Does this deal work?

Question

Hey, fellow investors, I need some advice on this potential house hack with a Fannie Mae Conventional Loan. I’ll be living in one unit and renting out the other three. Here are the numbers:

Purchase Details Location- Ohio

• Purchase Price: $249,900
• Down Payment: 5% ($12,500)
• Loan Amount: $237,400
• Interest Rate: 6.8%
• Loan Term: 30 years

Monthly Income (from 3 rented units, with me living in Unit 3)

• Unit 1 Rent: $735
• Unit 2 Rent: $925
• Unit 3 Rent: $725 - Minus
• Unit 4 Rent: $795
• Total Monthly Income: $2,455

Monthly Expenses

• Principal & Interest: $1,548
• Private Mortgage Insurance (PMI): $150
• Property Taxes: $317 (based on $3,790 annually)
• Home Insurance: $120
• Water & Sewer: $175
• Repairs & Maintenance (5% of rent): $123
• Capital Expenditures (10% of rent): $246
• Vacancy Reserve (5% of rent): $123
• Total Monthly Expenses: $2,802

Monthly Cash Flow

• Total Monthly Income: $2,455
• Total Monthly Expenses: $2,802
• Monthly Cash Flow: -$347 (out-of-pocket)

Annual Cash Flow

• Annual Cash Flow: -$4,164
•

Is there anything I’m missing? Does this look like a viable house hack, or would you pass? Appreciate any feedback or suggestions!

Victor Nganga · Answer

13605 Othello Ave, Cleveland, OH 44110

Matthew Porcaro · Answer

The ways to make a house hack work well are either:

1. You save yourself part or all of your living expense by house hacking. A win could be, if you're currently (or potentially could be renting) at $2,000 a month, and you find a house hack where you only need to contribute $1,000 a month, you're saving yourself $12,000 per year which could be saved or better invested into other assets.

2. You buy a good deal. You want to be a house hacker because you want to invest in real estate. Being an active investor in real estate means first and foremost seeking out and creating profitable opportunities.

In the case of your deal, its negotiating down with the seller to get the property at a discount.

Or, renovating the units using a 203k or other renovation loan to increase the value of the property and subsequently the rents of the other units.

Properties arent listed on the MLS to make you rich or wealthy. You need to seek out the opportunities by having a sound deal finding strategy or exit strategy (or both) by having a true plan to find deals that work this way.

Victor Nganga · Answer

Thanks, Matthew. Since I was moving to Cleveland anyway, my plan was to pay myself rent and have the other units help cover the negitive cash flow on the $250k property. I see now that reducing expenses or adding value with a 203k loan could make a big difference in making it profitable. I appreciate the advice on finding a strong deal and having a clear strategy.

Gladimir Lobo · Answer

As long as the mechanicals are sound, with 10% CAPEX, 5% vac and 5%.  It's a go!

James Wise · Answer

Numbers look great. So long as you are comfortable living in the neighborhood, no reason not to do the deal.

Samuel Diouf · Answer

You can't analyze a deal just off of the current rental income..

What neighborhood is this in? What are the sales comps? What's market rent in the area? What is the condition of the property?

Victor Nganga · Answer

You’ve got a good point. What numbers would make a house hack work well? I'm still trying to figure out the right numbers to make it profitable. Thank for your feed back.

Nathan Gesner · Answer

Total monthly income includes you paying rent. Where's the benefit?

You'll lose $4,000 this year. The only way you win is if you hold onto it long enough that it appreciates in value or the rent rates increase so much that you'll eventually offset the losses of the early years.

I wouldn't bet on either because your calculations are based on a perfect outcome. What happens if you get a bad tenant who stops paying rent and trashes the place? You could lose an additional $10,000 without batting an eye.

Does this deal work?

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