Key metrics for house hacking

[Austin Robertson]

Hey everybody - Im new to this forum as well as real estate investing but have been listening to the bigger pockets podcast for several months now. I'm looking at buying a home in central coast California and ideally want to house hack. Buy a duplex and live in one of the units while renting the other out. I've been researching properties and running some numbers (NOI, Cap Rate, Cash Flow, Cash on Cash return) and find there are some properties but I don't feel confident that I'm on the right track. I wanted to get some feedback on what ya'll think I should be looking at or what I'm missing.

[Abel Curiel]

Hello @Austin Robertson,

House-hacking a duplex is a great way to get started. If 3-4 units are an option for you, I'd definitely explore those as well.

A couple of metrics I'd recommend looking into are:

- Average days on market (DOM) - to get a sense of which local submarkets are slowing down and may give you some wiggle room on negotiations

- Absorption rate - how much inventory exists in a particular market. The more competition sellers face, the better chance you'll be able to negotiate down to a # that makes sense for you.

- Rental rates for the last ~3 years. This will help you forecast future rent increases & run a pro-forma 

- Local vacancy rate 

A local investor or Realtor should be able to help with the above.

Best of luck to you on your first deal!

Abel

[Jacob Sloop]

Don’t over think it.

Find out market rents for the properties your looking at , start a saved search on Zillow, hot pads etc. You will get daily updates

Talk to a lender and get real numbers for what you can afford and what your mortgage payment will be.

Let time do it’s thing and build some equity and experience!

[Corby Goade]

House hacking is a totally different beast- as you are analyzing deals, most of those rules of thumb are meaningless because it's all about offsetting your expenses rather than calculating returns- at least at first. In reality- even if you are paying $2k in rent now, you buy a duplex and your net expenses are $2k, you are already ahead because you have equity, debt paydown and depreciation. If you can further reduce your expenses, obviously that's even better. 

Keep in mind that cap rates do not apply to residential properties with 4 or fewer units. Lots of newbies throw that number around on BP and it will give you a false sense of value and it's not a meaningful metric. 

Good luck!

[Eliott Elias]

The most important metric is wiping out your monthly payments. Do the other units rents cover your monthly payments to the bank? 

[Scott E.]

Step 1: Pick an area that you would like to live in, AND an area that you think will stay a strong rental market for the foreseeable future

Step 2: Start underwriting deals. Run the numbers on literally every 2 unit, 3 unit, and 4 unit in that sub-market. Do a full underwrite as if you were buying the place. Figure out how much income the property would generate every month if you lived in one of the units. Then run a second calculation on how much it would generate if you moved out and rented all of the units.

Step 3: Once you start honing in on a couple of deals that look like they might work, come back to the forum and share your underwriting. We can let you know if you are missing anything.

[Jordan Moorhead]

@Austin Robertson all you need to worry about is can you save money while you live there and will it cash flow when you move out. I'm living in my 4th and if you focus on these 2 things you'll do great!

[Ryan Thomson]

@Austin Robertson I agree with Jordan! When you run your numbers add your "Rent avoidance" to your rental income. Reach out if you want an awesome spreadsheet that takes into account (loan paydown, cashflow, appreciation, and tax savings). All things that should go into the picture if you are considering house hacking. It's not all about cashflow. 

[Austin Robertson]

Thank you all for your reply, very helpful! @Scott E. Underwriting would be looking at my financial situation and the property value to see if the deal works, correct? I'll absolutely be back on the forum with some more clarity.  

[Scott E.]

Quote from @Austin Robertson:

Thank you all for your reply, very helpful! @Scott E. Underwriting would be looking at my financial situation and the property value to see if the deal works, correct? I'll absolutely be back on the forum with some more clarity.  

Yes correct. Your underwriting on the deal can be relatively simple:

GROSS MONTHLY RENT

-Mortgage (PITI)

-Utilities (power, water, gas)

-Maintenance (landscaping, pool, pest control, etc)

-Repairs + Capex (Assuming 10-20% of gross rents depending on age of property)

+Additional income (Rubs, laundry, etc)

=NET MONTHLY INCOME

[Owen Schwaegerle]

Consider what your total cost of housing is currently. Now find a way to cut that cost in half or reduce it completely through house hacking. If your rent is $2000/mo, and you could buy a place for $4,000/mo with PITI, it might seem like a bad idea. But, if you have someone in a duplex paying half of that, and a roommate paying a little bit you could come out ahead.

Oftentimes, a house hack won't have massive cashflow, but you have to consider the other variables that are putting money in your pocket:

#1 Every month you own it you are paying down the principal. Putting $ in your pocket rather than someone else's pocket.

#2 What is the rate of appreciation for real estate in your market (historically 5% over 100 years). If you bought a $500K property, that means it would be going up $25K/year which is already a huge bump to your net worth.

#3 What would the tax savings be owning a place that is also an investment? I'm not a CPA, so please confirm with your tax advisor, but you can write off a large chunk of the expenses of ownership on investment properties. If you own a multiunit and live in it, you will only be able to deduct a portion of the pie for certain expenses like depreciation etc. 

Overall, I say just do it! The best time to plant a tree was 20 years ago. The next best time is today!

[Lawrence Potts]

@Austin Robertson,

Everyone has made excellent points to answer your question. Nothing much to add there.

I highly advice that you start talking to a reliable lender though. They’ll give you accurate numbers on what you can afford and what you can do to improve your buying power.

They’ll also be your resource to good agents in your area.

Since you are starting out, you'll probably be looking at multifamily to house hack. You can use FHA 3.5% down, but you can't use a conventional 3% or 5% down. FHA is good for 1-4 units! But 2 unit properties underwrite differently than 3-4 unit properties. A lender can go into more details about that.

No matter what though, you always win house hacking. I would consider your long term goals and calculate your plans with the property years from today: will it cashflow in 5 years when you’re not living there anymore? Is it in a safe neighborhood? What expenses to expect down the road?

Hope that helps! Keep asking questions, we all want to see you get your first deal 👍👍👍