Contractor · San Mateo, CA · Member since 2021 · 7 posts · 4 votes
I am currently saving up money (about 82% of my income a month) for a down payment for my first rental property in which I plan to house hack to pay for the mortgage. In the meantime I wanted to practice finding a good deal by “running the numbers” or analyzing deals in my area so that I become familiar with the terminology, the process, and ultimately what to look for in a good deal.
I know every deal has a number that makes it work... how do I find that number for a househack rental property?
I currently reside in the San Francisco Bay Area (San Mateo County) and work as a general contractor. I also understand prices to be higher here compared to most other areas across the country, but numbers are numbers. Can anyone help?
Rental Property Investor · Northern Virginia · Member since 2019 · 793 posts · 620 votes
5y
@Tyler Villaroman That's great you such a high savings rate to save for a house hack!
As @Anthony McEvoy stated, the numbers in every market are very different. You may run the similar numbers, such as cash flow, cash-on-cash returns, etc., but the results and what may be considered a high or low return is specific per market.
A good or bad return is also dependent on your personal investment goals. Are you investing for cash flow or appreciation? Are you looking for immediate cash flow? A 8%-10% cash-on-cash return may be a "great" return to one investor but not even worth consideration for another investor looking for 15%+ returns.
In the Bay Area, you are most likely going to see lower cash flow and cash-on-cash returns unless you look for a rehab project or can convert unused space into rentable space. You'll also likely be buying for future appreciation. I did a house hack when living in the Bay Area and sold my investment in 2019. It is possible, you just need to make sure you buy right.
Investor · Champaign, IL · Member since 2018 · 160 posts · 114 votes
5y
@Tyler Villaroman - Every area is different because things like taxes and local regulations will fluctuate the expenses. Start with adding up all of the annual expenses. Things to consider are property taxes, registration fees, maintenance (typically around 6, 8, or 10% of the rent depending on the condition of the home), insurance, and vacancy rate. Compare that number against the rental income you could receive. You will start to notice a trend of where the final purchase price needs to be (don't forget about closing costs!). From there, you could determine what you need to purchase a house for based on the work it will need.
Rental Property Investor · Northern Virginia · Member since 2019 · 793 posts · 620 votes
5y
@Tyler Villaroman That's great you such a high savings rate to save for a house hack!
As @Anthony McEvoy stated, the numbers in every market are very different. You may run the similar numbers, such as cash flow, cash-on-cash returns, etc., but the results and what may be considered a high or low return is specific per market.
A good or bad return is also dependent on your personal investment goals. Are you investing for cash flow or appreciation? Are you looking for immediate cash flow? A 8%-10% cash-on-cash return may be a "great" return to one investor but not even worth consideration for another investor looking for 15%+ returns.
In the Bay Area, you are most likely going to see lower cash flow and cash-on-cash returns unless you look for a rehab project or can convert unused space into rentable space. You'll also likely be buying for future appreciation. I did a house hack when living in the Bay Area and sold my investment in 2019. It is possible, you just need to make sure you buy right.
Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes
5y
@Tyler Villaroman first off, great job on the savings rate. That's awesome and impressive. Second, I think its awesome that you're gaining knowledge with deal analysis in the meantime. You're taking all the right steps. Lastly, since you're doing a househack, maybe you could just base your analysis on "will the rent cover my mortgage?" Here's how you can do that:
1) You can either just run mortgage calculators, or there are excel functions that will calculate your mortgage payment. Plug in your purchase price, interest rates and other information and you'll get your mortgage.
2) Go on Zillow, Rentometer, Apartments.com and other sites to get a couple different rent projections. How does rent compare to your mortgage calculated in step 1?
3) Decide on if you should go for it or not. Maybe you want to profit, maybe you just want to break even, maybe you don't mind paying for a certain % of the mortgage. Either way, if it works while you're living in it, it will be a cash flow monster when you move out and get the other side rented.
It might not be the best analysis for a traditional rental, but you're not traditional renting, you're househacking. Good luck!
Contractor · San Mateo, CA · Member since 2021 · 7 posts · 4 votes
5y
@Anthony McEvoy thank you. I will do some research on these metrics and take notes along the way - trends will most definitely reveal themselves for my specific area.
Contractor · San Mateo, CA · Member since 2021 · 7 posts · 4 votes
5y
@AJ H. Thank you. It sounds like I need to get specific with my goals in terms of return. My short term goal is for cash flow (to counter the mortgage) and my long term goal is holding these properties as long as possible to build my portfolio over the long run with appreciation and getting creative to add value where I can - be it cosmetic, structural, adu, etc.
Contractor · San Mateo, CA · Member since 2021 · 7 posts · 4 votes
5y
@Tucker Cummings thank you for these MINS and the advice. Going off what you said, breaking even will keep me around a similar savings rate to which I am currently operating and in that case it will make a great deal, and anything on top of that will be a cherry on top.
Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes
5y
@Tyler Villaroman exactly, you're still living for free. Then when you move out, you'll make awesome cash flow. I've never househacked, but from what I hear from most people, the goal is to get within 10% of your mortgage.
Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
5y
@Tyler Villaroman I always advise clients to run numbers as though they are not living in the unit. Here in Chicago, that typically means breaking down how heat, hot water, trash, etc are paid. It also means digging into where rents can be raised on legacy tenants. This allows them to compare this to any other investment opportunity. I think the main mistake most house hackers make is that they expect to live for free AND make a profit. They don't count the free rent as what it is (tax free income).
Real Estate Agent · Member since 2019 · 192 posts · 131 votes
5y
@Tyler Villaroman I think a good place to start is the BP house hack calculator. You need a pro membership to use it unlimited times, but you can do a certain amount for free and start to get a sense of how they're breaking down expenses. I would suggest just pulling properties you would consider and plugging them in to get comfortable with the exercise of analyzing a deal.
Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes
5y
A quick back of envelope analysis you can do is what is the Rent-To-Value [RTV (best to be ≥1%)].
For instance, if you buy a duplex for $300k, you want the rent to be at least $3,000 per month. Though this isn't a full analysis, this method can serve as a quick yay or nay for you before doing a deep dive on every deal you come across.
Sure, a deal can be at 0.8% RTV and could still work.
Rental Property Investor · San Francisco Bay Area · Member since 2020 · 17 posts · 5 votes
5y
Fellow Bay Area(n) here. Honestly for me to househack here, I'd be happy if I can just live here for free. Or even negative a couple hundred every month. Because that's still cheaper than what 95% of the people are paying in this area. The 1% rule or RTV is not going to work here, if you buy a property for $800k(which is very normal here and on the cheaper end), that's definitely not going to rent for $8000.
And like someone mentioned above, hoping for future appreciation. And I don't think rental would be an issue. But I'd use the current rental rate to calculate, rather than pre-Covid rental rate, just to be safe.