BUY or PASS? 180K HOUSE + 60K renovation

[girliebeard]

Hi all,
Really was wanting to get advice from this group.
I am considering purchasing my first house.
I want to be able to supply solid housing for my father. At the same time, my thinking has been that houses are expensive and it would be better to buy a property I could rent out. This way, at least in the short term, I can pay off the house as quickly as possible. The goal would to retain this property for myself and my father after it is paid off. So - it's not really a pure investment property.

I have found a property I think would work well for both of these purposes. It has a location I love and that I think has a lot of value. It is $180K and needs roughly $60K for renovation. I have $20K in mutual funds and I could borrow $20K from a 401K loan (could borrow more but prefer to keep that borrowing down). (I am 28yrs old and haven't saved a ton of money outside of my 401k) I would plan on putting 20% down and taking out a HomeStyle Renovation loan for the mortgage plus renovation costs.

The property I am looking at is close to my alma mater. I feel understand well what a student or young adult renter looks for in a property and think that I could make this property work for two renters in addition to my father. I don't really want to become a real estate investor/own a bunch of rental properties. I am really excited about this place because it is close to where I grew up, reasonably priced, in area with great schools, and has a rental demographic I think I understand well.

The goal would be to charge $600 and $700 for the each (preferably grad) student renter and $300 (cutting down my dad's rental costs by a third) for my father. This would leave me with a $800 short fall if I am going by the 1% rule for an investment property (which states that an investment property is worthwhile if the rent payment covers 1% of the property cost).

I still have more work to do breaking out associated costs with the property and refining my cashflow, but I expect being able to pay off the mortgage in 7 years (if I assume a 15 year mortgage rate) at most.

What I was wanting help with was:

What additional analysis/questions should I be asking in this process?
Is this a worthwhile investment?
Is it a good idea to borrow from my 401k or is that truly truly a last resort?

Welcoming all advice and face punches - please!

Edit - Added my surely busted a** spread sheet https://drive.google.com/file/d/1sShzQz9h7XSN8f9T0iXeekpdYi7Agruf/view?usp=sharing
(the Renting Calc tab is most relevant here)

[waltworks]

20% down and closing costs is $40k (unless you're going to live there plan on 25%). So you will have basically zero left when you buy the property. Where is the $60k in renovations going to come from? LTV concerns are (I believe) going to prevent you from getting any further leverage via Homestyle type equity loan strategies.

I mean, it's a terrible idea. Really terrible. If you had a bunch of spare cash, wanted to help your dad out, and were super handy/had free time and could DIY a lot of that stuff, then maybe it would be worth losing money every month. As it stands, it sounds like a surefire way to get foreclosed on/go bankrupt, and put your father in a bad situation with you.

I'm also confused about how you plan to pay off the property in 7 years, given that it'll be cashflow negative from the get-go, assuming you can even manage to fund/accomplish the needed repairs.

If I were analyzing this:
-$240k purchase price, including renovations. Closing costs will add to this a bit but let's ignore that for now.
-Assuming you can finance the renovations, assume you put down 25%/$60k (you're not owner-occupying, right?) You don't have this, but let's pretend you do.
-At 3.5% or so for your preferred 15 year loan, you're looking at PI of $1290 or so.
-Assume 5% for vacancy, so $100/mo.
-Assume 1% for maintenance, so $200/mo.
-Assume $150-200 for management. I know, I know, you're going to self manage. Sigh.
-You will need to cover the 401k loan as well, which AFAIK is a 5 year payback. I'm unfamiliar with the details, but you'd be looking at $330/mo or so, minimum. It's money you're paying to yourself, but it's still money you have to come up with each month.
-You're getting a gross (at market rate) $1800 in rent.

So you're basically, using conservative numbers, losing $200-500/mo (if renting to dad below market, you're going to lose much more), and that would be if you had the money to actually buy the place and have any semblance of reserves to cover a new furnace or a new roof or anything else. On the plus side, it's a 15 year loan so if you can somehow survive those 15 years, you'll own the place free and clear.

-W

[girliebeard]

@waltworks Thank you so much for your response. This is exactly what I was looking for. I really just needed someone who could look at this and tell me if it was a steaming hot pile of trash.

It was really helpful to see the analysis break out too. It was heartening to at least that I captured some of the same items in my spread sheet. It seems like an obvious thing but one of the main reasons I posted was because I really didn't have an appreciation for the financial risk involved.

Re: payback in 7 yrs line - I was assuming that I would pay an additional $1k a month to pay off the loan early. I would be able to afford that or a little more baring unexpected maintenance.

Phew, now I can get on with my life and hopefully better solutions for how to help out my father. I am pretty sure there is a way to two bird with one stone the helping my father thing and helping myself FIRE thing but this seems like it definitely is not it.

Thanks for your time.
Happy Holidays!

[waltworks]

The place could make sense if you were planning to move into it as well (ie, house hack) but even then, you don't have the money saved up for a downpayment, let alone the repairs (and $60k of repairs is a LOT of repairs!)

Right now your best course to head for FIRE is to save more money from your normal job/spend less. You're young and probably just starting out, so you're doing fine, but posting a case study in the case study forum might be helpful.

