How to Analyze an Owner Occupied Duplex

Question

Good Morning BP!

Im looking to buy my first property. I want to house hack a duplex and live in one side. Im curious what you look for when analyzing a duplex to owner occupy. Im in a rather expensive city but future appreciation looks great still. It seems the days of renting one side to cover your mortgage are gone. Do you usually look to reduce your mortgage as much as possible or are you looking more in the future when you want to rent both sides? Is it wise to look at places you can afford alone, or use rental income to offset what you can afford?

Austin Steed · Answer

Both metrics would be good to look at when analyzing a deal. First step is to lowering your monthly housing expense as much as you can. Second would be to make sure that the deal cash flows or comes close to cash flowing when you move out.

A good way to think of things too is to compare how the deal would look if you just purchased it as an investment with 25% down. With house hacking you'll be able to close with less cash out of pocket and you'll have favorable owner occupant financing (lower interest rates).

If you start young and hold for the long hall it's hard to lose with a solid house hack! I've been house hacking in Columbus OH for 5 years now.

Anthony Swain · Answer

Hey @Robert Mendenhall,

New house hacker myself. My wife and I settled on a small multi family approach, so we were able to purchase a duplex last December.

Some things I looked for in the house hack:

1. Location (rapidly changing/close to amenities)

This will hopefully make it easier to rent and give you options to rent out short term if desired. Most people renting short term prefer to be closer to amenities/main location IMO.

2. Value Add

This gives you an opportunity to renovate the property and force appreciation. This will give you a buffer if there is a down turn in the market.

If you're leveraging a low down payment, then this can majorly boost your return, because you get 100% of the appreciation not just 3.5% or 5%.

3. Save on Cost of Living

I'd say it is difficult to find a house hack in today's market that cash flows or leaves you with $0 to pay every month unless you're getting very creative. If house hacking can decrease your monthly housing expense, then it can be very beneficial in the long run. I'd argue that house hacking even to pay a similar amount compared to prior renting, because you'll get all the other benefits (appreciation, amortization, & tax benefits).

4. Ideally be able to rent both sides to cash flow in the future

If your property can cash flow after you move out, then you are in a strong flexible position. You can have options to stay, sell, or continue as a rental.

These were some of things I looked at while analyzing properties. I think you would be wise to make sure you could cover the entire mortgage like others have mentioned, because things do happen. If you're relying on that income to cover the cost, then you can get in some financial trouble. However, don't let fear dictate all of your decisions. Sometimes you need to calculated risks, especially investing in assets like real estate.

Good luck with your search. Don't hesitate to reach out if you have any questions! :)

Ko Kashiwagi · Answer

Hi Robert,

House hacking is a great way to get into real estate. In general, you want the property to at least break even by the time you move out and it is fully rented. If the payment you make while house hacking is lower than the rent you would have paid, it is worth considering.

Bradley Buxton · Answer

@Robert Mendenhall

House hacking a duplex is a great way to get started and there are other benefits to owning over renting. Look for rental comps in the area and check the math. If you pay market rent and your tenant in the other unit does too will both rents cover the loan, insurance, taxes, maintenance?  If you have to cover more than market rent on your own it still might be beneficial to own but you are taking on risk if the rents in the area are not increasing or you want to move out. As Jaron stated you will need to plan for the unexpected, such as vacancies and repairs. Vacancy will kill your cash flows so it's good to have savings just for such an occasion.

Are there other ways you can increase the income such as rent by the room or renting a room on the side you live on. Everything cash flows when you buy with all cash. The more cash you put down the more it will cash flow. In the Reno, NV market you'll need around 30% for a conventional loan. There might be some other creative loan products that are available to you so having a good lender can help reduce the monthly payments until the rents increase or you can refinance at a lower rate.

Jaron Walling · Answer

@Robert Mendenhall From the prospective of a beginner conservative investor your statement "Is it wise to look at places you can afford alone" answers your questions. If you can't afford the property with a vacant unit it's probably a bad idea. People stop paying rent, emergencies happen, people go to jail, and the list goes on and on. Successful investors don't get caught out (insert surprise) to win the long game. They have margin in every deal. They have an exit strategy or two for protection. If you're in that mindset you'll see why most properties don't work for rentals.

If the market is great and has future growth potential expect to pay a premium. Small multi-family is in high demand. Any income you make from the tenants is going directly to your mortgage reducing your cost of living which is the #1 goal for house-hacking.

Ideally the property cash-flows on it's own when you move out. Estimate what market rents will be in 2-5 years and play with the numbers. Given the current market that's probably a challenge but not in 2-5 years. Sacrifices could be distressed properties that need work or bad locations and less desirable tenants (difficult PM).  There are numerous strategies so pick your poison. Don't jump into the deep end unless you can swim. Cheers.

How to Analyze an Owner Occupied Duplex

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