Would YOU House-Hack this 4-Flat?

[Zenoviy Kovtun]

Hey guys,

Came across a potential house hack opportunity and wanted to get some feedback. I am determined to live rent free! What are your thoughts? Maybe some input from @JScott and @G_Alexander @Envision would be great:

4 flat - Asking ~363K in Chicago
Rents:
3bd ($1200+$120 garage) [Vacant]
3bd ($1250) [Vacant]
(2) 1bd ($700 & $675)
Gross $3,945/m - $47,340 annually
•Needs about 50K in rehab
Taxes: ~7K annually
PITI, underwritten @ a conservative 5.2% interest rate is roughly $1,955.
Remember, I must live in the property so I would occupy one of the 3bd's while also rehabbing the units using an FHA 203K loan. The income would be less once occupied.
Technically, I would be short a few hundred dollars on the mortgage before I find a tenant for the other 3bd.
•Fyi, the seller is motivated and I know there is room for negotiation. He is ill + owns the property free & clear. Was contemplating putting in an offer of 275K, which would decrease the PITI after the 50K rehab even lower to around $1,753.

Expenses underwritten@ 40% of gross income show some losses, but they are variable and with the rehab should be minimized. Perhaps to 30%
Tenants pay electric/ gas - I would pay water

A mentor of mine mentioned he didn't hate it and that it can work. Although, he suggested to save up more capital and to hold out for a better location/take on a bigger mortgage in one of those better locations. Even if that meant still paying minimal rent instead of what I pay now.
The area is currently working class, safer than before ( I felt completely fine while there) and seems to be improving. I can see growth ultimately happening here.
I've had trouble finding good income producing properties in the over-priced Chicago market lately, at least in this asset class below 5 units.

Truly appreciate the feedback. Hope to some day in the near future share my process with fellow fastlaners. Just like they did with me.

Thoughts?

 

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[Zenoviy Kovtun]

What are your goals? You mentioned living rent free... Is that it? If your rent were $0, but you later sold it break-even, would that satisfy your goals? If not, what would?

Which unit would you be living in? That will obviously impact the financial analysis.

Short term, my goal is to live for free. Through the rehab forcing appreciation and potentially refinancing, and using the money for the next one(BRRR). Goal would be to ultimately leverage into more units

Hypothetically, living for free, and eventually breaking even wouldn't be the worst scenario. Would allow me to eliminate my current rent and save that amount instead. Although, not my main goal.

Would ideally live in the 1bed unit, although, with both 3bd units being currently vacant and needing rehab, I've been debating whether this is the right decision. After one year would be moving out.

 

[Zenoviy Kovtun]

Once you're no longer living there:

If you can get the property for $300K plus $50K rehab = $350K.
Assuming an 3.5% down FHA 203K loan ($12,250 out of pocket) at 5.2% amortized over 30 years (on the full $350K), you're looking at a mortgage payment of $1855/month.
Your income of $3945/month after 40% expenses + rent loss + capex puts your NOI at $28,406/year.
Your cash flow after debt service would be $6151/year.

That $6K return on $12K out of pocket is about 50% cash-on-cash. Add back the monthly equity you're building with principal paydown and it's closer to 90% total return.

Seems like a great long-term buy-and-hold given those numbers (I'd buy it)...

Now, if you're living there, you have to subtract the $700/month you'd be losing in rent, which reduces NOI and cash flow by $8400/year. So, you're spending about $140/month plus utilities for your unit after taking into account other income.

If you hold it for 30 years and then sell it for the same $350K, your IRR is about 130%.

Overall, assuming your numbers are correct (and assuming I didn't mess up my analysis ) this seems like a solid househack and first buy-and-hold deal.

I will point out that this assumes your self-managing the property, and you should account for your time in the equation. I think you're 40% expense ratio (plus rent loss and capex) is too aggressive if you have a management company, and your 30% assumption is just plain impossible.

