $750/mo which was under market for the area where it is located. I asked the seller to deliver the property vacant because I wanted to do the renovation right away which would not be possible with tenants in place, pick my own tenants, and charge market rent. The seller agreed and it worked out very well. I ended up moving into one of the units after the remodel (I did the painting myself and paid Lowe’s to install the new carpets) and rented out the other unit for about $1000/mo. 

I am very glad I pulled the trigger as this first house hack allowed me to begin to feel comfortable owning and managing rental properties. I continued investing in more multifamily properties, eventually partnering up with another investor and buying using the BRRRR strategy. I left my corporate job 9 years after I started with this one house hack and today I own 160 units. I credit it all to pulling the trigger on that first deal, punching fear in the face and doing something most people never have the courage to do.

Some questions you should consider and know the answers to before deciding whether this deal will make a good house hack for you are (1) is it in a safe neighborhood? (2) how is the school district where it’s located is rated? (3) will the space and features it offers make it comfortable for you to live there for at least one year? (4) what are market rents for each apartment after renovations? (5) will the property cash flow or at least break even after you eventually move out of the unit you will be occupying?

Hope this helps! Feel free to message me directly if you want to discuss any aspects of house hacking or the BRRRR strategy I used to scale.

Vitaliy