-W

[PMJL34]

Hi OP,

Walt outlined the financial part well.

My questions are:

What is your income?
What is your end goal? Is it to buy your dad a house that you plan to payoff in 7 years and you are trying to do so with some room rental offset?
Is your father able bodied and working? Does your dad currently have housing? Like is this a need or an upgrade for him?
Is he okay living with students for 7 years?
Are you living there with him? Do you already own a home? Are you at least close by?

My thoughts are:
-I applaud you for thinking about helping your dad. That's awesome!
-Don't raid your 401k. If you have decent income and low expenses, you should be able to save up enough to do what you want in a year or less.
-You absolutely do not need 60k for renovations. You don't need a 20K kitchen remodel, especially for student housing. You just need new floors, new paint and some other minor things to make it nice and tenant ready. For a small college town 3bed home, it shouldn't be more than 15-20k at most. You can always upgrade later.
-I'm not sure how many students are going to want to live with your dad. Are you sure you can get 600/room to live with the owner? Usually owner occupied room rentals are significantly lower rents than students only housing.

I think you are on the right track and it's totally doable depending on answers above.

Best of luck!

[girliebeard]

Gotcha @waltworks, I don't think I would be able to house hack since I don't live in the state as my father.
I think you are right - just got to keep reducing spending and save save save. I posted a case study here: https://forum.mrmoneymustache.com/case-studies/turning-anxiety-into-empowerment/ will probably update it on a 6month basis to try to not be suuuper annoying.

Hi @PMJL34 thanks so much for your response!
Answers to your q:
1. Blessed enough to be making 106K (68K after tax)
2. End goal would be to have a house my dad could live in that I also think is a good investment either for resale or my own future residence. If it is able to generate an extra cash stream so I can set at aside for unexpected expenses related to my father all the better. I will add that I did genuinely like this property. It has a lot of acreage for where it is at and even though (in dream land) I would offer $180K a lot of the houses in the area are atleast $400K with a lot that are in the millions (but also you kno more like super nice homes or whatever).
3. I would say yes he is able bodied - he has had two relatively big health scares but fortunately being on medicare they didn't break the bank. I sort of expected these health scares given his habits but not sure what may come in the future since surgeries mostly re-set his health.
He does work - lives below the poverty line and shares an apartment with three other men (one who is sort of an alcoholic - kitchen is generally a bit of a mess and one trucker who is mostly absent but smokes in his room when he is in). I would like him to have more of his own space and covid has made that point more salient for me. This is more of an upgrade but it would save him $600 a month which would help because he also has significant debt. This is something I helped him with in the past but then realized I didn't actually have the money to do and can't do again.
I was going to help him with his next apartment since his lease is but in March and that's what got me thinking why don't I just get a place instead of having us both throw away $$$.
4. Yes - he is easy going and I would make sure his section of the house is tucked away.
5. No, No, No

RE: Thoughts section
1. Thanks - I love my parent it's not even a thing I just want to be there like they were there for me.
2. Gotcha I got to get more organized with putting away money
3. Yeah I mean that is a rough back of the napkin estimate I got - won't go too into the weeds but house needs electrical, plumbing, roofing, and then yeah some more basic cosmetic remodeling in the kitchen and bathrooms and potentially adding an extra door for my dad's suite
Definitely not going top of the line with this and would probably would have stayed in the house during renovations for the 6months or so it would be needed to turn things around and do small things like bathroom painting, try to lug as much of the building materials to the site, etc.

But bottom line is I don't have enough cash - I actually have $31k on hand if I count my emergency fund - and raiding 401k is not the best move. Still a useful thought exercise and I really appreciate your feedback!

Thanks again both for taking the time!

[PMJL34]

OP,

Thanks for the response. You have excellent income and low expenses. You are on an awesome track. You should be able to save for a down payment in no time.

1. I'm confused, is the house 180k with acres or is it really 400K to a million dollars? This doesn't make any sense.
2. You need to refine your goal. You are trying to do 4 things at once (housing for dad, investment, future residence, and possible sale) that's impossible. If you want to focus on your dad, you need to find something very cheap and affordable for him so that you can subsidize him here and there, but not be responsible for everything forever. If you want investment, then you have to look at numbers only, no emotional ties or whether your dad would like it. If you want future residence, then buy a home when you are ready, not now. If you want to sale, then you are talking about appreciation or a great investment.

My suggestion would be to buy a multi family (duplex, tri, or quad) or a single family home with an in-law unit or detached garage that you can convert. Buy this property in the future when YOU are ready to buy YOUR own home. You can then have your dad live in one of the units. Your dad sounds like a low maintenance person and doesn't need all the bells and whistles and I'm sure he would love his own space as he continues to age. It also sounds like his working days are numbered and he may be a financial liability.

[Dicey]

Couple quick thoughts. If you rent to a family member for below market rates you could be courting trouble with the IRS. Next, leverage is your friend. Mortgages = leverage. Please, please come chat with the friendly folks at the DPOYM thread and learn why a mortgage can be an excellent tool for building wealth:
https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/