Original Duplex we bought in 2013 with fha first time home buyer loan
redevelopment of dulex into 4 plex with fha 203k loan or home style renovation loan
finished 4 plex with our new home and my company offices in our 2 story apartment home
I have wanted to build fun, architecturally interesting, sustainable communities that add value to the communities we love to spend time in for years. Ever since I spent 3 years as a volunteer in the United States Peace Corps I have been enamored with village-style living. Perhaps this is why when I returned from Nicaragua small town living, I was rudely awakened to the “communities” most Americans live their daily lives in. Since returning from the Peace Corps I have dreamed of slowly re-building communities in a more social, fun, and sustainable manner. Tieing in ideas I most enjoyed from the slower paced village-style communities I experienced in Latin America.
I knew I wanted to redevelop run-down properties in the towns we most love, lived in, and visited like San Diego, Lake Tahoe, Mammoth, Crusted Butte, and Jackson Wyoming. However the financing, and knowledge on how to start seemed daunting. Furthermore most resources I found just talked about the process in a theoretical manner.
Well my friends, I am here to layout one of the more economical loan programs and ways to house hack, possibly building cool new housing of your own design, using the 203 k loan program or home style renovation loan. The 203k loan program is especially powerful allowing you to purchase run-down homes or duplexes and “renovate them” up to 4 units for around 3% down. We used a similar loan to redevelop our duplex home into a new 4 unit community of our own design this last year.
Allowing us to design and build our ideal community and a nice home for our selves. Ultimately providing us a creative path to house hacking, living for free or very cheap, in a brand new build we owned with 3 rental units to pay for all or most of the mortgage. Not to say that it was without its stresses initially, but living close to mortgage-free using this creative house hacking method using the 203k loan is worth its weight in gold long term!
Best part of it is you can do it again and again if you really want to add value and nice rental units in your community and build your wealth along the way part-time.
Initial Duplex Basic Numbers:
- The original Purchase price for our Duplex in North San Diego 2013 $570,000. I put down around $15-18k 3% down with fha first time home buyer program. You can buy up to 4 units I believe with this loan still depending on purchase price limits
- Total mortgage initially was around $2500 a month or so I believe with mortgage insurance
- We lived in front house and rented the 2nd 2bed 1 bath house for around $1950 a month
- Living for around $2,000 with insurance and utilities and maintenance included which was pretty inexpensive in san diego for having a fairly nice home at the time
- Once we refinanced and got the PMI off our mortgage in a year or 2 our total monthly expensive was more like $1200 which was less than a studio apartment rent in san diego at the time!
Once I found out we could build 4 units we got to work figuring out how we could affordably add 2 additional 2 bedroom apartments to our lot. I even know a trick now that would have allowed us to build 5 units with some architectural trickery! 😊
Adaptive Re-development into a 4 plex process:
- Leveraged our equity in the property after 3 years of paying down the mortgage we used a 203k loan / home style renovation loan to adaptively re-build our duplex into a 4 plex.
- The first phase was coming up with an architectural plan that we liked and fit within the city’s max height, floor area ratio, setback, and other zoning requirements. In our case, our lot was zoned RM 3-5 allowing us to build 1 unit per 1500 sq ft of lot space. We had a lot just over 6000 ft so this allowed for up to 4 units
- Once we had an architectural plan together we began interviewing contractors for bids and entered the review process with developmental services of the city of San Diego. I took the plans through plan check myself and had the architect help us with any changes. I would say this process can take 3-6 months depending on your skill and interest. Or you can just pay the architect to help handle it for you which is probably easier but costs more.
- After passing permitting we got our building permit and demolition and rebuilding took around 10-13 months.
- Generally, these 203k loan and home style renovation loans let you come in with a low or now down payment, allow you to borrow up to $1.2 or $1.3 million or 110% of your after repair value. They also allow you to finance up to 6 months' worth of payments while you are rebuilding or renovating your property. Generally, they are used for remodeling a home etc, but you can build up to 4 units which is an awesome way to leverage your money saved.
- Our 4 plex took about $700,000 to permit and build leaving us at around $1.3 million all in to acquire/assume the duplex loan of $500,000 and build 4 units out of our duplex.
- I had to do a lot of calling around to portfolio lenders and community banks but eventually found a credit union that would let us cash-out refinance up to 80% loan to value. So we pulled around $100k out in cash to pay some overage off and get into a more traditional 30 mortgage at around 3.1%
- Our mortgage is now around $6700 a month now and once we rented the 3 units we were bringing in around $7,100 in rents. Essentially living for very cheap and or free right off the bat.
- To sweeten the deal even more, our tenants are helping us pay down around $30k in equity a year and we can depreciate the 3 rental units “value” over 27 years. Virtually eliminating another 90-100k in taxable income from my family's taxes. We basically will not be paying taxes anymore
- Did i mention you also own a business now so you can write off most of your expenses against any income you show. You know laptop, mobile phone, car, mileage, internet, electricity, water, food in your company fridge, and on and on.
- If you wanted to go further we are now applying for a HELOC home equity line of credit against the 4 plex of $250k or so based on a valuation of around $2million for a new 4plex in san diego.
- Save a little more money over the next year or so, combine it with your heloc money you can borrow short term and rinse in repeat to build a few more units and move into those. Not to mention our unit in the 4 plex will rent for around $3500. Giving us a cash flow on a new 4 plex of around $2500 a month holding back 1k for capital expenses like re-roofing, repainting etc.
I would not say this has been an easy undertaking. But, we got to design and build a community basically from the ground up. We included amenities and unique features that were very important to us and our long term concept: loaner bikes for the tenants, loaner surfboards, solar power to power the entire community. Vegetable gardens for those who want to grow their own food, and great social community spaces with picnic tables, market umbrellas, Adirondack chairs, etc to make the place cool and unique. More of an experience than an address as I like to say! If this house hacking method using the 203k loan or homestyle renovation loan is interesting to you connect with me. I would be happy to help you with a little front end consulting and share my proforma with you to put you on the right track.
All consulting or one on one coaching fees we would charge further help us to build more cool, sustainable, architecturally interesting communities. Benefiting the towns we most love that need good rental and affordable for-sale housing desperately. We hope you found this information helpful and more of the nuts and bolts information you would need to replicate the process.
Yours in making our communities fun, cool, social, and architectural interesting again!
Jeremy Curran
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