Buying an Owner Occupied Property with Negative Cash Flow

5 Replies

I have been reading a lot on what makes a deal a "good" deal and also about the 50% general rule.  I do have a general question about this as it relates to owner occupied real estate properties:

I plan on buying a duplex that I myself would occupy with my family and then would rent out the other unit.  For an example, let's say the property I'm buying is worth $200,000, but was able to buy it for $180,000 and I put $6,000 down payment on it, so my loan would be for $174,000.  Lets say this works out to $1,000/month P&I.  

So now let's assume I can get $1,600/month for the second unit property.  Using the 50% rule, $800 is for expenses and then $800 is left over.  This would produce a negative cash flow of ($200.00)/month.  Which is obviously the opposite of what your looking for in a rental property.  

Is this still a good investment?  The way I figure it, I am looking for a house to live so I am obviously expecting to pay a mortgage.  I'll pay the $1,000/month for the mortgage like I would expect, and keep that separate from my investment.  This means I would have $800 cash flow after the 50% rule if I separate the two.  

Does anyone else have any advice when it comes to owner occupied investments of what make a deal a "good" deal?  I think it would be tough for me to afford a triplex or a 4-plex.  Things are expensive here in MA....

Look at it as if fully rented, to decide if it's a good deal.  Also the 50% guideline for expenses would be 50% of ALL units rented, as your repairs, taxes, insurance, etc are the same whether you are "paying" rent or not.  You can't expect to occupy half of a property, for free, and still have it cash flow...won't happen.

Hi Nick, I suggest you check out a recent blog post by Scott Trench http://www.biggerpockets.com/renewsblog/2015/02/21... that was recently featured as a top article in Money Magazine. It discusses some additional factors to consider when finding a place to house hack. On my house hacking property, a duplex, I actually charged myself rent when running the numbers, because I could not find a property in an area I wanted to live in that would cash-flow without charging myself rent. I was willing to sacrifice living completely rent free to get the location I wanted. That said, I know if I ever want to move, the property will cash-flow and be a solid investment property.

@Nick Noon

50% Rule says that 50% of your income will go toward operating costs.  In terms of a duplex, the total rent presumes rent on both sides.  Therefore, if each side would rent for $1,600, $3,200 total, then your expenses relative to 50% Rule would be $1,600/month - and that's not including the mortgage.  Including the mortgage payment of $1,000, you'd be spending $2,600/month on the building.

Originally posted by @Nick Noon :

I have been reading a lot on what makes a deal a "good" deal and also about the 50% general rule.  I do have a general question about this as it relates to owner occupied real estate properties:

I plan on buying a duplex that I myself would occupy with my family and then would rent out the other unit.  For an example, let's say the property I'm buying is worth $200,000, but was able to buy it for $180,000 and I put $6,000 down payment on it, so my loan would be for $174,000.  Lets say this works out to $1,000/month P&I.  

So now let's assume I can get $1,600/month for the second unit property.  Using the 50% rule, $800 is for expenses and then $800 is left over.  This would produce a negative cash flow of ($200.00)/month.  Which is obviously the opposite of what your looking for in a rental property.  

Is this still a good investment?  The way I figure it, I am looking for a house to live so I am obviously expecting to pay a mortgage.  I'll pay the $1,000/month for the mortgage like I would expect, and keep that separate from my investment.  This means I would have $800 cash flow after the 50% rule if I separate the two.  

Does anyone else have any advice when it comes to owner occupied investments of what make a deal a "good" deal?  I think it would be tough for me to afford a triplex or a 4-plex.  Things are expensive here in MA....

 Hey Nick,

How I would look at it is treating one side as your residence. You should look at it in terms of splitting the property instead of paying a mortgage/renting a free and clear property. If you think of it this way, your paying $500 for each unit, so on one hand you have a $500 mortgage for your personal residence, and expenses and maintenance will be paid for by you as the homeowner. The other unit you expect to rent for $1600, 50% rule $800, but a mtg of $500 would be +$300 monthly cash flow.

Again, not saying its a good deal, I'm just telling you how I would use the 50% rule in that scenario.

Adam

Thank you all, this has been extremely helpful.  It seems like there are two ways of thinking of it.

1.  Treat myself as a renter and see it from the outside and see if the deal makes sense...and when I eventually move out and rent my unit, will the property positively cash flow.

2. Think of my side as my house and incur all expenses and mortgage separately as if I just bought a single family home and the 2nd unit was a single family home I was renting out.

I think i need to look at the property in the first way to make sure the investment makes sense, and look at the the property in the second way to see if I as a homeowner am satisfied paying 'X' mortgage.

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