Everybody, meet Grace Wang aka G-Wang. Grace was like any other 24-year old Denver dweller. She was making about $50,000 at her corporate job while having a great group of friends that liked to have fun on the weekends. However, her life changed when she discovered house hacking while listening to the BiggerPockets podcast.
“Woah… why would I spend thousands of dollars trying to invest long distance while I could save thousands while living for free?! I am sold!”
Grace reached out to me (Craig) on BiggerPockets and the journey began.
Criteria:
Grace made an average salary so she was certainly not buying the Taj Mahal. Never mind the Taj Mahal, she really could not even afford an updated five-bedroom property. Did that stop her though? Absolutely not! She took the cards that she was dealt and worked them to her advantage. What were those cards you ask? While she did not have a lot of money, she is a highly motivated, smart, and gregarious woman that knows how to get what she wants.
What she wanted was a house that had the square footage of a five-bedroom home, but only had three or four. She was not afraid of cosmetic updates, but needed the bones of the house to be sound. By “bones” we mean plumbing, electrical, HVAC, structural, roof, and all of the expensive fixes that do not deal with the aesthetics of the house.
After learning her criteria, I set her up with a search on the MLS and we started looking.
The Search:
House 1
First house we went under contract with
On the first tour, Grace and I looked at four or five properties. Out of the bunch, one stood out as a clear winner. It had four bedrooms, three bathrooms, could have used a few updates, but certainly livable. These are my favorite types of house hacks. I love the flexibility of being able to rent it out immediately for cash flow or the ability to update it, add value, and then cash flow even more all while adding value.
We got this one under contract! The next step, biggest hurdle, and bottom of the emotional roller coaster was the inspection. Grace attended the inspection and made friends with the inspector. She was asking all sorts of intelligent questions and the inspector was impressed.
After reviewing the inspection report, the inspector did notice the concrete slab in the garage was sinking towards the house. It had sunk about 4-5 inches. We got a structural engineer to check it out further and there was not much of a concern. However, Grace was nervous that there was even a slight altercation with the foundation. So, much to everyone’s chagrin, we backed out of the deal.
HOUSE 2
Second house we went under contract on
For the second tour, Grace and I went out and looked at another four or five properties. Again, there was a clear winner. This one a six-bedroom, three-bathroom house in Broomfield, CO. This one was completely turnkey, no updates needed. She would be able to rent out each bedroom and cash flow well over $1,000 per month while also living for free. We got his one under contract!
Next up, is… you guessed it! The inspection. This time the inspection came back relatively clean. However, in doing her own diligence, we realized that Broomfield had strict occupancy limits. You cannot have more than three unrelated people living under one roof. While Denver and many of the other suburbs do not enforce these rules, Broomfield does. For that reason, we had to back out.
We went on a couple more tours after these two, but did not find anything worth putting an offer in on.
HOUSE 3: WINNER!
While I was in North Carolina checking out some investment properties, I received a call from Ms. G-Wang herself, “Craig, I am at an open house and want to put in an offer.”
“Okay, Okay. Let’s take a look.” I said.
She Face-timed me and she showed me around the property. It was a four-bedroom, two-bathroom that can easily be converted to a five-bedroom, two-bathroom by adding a bedroom to the basement.
The layout was perfect, but the entire place needed updating. There was gross carpet throughout the entire house, the kitchen and bathrooms needed updating, and the walls throughout needed a good painting. Initially, she wanted a project… here she is getting one!
We put in the offer and lo and behold, we get it!
You should know the next step by now, inspection! The inspector comes in and at this point, Grace and the inspector are good friends. As all inspectors do, he finds a handful of things that needed to be updated. Among the major were: aluminum wiring throughout the house, a blockage in the sewer, high radon levels, toxic mold, and a few other minor things.
We wrote up the inspection objection saying the seller needed to remediate all of these things. Much to our surprise, they agreed to most of it without question!
The appraisal and came back $2,000 over what we were under contract for so there were no issues and we were on to the closing table!
Let the project begin!
The Project
Demolition
With good bones, it was time to get to work! Grace wasted no time. The next day after closing she had a dumpster at the house and started demoing. She ripped up all of the carpet throughout the entire house, tore down the bar downstairs, ripped out two fireplaces, the bathroom downstairs, and a whole lot more. That dumpster was chuck full.
