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House Hacking, Value first multi-family investment

My first real estate partnership with Hedda involved purchasing a multi-unit property in San Francisco in 2010. We both didn’t have any experience with construction nor flipping but decided to jump right into a crash course on real estate investing. We took the plunge, with some calculated risks and went for it. We did this as new moms to toddlers, toting our 1 and 2-year-olds along with us to the job site, material shopping, and meetings. We used various strategies to achieve the returns we projected and course-corrected along the way, being flexible to the ups and downs of this project.

How did we find the property?

Hedda is a real estate agent, so she was amazing at identifying a multi-unit property in very bad shape in a sought after neighborhood in San Francisco. Most buyers would pass on this property, as it had tenants in all units. In San Francisco, there are strict laws around evicting renters and involve high payments and risk of negotiations to have them leave. The property was also an eyesore and required a lot work to make it beautiful again. Instead, we saw an opportunity to add value to the property. It had great bones, great square footage, and in a great neighborhood.

What was the property?

We purchased a multi-unit property that was fully occupied with 8 tenants and in disrepair. There were 3 units - two 3 bedrooms, 2 bathrooms units, and a one downstairs unit with 1 bedroom, 1 bathroom.

What was the plan?

Our plan was to fully renovate the building down to the studs, live in the units, condo convert them and sell them after 3 years.

Before this was to happen, we needed to remove the current tenants from the building which involved working with a lawyer and negotiating with 8 tenants on the amount to pay them to leave. This took some time, but eventually, we came to an agreement with all of them.

Meanwhile, we were building our team for the renovation phase of the project. We interviewed architects, contractors, suppliers, got bids and built our team. Our renovations were completed in 6 months. It was a complete overhaul down to the studs, building a new staircase, and exterior paint and landscaping.

We house hacked and Hedda and her family lived in one unit and me and my family in the other. The downstairs suite was occupied by one of our friends. It was the “friends” house. We planned to live there for 3 years, to take advantage of the capital gains primary residence exemption and qualify for condo conversion.

The condo conversion was another value add in our strategy. We followed all the rules to convert the building from 1 title to 2 separate titles, therefore allowing us to sell these to 2 separate buyers. It’s a complex set of rules, but we got through it with the help of a lawyer and educating ourselves.

After 3 years, Hedda listed the 2 units on the market which we sold within 3 weeks. We turned one unit into a 4 bedroom, 3 bath with den and the top unit 3 bedroom and 2 bathrooms.

What did we learn?

  • Taking massive action and diving in is a great way to get into real estate investing. Of course, you must do the legwork of analyzing the deal to make sure it’s a calculated risk.

  • You need to be flexible and resilient when things don’t go as planned. For example, during the condo conversion process, we found out part of our home was built on the neighbor’s property. We needed to work with them to adjust the lot line before we could sell the home. There was flooding in the basement, so we needed to fix that with a sump pump. Supplies not received in time and construction delays affected our timeline.

  • You need to surround yourself with a great team. Picking the right architect, contractor, loan agent, suppliers, lawyers, surveyors will help in executing the project on time and close to budget.

  • We learned to balance friendship and a working relationship. We learned to trust each other and know each other’s strengths. Hedda was great at negotiations and construction and my strengths were in project management and design.

What were our returns?

Not only did we each get to live in a brand new home for 3 years in a nice neighborhood with friends, but we also doubled the value of the property and made a return of 58%. Not bad for our first project together! This, of course, spurred our desire to continue with our adventure in real estate investing.


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