Indianapolis, IN · Member since 2017 · 3 posts · 1 vote
We are looking at buying our first property. We are looking at a duplex or triplex. We have read a lot on this site about how to run numbers on a multifamily home, but not what to expect when you are living in one of the units. My question is when we look at the cash flow / cap rate / cash on cash, what would be a good / typical target assuming that we were living in one of the units of the duplex / triplex?
@Alejandro Villanueva, I would say if the "numbers" look good for all units rented, then look at the numbers with one tenant replaced by your use. However now you need to consider what your own rent was or would be if you were not living in the unit! If you rent would have been greater that what the tenant would have paid then you are definitely home free! if not then look at how the number look with the one less tenant and your rent value added in. You should now eliminate Property Management and do it your self. If the numbers are so negative you can't handle it (which I doubt would be the case) then perhaps this is not a house hacking deal.
Good luck in your journey. Listen to podcast #223 and get a copy of Scott Trench's book "Set for Life".
@Alejandro Villanueva, I would say if the "numbers" look good for all units rented, then look at the numbers with one tenant replaced by your use. However now you need to consider what your own rent was or would be if you were not living in the unit! If you rent would have been greater that what the tenant would have paid then you are definitely home free! if not then look at how the number look with the one less tenant and your rent value added in. You should now eliminate Property Management and do it your self. If the numbers are so negative you can't handle it (which I doubt would be the case) then perhaps this is not a house hacking deal.
Good luck in your journey. Listen to podcast #223 and get a copy of Scott Trench's book "Set for Life".
@Alejandro Villanueva I would try and stay "neutral" and look at the property as thought it were a pure investment property. Look at it as if you were putting 25% down (like a non-occupant) and see how the property pencils out without the unique aspects of living in one of the units: 3.5% mortgage (on the positive) and losing the rental income of 1 unit (negative). You can always readjust and rerun numbers for your own situation to see how it will pencil out with your down payment, etc. but at the start I'd try to put myself in the shoes of a non-owner occupant to see how it performs. If it's a solid deal from an investor perspective you should see how it maps to your personal situation.
I agree with @Andrew Johnson. Make sure the numbers work for you if your plans change and you have to move out in a year or two. Maybe you want to get another house hack, or move into your own home, change jobs/cities, etc.
If you can cash flow with all units rented, accounting for vacancy/maintenance/loan servicing, etc. then its probably a winner. While you live there you will probably live for free, maybe even pocket some cash and use that towards the next investment or a regular home.
With the specific property that we are looking at right now, the numbers after calculating it at 25% down and fully rented out would give us a $810 cash flow with a cap rate at 7.19% and a cash on cash of 11.97%. With those values does the property seem to be a good deal?
@Alejandro Villanueva That's a tough one as so much of it is related to the area. You can find 12 cap rates in warzones all day long. But since it's not a commercial property I'd consider you also use comps to derive value. If you're using cap-rate you could turn those 12 caps into 8 caps and come up with a "false" value that will leave you scrambling when the appraisal comes back. You might consider posting the numbers you're using to come up with the $810 cash-flow, cash-on-cash, etc. to make sure you're not forgetting anything. You'd be surprised how many people assuming vacancy is zero or that they should only hold back 3% for cap-ex. Regardless, it would still be hard for me to say good vs. bad deal because I don't know the market. Others might.
@Andrew Johnson Here are the details of where we got our numbers. I think that the property taxes might actually be lower than that number, but that is what was stated in the listing (I think that was at the yearly rate, not semi-annually, so it would be half of that).
@Alejandro Villanueva I don't see any holdback in there for cap-ex. When the HVAC goes down, the kitchen cabinets needs replacing, or the roof needs to be reshingeled (or replaced) those cost real dollars. I don't know the age or the property or the expected life of your cap-ex items but most people will tell you to hold back 10% of gross rents for them. So that knocks your cash-flow to $460 per month and a cash-on-cash return of 6.8%.