Help me review this deal! First hack.

1 Reply

Advice requested herein for my first home/investment proposal. If you can spare five minutes, let’s get into it. I sincerely appreciate the advice since this is a new venture for me.

Background: A few months ago, a discussion came up amongst about where to invest as an adult in thier mid 20’s. One of the responses that inspired me was when somebody mentioned “house hacking,” i.e., covering the cost of your living expenses by buying and and renting a home that will also be your primary residence. After two months of taking a crash course on real estate through books, forums, and by talking with investors, I’ve found a property that I want to do this with.

Situation: I’m on the cusp of placing an offer, but want to get opinions from the forums. Would love to challenge my hypothesis.

Details: Located in Belleville, NJ (north of Newark). This is a turnkey two family home with an upstairs and downstairs unit with separate entrances. There is also an unfinished basement where I plan to live post-renovation while maximizing my rental income by renting out the upper three bedroom one bath and main level two bedroom one bath units. The utilities are separated for each unit. There is parking available behind the house. The home is near a hospital and other professional business, which makes me confident in being able to find quality tenants.

Cost Analysis: (For the purposes of the analysis, I'm going to ignore the housing trends and not discuss appreciation or potential depreciation) The home is priced at 499k. The average homes in the area (or so I'm told) are going 8% over list. The realtor advised me to come in with a 527k offer. At 2.75% 30 year rate, I'm approved for the amount through an FHA loan. My down payment is 3.5% and closing costs will be another 2.5% of the purchase price. This comes out to $3450 per month after homeowners insurance also factored in. The upper and main level units should rent for (again, realtor guidance) $1700 conservatively to $2000 a month. Conservatively, I'm living nearly for free if the rental income matches my mortgage at $1700 per unit. Best case scenario, I'm cash flowing $300-400 a month. That's not taking into account reserves for needed maintenance and repairs, personal utility, etc. The breakdown for numbers people:

• $527,000 @ 3.5% down = $18,445

• Closing costs @ 2.5% = $13,175

• Immediate basement & other reno = $25,000***

Total Investment = $56,620

• Mortgage = -$3300/mo @ 30 years

• Renters insurance = -$150/mo

• Reserves for periodic repair, etc. = -$200/mo

• Rental income (conservative) = $3400

Total income = -$200 (by these very conservative numbers) to +$400 with a more optimistic estimate.

Summary: While the property may not be an income producing machine, I’m eliminating my monthly rent and putting equity into a home while breaking even or cash flowing. The crux of the decision is asking myself if I will want to keep this in my portfolio for 10+ years, and the resulting answer.

***Asterisk on the basement reno costs. Realtor estimates it will be $10-20k for the basement to be finished. It’s 1750 sq ft. I’ve seen quotes go much higher, curious what other’s have to say.

Thanks for your help! Can’t shake the feeling like I’m overlooking something.

Hey Nick,

Great write up and super glad to hear you are thinking of house hacking. One big question to ask yourself is how will the property perform after you move out? Will it cash flow or will you be paying to hold on to the property? If you will be paying, be careful of betting on appreciation as nothing is promised. 

While and FHA is a great option, it does not mean it makes for a great deal. Many people leverage high value properties not realizing that they will be left with a high mortgage payment.

Also, I think $20k for a basement reno is possible but if you only plan to live their for a few years, not sure it is worth it. 

In my opinion unless you plan to live in this property for the next 10 years, you are running the risk of holding a non-producing property with a high balance. This may also bring down your debt to income ratio depending on your salary. 

Another option may be to purchase a live and flip property instead. You could rent out a room while you work on the property allowing you to offset your living cost while building up some forced appreciation for a future sell. Usually this is done with single family homes.

I am curious to know what others think.

Good luck and keep looking for a house hack. Do not settle for the traditional route.