As a new investor looking to house hack, what would you say is a good Cash on Cash return for someone who's using an VA or FHA loan? Does it matter, or should I be focused on the future result of having both units rented out?
Like you said I calculate based on what the future numbers are when I'm not there. I try to make as much as possible when I house hack, but if it's break even (ie I have no housing expense) I consider that a huge win! Even if you are "losing" some money per month depending where you live, your housing expenses are still reduced by tenant income. And you also get the other benefits of owning real estate
VA is one of the most expensive loans you'll get in terms of the funding fee paid up front. It is also one of the most cumbersome in terms of paperwork and inspections, though FHA is no cake walk. Expect to kill at least one medium sized tree. *grins
Joking aside, one of the best ways to buy real estate and get a good deal is with a quick closing and few contingencies. FHA and VA loans are the opposite of that: they take a long time to close and are filled with contingencies. Sure, they are low down payment, but that comes at a cost, not just in loan fees but also in paying a higher price to convince the seller to go thru all the hassles.
To tie this into your question, the better price you pay and the lower loan costs mean you will have a much better chance of cash flowing positively or losing less. The fact that you are getting free rent when having roommates or other renters helping pay should be factored into the equation. So if your unit would rent for $800 or $1000 or whatever, work that into your numbers as if someone else were paying it. You aren't getting any income from your residence, but your free living space is balanced by the expense of not receiving market rent for it.
Keep in mind: you will not be able to fully deduct expenses for any place where you are living. Expenses will have to be apportioned at tax time based on what percentage is being rented for income vs. personal use, including depreciation I think. The reduction of tax benefits must be considered if you want to compare apples to apples.
I house-hacked my first property (triplex) many moons ago through an FHA, and I never looked at it through the lens of Cash-on-Cash, especially while you're still living there.
I looked at it through the lens of: How much will I be making per door when I move out?
Cash-on-Cash return gets horribly skewed when you're coming to the table with so little money, anyways.
Smaller properties operate on thinner margins so you probably won't make much more than $200-300/unit (after accounting for all expenses (and I mean all!)).
Factoring in the extra costs of an FHA loan, I would expect that cashflow to be closer to $100/unit, honestly.
Then again, real estate is hyperlocal so it all depends on your specific market.
@Christian Jaictin Congratulations on starting with house hacking. That is a great strategy to start out with. My vote is that it does not matter. Obviously, you don't want to get upside down and it would be nice to cover the note if not all the expenses. Renting them both out in the future is the icing on the cake and then you can move on to the next one with everything you have learned. Very smart!
@Andrew Powers well said. Having as close to $0 cost of living is the goal of house hacking.