Analyzing a house-hack, do you include your own "rent" portion?

Question

Since this Superbowl is super boring this year, I decided to analyze some properties for practice.

I'm looking to purchase a residential MF and live in one of the units using a VA loan this year. I'm focusing on 3 and 4 plex's  for less vacancy risk and more likelihood of the rental income covering all expenses.

When analyzing, does it make sense to include your units potential rental income even though I'd be living in one of the units? Or would it make more sense to analyze on expected actual rent roll without my unit's potential income? It seems the most logical approach would be to exclude my unit but it seems very difficult to find properties that work. What are your thoughts?

Anthony Wick · Answer

@Mike Hoherchak

When I house hacked my first duplex, I analyzed two numbers. The first was, how much did I need to chip in for PITI after the other side rent, and was that less than my current rent? In other words, would I be immediately better off financially?

And then I analyzed numbers for when I’d be moving out. That number has to be cash flow positive, after expenses and hold outs for future expenses.

I never tried finding a property wherein I would live there and be cash flow positive right away. Those don’t exist in my town. But my rent went from $1,250 a month to me paying $800 a month to round out my PITI after tenants rent.

Justin O'Malley · Answer

Hi, I'm a newbie too but I would for sure factor the rent as if you weren't living there. If it cash flows positive without your rent that's amazing but you always need an exit strategy. Be careful of putting all your money into one purchase because that puts you back to square one in the eyes of a lender. Good luck deal finding!

Andrew B. · Answer

For long term viability as an investment, you calculate the unit you live in as though you are collecting rent. in essence, you are saving $XXX b y living there, so of course it can be considered positive cashflow. You should also take into account what your cashflow will be while you live there. This is so you know if you will be able to support the investment when CAPEX items need to be replaced. Example, if you have only $100 cashflow while you live there, you better be putting they extra "rent" money that you are now saving into a reserve account.

Chace Fraser · Answer

Hey @Mike Hoherchak

The game was a little bit of a yawner. When we're analyzing house hacks in our market we take a couple things into account to see how good the deal is. We will analyze multiple times with a few different scenarios. First with the owner living in one unit with current rents and again with estimated market rents. Then we'll do it again with the owner not living in it with current rents and estimated market rents. The absolute bare minimum is that the property must float if fully rented out at current rents.

Keep in mind If you are using a low down payment, it's not really realistic to expect to be cash flow positive. When an investor is looking at being cash flow positive, they are typically putting down 25 percent or more. If you are in a high demand metro area, it's simply not realistic to expect to be cash flow positive if you are putting down 0-10%.

Now if that is all the capital you have, that is what it is....is it better to keep renting than to buy? Typically it is better to buy. Better to build your own equity through the debt pay down, enjoy the tax benefits of ownership, and garner the equity of an appreciating asset. You just can't expect to cash flow on an initial purchase with a low down payment. Now with time and rent growth, what could be a negative cash flow property might very well become a cash flow king, but that takes patience.

Another way to increase cash flow would be renting out rooms in the unit you live in, either Airbnb or longer term.

What is most important is that the property will cash flow, or at least float, once you're out.

Mike Hoherchak · Answer

@Chace Fraser Thanks for your detailed response. I suppose I was expecting to be cash flow positive but I don't know what I don't know. Your response makes sense.

@Andrew Boettcher That's my plan...any positive cash flow will be going to the reserves account.

@Anthony Wick i like this approach. Since it's not realistic to be cash flow positive right out of the gate, I think it makes sense to use those two metrics. I'm currently renting for $950/m so if I'm paying less than that to live after all expenses then I would take that win. Plus I'm building equity so I'm still benefiting.

Analyzing a house-hack, do you include your own "rent" portion?

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