After demolition, she realized the downstairs bathroom and adjacent bedroom still tested positive with 3-feet of black mold (toxic) as well as asbestos. She brought in her mold and asbestos companies for further testing and remediation. $4,000 and six trips later, the mold and asbestos were below the recommended standards
Upstairs
The first rebuilding step was the upstairs. The upstairs was in desperate need for a new paint job and new flooring. She employed a couple of her friends to paint the upstairs in exchange for some gluten-free pizza (yes, she’s a millennial) and her friendship. Stonington Grey was the color of choice for the walls and Pegasus for the bathroom and trim! Side note… this was MY recommendation that was recommended to me by my good friend Alexandra Hughes.
While painting, she had some contractors come in and work on the floors upstairs. She chose luxury vinyl plank; inexpensive, tenant proof, and still looks good. Once the floors were all in, it was time to tackle the kitchen.
Not wanting to spend an arm and a leg to replace the counters and cabinets. She decided to paint the cabinets white and installed brush nickel hardware on all of the doors. They turned out pretty good. For the counters, she used a “butcher block” wrap that she basically stuck on. This is a temporary solution, but looks surprisingly good if you don’t look closely.
Downstairs
Now that the upstairs was complete, it was time to move on to the downstairs. The common area in the downstairs was massive and had the perfect amount of space to add an extra bedroom (cha-ching!). With the help of her contractor, they put up a wall, a closet, and a door. Voila! They had themselves a bedroom for $700. This will pay itself back in about one month.
In addition to the bedroom, the downstairs needed a fresh coat of paint as well as flooring throughout. To save money and remain consistent, she used the same paint and flooring as upstairs. Within about two weeks, the floors were complete and the walls/trim in all bedrooms were painted.
The last and final step of the downstairs was replacing the bathroom. This bathroom was absolutely atrocious as you can see from the picture below. She got a plumber in to replace the shower and her contractor to finish it off the bathroom. Ahh, so refreshing to have a bathroom that you aren’t afraid to walk into.
After about 3 months, Grace is just about complete with all of the rehab. Now, let’s get into the numbers.
The Numbers:
Grace purchased this property as 4-bedroom, 2-bathroom property for $358,000. She purchased this with a 3% down conventional loan making her down payment $10,740 and her monthly obligation of principal, taxes, interest, insurance, and PMI $2,100. After closing costs, she needed $16,000 for the property purchase.
The aforementioned rehab cost her about $33,000 so she was all-in for a total of $49,000. Note, she did not pay for the entire rehab herself, she did obtain an 18-month interest free credit card to front some of the cost. Remember, this credit card is not for “spending”, it’s for “investing.” Grace actually increased the value of her house by $40,000 by doing this rehab.
With the place now fully rented out, Grace is getting $2,900 per month in rent while living for free in her bedroom. She could rent her bedroom out for a total of $600 so her actual rent is closer to $3,500. Because her place has been completely updated, is in a decent location, but is quite large (2,300 square feet), we set on $300 of reserves. So all in all she is making $500 per month of true cash flow while living for free! When she moves out and rents her room out for $600, it will be closer to $1,100 a month or $13,200 annually.
Combine this with the fact she eliminated her previous rent payment of $1,100 and her monthly cash flow difference is almost $2,000 per month! Now who wouldn’t do this?!
The final thing I want to mention is that while Grace is receiving monthly checks, living for free, and increased her property’s value, she is ALSO paying down her loan with every monthly payment she makes. After the first year, she will have paid off about $6,000 worth of principal.
There were a lot of numbers in this paragraph and numbers in paragraph form can be a bit confusing, so let me recap:
Recap:
Purchase Price: $358,000
Down Payment + Closing Costs: $16,000
Rehab: $33,000
Rent: $2,900
Rent Savings: $600
Total Rent: $3,500
Monthly Obligation: $2,100
Reserves: $300
Cash Flow: $1,100
Annual Cash Flow & Rent Savings: $13,200
Appreciation: $40,000
Loan Paydown: $6,000
Cash on Cash Return: $13,200/$49,000 = 27%
Total NWROI: 121%
Conclusion:
In her first deal, Grace has used all of the wealth generators of real estate to her advantage. She bought a cash flowing property with a low percentage down loan that she forced appreciation with. Oh, and come tax time next year, she is going to be saving a whole bunch as well.
As she approaches the end of her rehab, Grace does wish she chose something easier for her first deal (less of a rehab). Though, I bet her opinion will change a few months after she is done when she sees just how much appreciation she has forced. Not to mention, the benefit of seeing her vision come to life!
Grace will now get her license so she can do her own deals and help House Hackers start their journey. Stay tune for her next deal in January 2021.