It doesn't matter if you just did a full rehab, that doesn't change the fact that you're capex stays exactly the same, and your long-term maintenance won't change. It may change your IRR a bit, as the money is saved in the early year, but the long term costs don't change, and you're likely at 45-55% expense ratio with property management and 35-45% self-managing.

What made your mentor not like it so much? He did get different numbers?

You make some great points. I definitely agree on many of them.
My mentor just suggested perhaps looking at a slightly better location.
He recently renovated his own 4 flat and will greatly improve his NOI, almost by 50%. The location is already popular and will only continue improving, where as, this location is a bit less desirable, not as much transit.
I understand his points, and agree on some aspects, but lack more of the capital needed.
He supported the deal, and mentioned some of the numbers, cash on cash etc. but suggested perhaps waiting a bit more and saving capital. Otherwise, going for it.

 

[Envision]

Im with @JScott on his numbers and reasoning. It seems to be a good first property, my question would be why would you live in the 3bed when you could the 1bed and get more rental income renting out the 3bed.

I dont know the area but it sounds like your mentor does, does he think you can find other good deals in better areas relatively easily? How often are deals like this coming around in your area.

If I were you, I'd buy it. But id try to see if there was some seller financing, owner carry deal you may be able to workout and maybe keep your FHA loan for a second property and work something out with the owner under the circumstances..

 

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[Zenoviy Kovtun]

Im with @JScott on his numbers and reasoning. It seems to be a good first property, my question would be why would you live in the 3bed when you could the 1bed and get more rental income renting out the 3bed.

I dont know the area but it sounds like your mentor does, does he think you can find other good deals in better areas relatively easily? How often are deals like this coming around in your area.

If I were you, I'd buy it. But id try to see if there was some seller financing, owner carry deal you may be able to workout and maybe keep your FHA loan for a second property and work something out with the owner under the circumstances..

Thanks for the input! It makes much more sense to live in the 1bd, which I was planning on doing intially. Then I started thinking about the rehab work and figured it can also make sense to occupy one of the 3ds, which are vacant, and simultaneously work on them while the 1bds brough in at least some income. Of course it would be much less income If I occupy the units. Just thinking in terms of construction scope and how to make it work.

He thinks I can find better deals in better locations. Which is true to an extent but requires more capital. I wouldn't say it's easy finding deals like this lately with this kind of income and at this price. E.g. another 4flat I liked is in a better neighborhood, similar unit mix, $3900/m income yet is asking $509K and also requires some rehab. It has an easier time staying occupied though.

Seller financing would be interesting but I don't believe it would be applicable to the owner. From my understanding he's getting ill to the point it can be life threatening. In short, wants his lump sum now rather than a few years. Or like you said, he carries some of the loan at least.

 

[AlexFS]

@Zenoviy Kovtun I assume there are tenants living in both the 1 bedroom units? I was always curious, do you evict them once you buy the property? Also, do you know why those 3 bedroom units are vacant? Is it hard to find tenants, or something wrong with the units like roof leaks or something the owner cannot currently afford?

 

[Zenoviy Kovtun]

@Zenoviy Kovtun I assume there are tenants living in both the 1 bedroom units? I was always curious, do you evict them once you buy the property? Also, do you know why those 3 bedroom units are vacant? Is it hard to find tenants, or something wrong with the units like roof leaks or something the owner cannot currently afford?

@Zenoviy Kovtun I assume there are tenants living in both the 1 bedroom units? I was always curious, do you evict them once you buy the property? Also, do you know why those 3 bedroom units are vacant? Is it hard to find tenants, or something wrong with the units like roof leaks or something the owner cannot currently afford?

Yes, the 1bds are occupied. One of the 3bds is currently vacant and the other will be vacant by the end of the month. Not sure on why. Assuming the owner is simply not concerned or engaged to fix it.

I woud intially keep the tenants there. And focus on the 3bd rooms and rehab I was thinking intially. But obviously makes more sense from an income perspective to live in the 1 bd. I need to find additional rental comps to see how these compare. Also, the tenants are month to month so that shouldn't be too big of a problem.

 

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