House Hacking in HCOL Areas - Analysis Metrics and Thumb Rules?

4 Replies

This question is for current or previous house hackers or others familiar with the numbers surrounding house hacking in HCOL areas:

As part of one of Brandon's webinars, I wrote down his rules of thumb for analyzing rental properties (in his market): $100 positive cash flow per unit, Cash on Cash ROI of 12% or higher (double risk premium of S&P 500 historical to justify added work and risk). I have analyzed a dozen or so properties and so far only one has met these standards in class B areas. That property, plus the highest possible purchase price to reach those two metrics, also fall under what I suppose could be called the "0.8% rule."

Now, those benchmarks Brandon mentioned are for Washington, a much different market than metro Boston Massachusetts, my market. Given the market differences between LCOL and HCOL, are these benchmarks too aggressive? Too conservative?

I also have been analyzing my house hacks with the assumption of all units being rented out, with effectively me "renting" as one of the tenants. This would make the only real calculated benefit of house hacking versus buying a multi-family be the low down payment. When running the numbers, is there another metric I ought to run that takes into account my being an owner occupant and improves the ROI from a certain perspective of accounting for not having to pay rent for primary residence?

If anyone has a house hacking analysis calculator they have created in Excel, I am also quite interested in order to inform my current spreadsheet.

@Ryan Hebert

Markets are different. Washington much different then Massachusetts

Those numbers are rules of thumb.... which means they are good indicators but are not set in stone 

Yes, I would analyze it with the unit you are living in to be rented out. 

You can look at it like this- If you are currently paying rent, then house hack- you are likely paying well reduced rent, having the loan paydown, possible chance of appreciation, and have the tax benefits of your primary residence!  

Keep in mind, each state is different, and each area of a state is different.

Brandon's part of Washington is VASTLY different than my part.  He might very well be able to find a 4plex that rents for $600 a unit and a purchase price of $200,000, hitting the 1% rule AND netting $100 in cash flow per unit per month. In my market, that unit would rent for $1,000, and would sell at $600,000!  (Seriously: there are two 4plexes with those metrics on the market right now. Crazy!)

With all that said, when I run the numbers for a house hack, my priority is to increase my personal monthly cash flow. For a property to work, it MUST work with me paying as little as possible each month. So if the other units can't cover the debt service AND the expenses (or at least 90% of them) its a no-go.  Hope that helps!

@Ryan Hebert

The numbers are different in a higher cost of living area, but that does not mean you should no longer be looking for a deal.

You have to look at a buy and hold investment property the same way a house flipper looks at a property. You find a property in need of a lot of work, off market, and at a substantial discount. You make the capital improvements necessary to raise the rents up to market levels. You then refinance the property to get your money back.

That is the best way you will be able to find properties where the numbers work in more expensive markets.

I strongly recommend that you use the BiggerPockets calculators when evaluating investment properties. The BRRRR calculator has helped me greatly on my latest investment.