Deal #11 – House-Hack BRRRR with 0% Down VA Loan

 

Overview:

This house is my wife and I’s first live-in BRRRR. We purchased it to live in with a 0% down VA loan, and even negotiated in seller paid closing costs. We spent very little out of pocket to purchase this home – which is a HUGE perk to using a VA loan. The house was the ugly duckling that sat on the market for a long time, but I was confident that there was significant value-add potential and I could utilize the lengthy time on market to purchase at a discount.

For starters, I saw the property has a large detached apartment which can be rented out to offset the mortgage. From my experience operating these additional unit (ADU) properties I knew it would have demand and that I could actually pay ALL of my living expenses with the rental income – all the way down to the WiFi. It also has 1,700sqft in the main house alone – with only two bedrooms and one bathroom! There is an abundance of wasted space in the house and it already has the footprint for 2 additional bedrooms and the space to add a large master bathroom. After seeing it, I knew this house could be converted from a 2/1 to a 4/2 for relatively little cost. By adding the bedrooms and bathroom I could add significant value to the house, but of course the listing agent left that out so all eyes that came across this property saw 1,700sqft with only 2 bedrooms and 1 bathroom as a problem. But that’s major opportunity! Finally, the property also has a detached structure that has electric and a wall A/C and heat unit. It is accessed by the back patio and can act as a detached office or 5th bedroom. It could also be easily plumbed to make a separate unit. For me I saw the highest and best use for this as a home office and then when it’s appraised we can count it as a bedroom, adding to our livable space and number of bedrooms, again significantly increasing the value.

On top of all of this, the property had some pretty ugly and mismatching paint colors (the main house varied from sea foam green, to pink, to sunrise yellow!) and was marketed poorly by the listing agent. The listing underplayed or straight skipped over some of the properties best selling points. This is a good point to make that sometimes finding a good deal is up to your ability to identify a good deal. For me what caught my eye was a 2/1 with 1,700sqft. Usually a 2/1 house is around 1,000sqft or less. A lot can be done with 700sqft! Once I saw the detached apartment in the pictures I knew this thing would be a money maker. It fits ideally into my house-hacking strategy in which my wife and I house-hack ADU properties and rent the extra unit with Airbnb. The income I can generate from a short term rental is far greater than what I could earn from a long term renter (around 3x) and I have the systems in place to handle all of the check-outs and guest management.

When I looked at the numbers, I have my own best comparisons with my other properties in the same area that I rent as short term rentals. I knew that my monthly living and operating expenses would be about $2000 to live in it and operate it on Airbnb. This includes paying my property manager, the cleaners, all the utilities, etc. I also knew the property would generate about $2,000/month gross income on an annual average, adjusted for seasonality. After running the numbers they revealed that we could buy this house for zero down with a VA loan if we occupied it, and live in it for free. We would move out of house we had been living in and add it to our Airbnb rental unit list. Since we already cash flowed from that property with the mother-in-law suite unit, the added income added from the main house would be all cash flow (less property management and cleaner fees). So by moving into this house we would add $1,000/month in cash flow AND increase our equity once the rehab is finished. The numbers revealed this property is a winner.

The Numbers:

Purchase Price: $217,500 (Original list price was $259,000)

Financing: 0% VA loan

Financing Costs: $7,800 VA funding fee

Closing Costs: We negotiated in seller paid closing costs, so we got a check back for $271 at closing. So after putting $2,100 as an earnest money deposit. We were all in for around $1,900.

Furnishing: Roughly $5,000 so far

Due Diligence Costs: $1,800

Rehab Costs: Roughly $4,000 so far (mostly for apartment).

Total Out of Pocket: Roughly $12,000 up to this point with the apartment rehab and furnished included

Refinance: TBD. The plan is to refinance out of the VA loan into a commercial loan with a local credit union once the rehab on the main house is complete.

My Return on Investment: TBD. We should get our money back in 2-3 years via the rental income from the apartment and live for free in the meantime.

 

Lessons Learned:

  • Know your market and your niche: In some markets, student rentals produce above average returns. In other markets, housing-hacking and renting by the room can work really well. In my market I have found that residential properties with ADUs rented on Airbnb work really well.
  • Working with the right people makes your life SO much easier: For this deal we hired out both the furnishing of the apartment and the rehab of the apartment. We found a great person with excellent taste for interior design and she made the place look amazing. She also purchased, picked up, and delivered all of the furnishing items which was a huge return on my time to focus on other things. The contractor I hired had a full time job but he was hungry to make a good name for himself and worked from 5:30pm to midnight for a 12 days straight to get the rehab done. These are normally two things my wife and I would do ourselves but instead decided to start outsourcing so we can focus on working ON the business and not IN the business.
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