House Hacking with large negative cashflow, can it make sense?

Question

Hi all, I am a resident of Salt Lake City and I am going through major listing sites trying to analyze deals while I save up and increase my earning potential in order to invest in real estate in a few years. In my research I am focusing on house hacks for multifamily properties. The best listing I came across was a 4-plex for 985k with a cap rate of 5%, IRR of 10% after 20 years, and a cashflow of -1.7k a month assuming an FHA loan with 3.5% down @ 6.5% interest and rents of 1350/month. This is including the rent from the 4th unit even though I would be living there so in actuality the situation would be even worse.

I keep hearing stories on the podcast of people living in house hacks that are cashflow neutral or even positives with insane cap rates and IRR. Do people just invest in properties like this with the hope of rapid appreciation?

If anyone could chime in and let me know if this deal is good or not or give any personal anecdotes about any investments they have made with large negative cash flow I would greatly appreciate it.

For additional context I am looking at 413 E Herbert Ave. Salt Lake City, UT 84111 and using the rental property calculator on calculator.net

Logan McKay Zylstra · Answer

Hey Douglas. That is every house hackers in SLC’s dilemma. The only house hack opportunities that I’ve seen cash flow are single family houses and renting by the room. Not saying multi units won’t every cash flow but you have to be quick and sometimes creative to land the deal.

As a house hacked myself I am just looking at 4plexes and eating the negative cash flow. I am a buy and hold guy so I am okay not picking up the sexiest deals upfront and okay waiting for rent increases, debt pay down, and appreciation to its thing.

Douglas Johnson · Answer

Thanks for the response Logan, that all makes sense to me. I just wanted to make sure I wasn't crazy and botching the math or not looking in the right places. Ultimately these deals still have good IRR's that outperform the stock market if you can wait 10 or so years but having that negative cashflow makes them much harder to support with a smaller W2 income.

Account Closed · Answer

Though you can spot opportunities for appreciation and can hope for it, don't bank on it any further than 2-3%.

Make investments as they are, not as they could be. Not too familiar with the market, but $5400 monthly rents for a $985k home is far from the 1% rule many target when pursuing SF/MF rentals.

Austen Mueller · Answer

Every market is diffrent. For a return like that it aounds like it is a nice turnkey property. This may suit someone looking to capitalize on appreciation in the market and has a large sum of money they want to invest. The deal you mention I wouldnt be intrested in because I couldnt carry that. Maybe look at property that needs work or purchasing a single family home or condo, Moving, then renting it out. That househacking startygy could make more sense in your market.

For me persoanlly. I invested in a 2unit in Reading PA. Much cheaper market. I got my duplex for $170k. It is outdated and I have been fixing it up as I go. As I live in it. It does not cashflow. When I leave I anticipate a break even if not slighlty positive cashflow with market rents and some more updating.

Some of these pod casts cherry pick great deals in my opinion. Not that its imposible. But it should NOT be the standard you set for yourself. Because then you would never purchase haha. For a househack you should really be focused on your needs in your market. My househack was no Homerun deal. But I like where I live, and now that I actually own it I can start realizing the benfits of real estate investing. My living expenses are less than 90% of the people that live around me. Being that I probably pay around $600/mo bottom line, And that gets me a home Im happy to live in. I was able to increase the value of my property by fixing it up over the last year as well. All the while paying down my mortgage and saving money on taxes.

Focus on your needs and not trying to keep up with the househacking Jones's who get these crazy returns. It wouldnt surprise me if they fudge the numbers a little for more views, and take into account the year they did it. I doubt that many people have been getting those homerun deals since COVID and the drop of inventory unless it was a "genuine" off market deal they found and negotiated directly with the seller.

Hunter Gibson · Answer

Hi Douglas, I am currently house hacking. There are a handful of different option that you can do. Unfortunately Utahs market is not the best to house hack. I have a few clients who are able to live for free when they are in the home but that would be your best case scenario.

I would be happy to explain to you a few options if you have some time

House Hacking with large negative cashflow, can it make sense?

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