Multi Family | Am I missing something??

5 Replies

Hey guys, brand new to real estate, been learning for about the past 2 months. But here's my question:

Okay so this is a hypothetical situation. I'm just going to use easy numbers and make tons of assumptions, I just want to know if my thought process is correct.

Say you found a duplex, get an FHA loan, and you rent out 1 unit for $1000 and live in the other. Mortgage (and other expenses), we'll say, is $1500. So you run the numbers and because you're still having to fork over $500 every month to cover the mortgage payment (and expenses), the calculator says it's a bad deal, your cash on cash return is negative.

Fast forward a year and you move out as early as you can based on FHA rules. You rent out the other unit for $1000 and now your income is $2000/month, expenses are still $1500 and it's cash flowing $500/month, cash on cash return is positive (let's assume it's a good return, 10% or more).

To me, this would be a good deal because you got to live in a place for cheap ($500/month, which is cheap in my head), then you move out after a year and the place cash flows great. What am I missing? I'm aware that the goal of house hacking really is to live for free, but if I could live for $6,000 a year in a nice place, I'd do it. Around me, $6,000 gets you about 4 months of rent.

I don't know why, but I feel like I'm missing something. I've learned recently to analyze multifamily deals as if you were living in one unit and renting out the rest AS WELL AS if you're renting them all out, but this scenario that I've laid out sounds pretty good.

Curious to know your thoughts. Thank you!

You're not missing anything. Welcome to real estate and financial freedom! 

You're not only saving money on rent (and cashflowing once you move out) but once that loan is finally paid off you'll REALLY be cashflowing. 

@Matt Stevi

Your on the right track. Here's a few thoughts.

Make sure you account for all expenses. Both actualized and future. What i mean is, make sure you are setting aside cash every month for future cap-ex, yearly taxes, repairs, ect. In your example, I would expect the numbers to not work so well when you move out.

House hacking isn't necessarily to live for free. Granted that's a huge win if you can, the goal is to minimize your living expenses while adding another investment property into your portfolio. 

As long as you are acquiring properties that will cash flow well when you move out, you will make a good investment.

@Heath Ryans yeah! I didn't specify but when I've been analyzing deals I add all those other categories of cap ex, property management (even if I'm going to do it), repairs, etc to the expenses for the property. Thank you for your response!

It sounds like you're thinking about everything properly. I'm currently closing on my first property now which happens to be a duplex using an FHA loan with similar numbers to your hypothetical situation. I had been looking at 2-4 unit properties trying to profit >$100/unit after accounting for vacancy, capex, repairs, property management, etc. The current rented unit is only for $825/month but I should be able to bring it up to market around $1000-$1100/month and possibly up to $1200/month per unit when I move out once I make some upgrades which I plan to do as I live there. While living there I'll pay $500/month to live there and will also put aside $400/month to cover expected other expenses. It's not the best deal compared to living completely for free but it's still a deal and I'm just trying to get started to learn and grow for the he next deal. An FYI, for FHA you can refinance after only 6 months or you can keep the loan and move out after 1 year.