Let’s meet Kendra & Matt. Kendra is a real estate investor who grew up here in Colorado, but has lived in Branson, Missouri; Orange County, California, and interestingly enough, has been a world travelling ballerina.
While living in Branson, Missouri she found that there were literally no places to rent so she was forced into purchasing a place. Kendra purchased a condominium with an owner-occupied loan. While her full intent was to live there, her coach gave her an incredible deal renting out their basement so she took them up on that offer. If you have never heard of Branson, MO it is a huge entertainment town, which is why she decided to AirBnb the condo. It made her incredible amounts of money and that’s when she first realized the power of real estate investing.
Matt is Kendra’s husband. He is active duty military and is often gone 3-6 months at a time. That did make the home buying process a little bit tricky, but I will show you how we navigated this.
Given his military status, Matt was able to use the VA loan to put 0% down, but as you’ll see with anything that feels “to good to be true”, it usually is.
The Search:
Let the search begin! Kendra & Matt really valued having their own living space. Since Matt was away for most of the year on deployment, they did not feel comfortable having a revolving door of people they did not know coming in and out of their living quarters. Their strategy was to find a place where they could live in one part of the house and AirBnb or section off another part.
Once a week for over a month, we would go looking at 6-7 properties to potentially put offers on. Every single time we put in a competitive offer on their favorite house and each time we would come in second place. Kendra & Matt were getting discouraged. I told them that second place is a good thing! This way we can be confident that we have a good understanding of the market; we are putting in competitive offers that are losing to one high bidder.
I had a relationship with a previous agent who said a property is coming on the market that would be perfect for Kendra & Matt. She gave me the address and I made sure we were the first to take a look. Sure enough, it was perfect so we put in an offer before anyone else could. We got it accepted! It only took a prior relationship and the fear of a world-wide pandemic to get us under contract.
The House:
The house itself is a 4 bed, 2-bathroom single family home that was completely updated and renovated. It was located right across from a park and extremely close to US-36 which gets you to Denver or Boulder in 15-20 minutes.
The downstairs was completely separate from the upstairs with its own entrance, kitchen, and laundry. The best part is that the downstairs was at garden level. That means the windows did not need to be egress and there was plenty of natural light to be had.
The house itself was listed for $369,000. However, given the market conditions and how perfect this house was, we decided to come in a little higher than asking price at $385,000 with $5,000 in appraisal coverage.
By offering $5,000 in appraisal coverage, this means that if the appraisal were to come back lower than the purchase price of $385,000, the buyer would have to cover that difference up to $5,000. In other words, there are three scenarios:
1. Property appraised at $385,000 or more = No money needed.
2. Property appraised between $380,000 and $385,000 = Coverage of the difference
3. Property appraised less than $380,000 = maximum of $5,000 covered.
The Closing Process:
In most cases, the closing process is relatively smooth. After going under contract, the buyer drops off the earnest money, sets up the inspection, and runs through a handful of items pointed out by the inspector. The inspection is the negotiation tool we can use to get the sellers to fix the property up, reduce the purchase price, or pay for our closing costs (aka concessions).
With Kendra, this process was relatively normal. The part that was holding us up was the appraisal. When obtaining a conventional loan (even if it’s 3% to 5%), the lender gets to choose the appraiser. When it is a VA loan, the lender commissions the VA to send a VA-specific appraiser out there. In most cases, these appraisers are insanely strict.
Our appraiser, not only was extremely strict, but he was incredibly old. He did not understand how to use technology, he ignored our deadlines, and it was almost impossible to ask him questions.
Rather than… you know, telling us all at once. He came out to the property four different times and found a new thing that needed to be fixed each time. This was frustrating for the seller and the buyer. We needed to continue to push out closing until finally we finished the last item and settled on a date.
When that final appraisal came in, the value was at $379,000, but we were under contract for $385,000. Given our contract, technically the buyer was supposed to cover the $5,000 difference. However, given the situation, we were able to negotiated splitting the difference. So the purchase price ended up being $382,000 and the buyer paid $3,000 at the closing table.
While the VA loan does offer the low-down payment, this is where the VA loan made it incredibly difficult for us to get the deal through. At the end of the day, Kendra & Matt still had to put down some money in appraisal coverage.
Finding Tenants:
Immediately after closing, the goal is to find tenants. Because COVID-19 was in full force, Kendra and Matt decided that rather than go with the original plan to Airbnb, they would get full-time tenants in the downstairs.
They filled the place within a week or two and are getting $1,850 per month in rent (more than we expected). Now that we know final numbers, let’s do a quick recap.
Final Numbers:
The house was purchased for $382,000 with the VA loan. Their monthly payment is about $2,000 per month which includes Principal, Interest, Taxes, and Insurance (PITI). The reserves for capital expenditures, vacancy, and repairs is $300 per month given that the place is in a great location, is newly redone, and about 2,000 square feet.
They are have rented out the downstairs for $1,850 per month and when they move out can rent out the upstairs for at least that same price of $1,850 per month.
Purchase Price: $382,000
Down Payment: $0
Closing Costs + Appraisal Coverage: $7,000
Rent: $1,850
Rent Savings: $1,850
Total Effective Rent: $3,700
PITI: $2,000
Reserves: $300
Cash Flow: $1,400
Annualized Cash Flow: $16,800
CoC Return: 240%
Conclusion:
There you have it! Another successful house hack in the books! Kendra and Matt are planning to rinse and repeat this process every six months alternating with who is on the loan so they can adhere to their one-year owner-occupancy requirement.
While every deal has its bumps and bruises along the way, once everything is settled, Kendra and Matt will be making over $1,400 per month which is a significant boost as they take large strides towards their goal of financial independence.