New to house hacking, tough market

4 Replies

I think this is the right forum to post. I apologize if not. This post turned into a wall of text, I apologize for that too

So, I'm debating whether my wife and I should pull the trigger on a duplex in the Boston area. I took a new job here and we are currently in temporary housing. If we don't buy a place, we're going to end up renting and that stinks. I see owner occupying a rental property as a great alternative to subsidize our lifestyle, but I'm having trouble with the numbers here.

The housing market here has on a strong climb since '08 and we are quickly being priced out of anything within a reasonable commute. Owner occupying a duplex will provide us the benefits of ownership, the headaches of land lording, and also monthly checks written by someone besides an employer. Not a bad trade-off. However, the best deals I can find around here are  barely 4% capitalization rate. I interpret this as the market being squeezed into speculative pricing. So, here we are looking at picking up something that I had dreamed would be a home run investment, and it turns out not to be much of a winner.

Pros:

  •  We are leveraging our credit to finance an investment. The overall returns won't be great, but we will generate positive cash flow. For this experiment I assume we pay the market rent for the unit we live in.
  •  We gain a great chance to learn 'handy' skills. We're motivated learners and see this as a great opportunity. I hope our positive attitude sticks and we don't get tired of swinging hammers...
  •  I see working around the house as an opportunity to monetize our free time while we are learning. That's like a double win.
  • The rents will provide a low returning investment, and if the home valuations continue to rise, we may be able to capitalize on that in the future for better returns. 

Cons:

  • There is an opportunity cost on the down payment being drawn from potential equities investments which could provide ~7% returns.
  • I don't know who would buy the duplex from us in the future since it's at the bottom of acceptable cap rates. Unless there are very efficient updates to the units which could pull in a higher rent, or rental prices pick up.
  • I don't feel confident with real estate yet. I've self-educated myself on the topic, but I'm still very unsure of the industry. So, not having a bigger buffer in terms of cash flow/returns worries me.

We're going at this alone and don't have any real estate gurus talk to, so if anyone cares to chime in, or even double check my numbers I would really appreciate it. Thanks for reading my wall of text!

Numbers:

$670k purchase price

1.19% property tax

1.5% annual maintenance (house built in 1920).

.11% insurance

6% vacancy rate

$4k total expected rent

These numbers provide me 3.93% cap rate. That's rough..

@Matthew Wadsworth - it’s up to you to be creative. Not many listed properties are great deals. You don’t want to count on appreciation for your returns, but others will think to themselves “well, this was 600,000 two years ago and worth $650,000 now, so it’s a good investment.” You don’t know how the interest rates will change future prices. As interest rates go up, people can afford less house on the same salary.

I look for something that’s immediately able to be occupied (within 4 weeks, needs few if any permitted work before occupying). I look for bad cosmetics and/or a sloppy listing with no or few photos. If the house is pretty, it’ll get premium offers. I get set up on email alerts from my agent so I know the DAY a property hits the market because sometimes they’re under contract within 5 days.

In terms of being creative with RENT and REVENUE - look at the price for AIRBNB and craigslist / Facebook marketplace rooms in your neighborhood vs the price of rentals. Sometimes AIRBNB in a neighborhood can pay you like $100/night or more. It’s a lot more work than just renting the other half to a longer term tenant. Another way I’ve spruced revenue is to furnish the common area of my rental and rent by the room for 25-35% more than the whole house would rent for, like market is $3000/mo for a 2br apartment or $2000/room for $4000/mo. Room renters average 12 month stays versus apartment renters at 4-6 years but filling the spots has been easy so far.

@Matthew Wadsworth

If you are able to house hack that's excellent! 

Based on your rough numbers... I would also add in water / sewer. Also is there separate heating/ electric. This would be good since if separate meter  , you will be able to have tenants pay their heating/ electric bill. 

Would you be inheriting 2 tenants? Or is one side vacant? Are the tenants inheriting at market rent? 

Since its 2 units... and you will be occupying one, the vacant rate may be high for short term, but 6% is not bad to have for long term. 

I would set aside cash for cap ex or big ticket items such as roof., heating systems, siding etc. This would be 5-10% depending on condition of home. 

Take a look at your PITI or principal interest taxes insurance as well, you should know this number since you pay it on a monthly basis

Thank you for the replies. 

I'm thinking it's time to back out of this. We're not developers or contractors. We're first time home buyers getting in over our heads. Summary: negotiate the price down $30k, put in $25k of updates to pull up the rent of unit 2 by $700/month. Seems risky for our experience level.

The rent estimates I was using were too high ($4k/month) the extra bedrooms in the units were too small. So, we're lowering the expected rent to ($3.2k) and we're taking a new tactic with this property. I don't think these duplexes are being priced to rent at market rates. I think they're being bought by renovators who put in strategic updates to draw an above market rent. So, after the home inspection we are budgeting for a new roof ($13k) and expecting extensive water damage ($5k for a high estimate). Finally, I'm going to use past termite damage as a risk and ask for another $10k to hedge our bets.

This will give us some wiggle room in the price + repairs where we can add some cap ex (~$25k) to update the unit we plan to rent. I'm hoping to bring the (lowered) expected from $1800 to $2500. That seems crazy though...