House Hacking and Cash Flow

10 Replies | Chicago, Illinois

Hey!

I'm thinking about house hacking in the north side of Chicago (Avondale and the surrounding areas).  I've used a couple calculators to assess cash flow and stuff, but I'm wondering if there is a rule of thumb or something to determine how good a deal is?  Like, am I expecting cash flow while I'm living there?  Or just when I move out?

Thank you!

Jaclyn

Expect to pay less out of pocket while living there then you would pay renting a comparable apartment and to cashflow once you eventually leave and rent out the whole building. If you find something with an illegal basement or attic unit that's when you can sometimes live completely free or even cashflow while living free. 4 units also sometimes let you live completely free. 

Avondale is an awesome area one thing to note the rents will be a lot higher then you see on MLS as they have gone up a lot even in last few years. Most deals there at purchase are under market rents.

Originally posted by @Jaclyn Spinelli :

Hey!

I'm thinking about house hacking in the north side of Chicago (Avondale and the surrounding areas).  I've used a couple calculators to assess cash flow and stuff, but I'm wondering if there is a rule of thumb or something to determine how good a deal is?  Like, am I expecting cash flow while I'm living there?  Or just when I move out?

Thank you!

Jaclyn

For the most part on the north side the rule of thumb is not to expect cash flow while you're living in the property. The rents should just reduce your cost of living. A good deal should provide cash flow when you move out. How good a deal is up  to you- Do you expect 20% Return on Investment; 10%,..... Establish a target and evaluate potential properties against that target.

 

Originally posted by @Jaclyn Spinelli :

Hey!

I'm thinking about house hacking in the north side of Chicago (Avondale and the surrounding areas).  I've used a couple calculators to assess cash flow and stuff, but I'm wondering if there is a rule of thumb or something to determine how good a deal is?  Like, am I expecting cash flow while I'm living there?  Or just when I move out?

Thank you!

Jaclyn

 I have been househacking for 14 years and it still hasn't cash-flowed.  My measuring stick was comparable rent and balance sheet. 

We went balance sheet neutral about 7 years in.  The rent received plus the principal pay-down ($1000) on our 15 yr loan let us essentially live for free.  We are now balance sheet positive about $500/mo while  being cf negative about $900/mo.  $1400 in loan pay-down costs us $900 monthly. 

Comparable rents for our house would be $2100, but we are being 'paid' $500. See? Plus we may not be able to have our dog and we would have rising rent and owner sell out from under us risk amongst other runder their thumb rules. 

If we were to move out, it would cash-flow great.  Ours is not a typical plex, but more of a luxury househack.  Plexes should cf much better if you can handle that lifestyle. 

@Jaclyn Spinelli Avondale and some of the surrounding areas more life style areas and pricing in todays market is pretty high. Having said that your cash flow is going to be driven by the deal that you find in terms of purchase. Generally if you buy right it will cash flow but you will have to do some digging and then the other factor will depend on condition of the property. I own quite a few properties in Chicago suburbs but a recent purchase just south of Belmont (Just South Of Avondale) meets all the numbers we use. Some of these area in the city are what I call lifestyle or aspiration areas so you end up paying a premium for them and cash flow become tough. 

If you are looking to a house hack personally you use some back numbers that will set you up for the long term. So even after you move out of this property you can keep buying more and more properties and it's not based on your income in the future. 

75% of all rent collected should cover all expenses (Principal + Interest + Taxes + Insurance + Common Area Expense)

For Example you have a 2 unit Each will rent out for $ 1400 * 2 = $ 2800 

2800 * 75 % = 2100

Your Goal should be to hit 2 numbers 

#1 75% of rent collected covers all your expenses. 

# 2 DCR (Debt Coverage Ratio) - Min of 1.33%

If you keep these tow numbers in mind you will never go wrong and you can keep building one after the other regardless of your job situation. You can keep scaling property after property as long as you keep these numbers in mind. 

So assume you pay $150/ Month in common area expense like heating+ Water + Garbage etc. (Notice I did not put Cap X expense) that should not be taken into account when you do house hacking you will have plenty of cash flow if you follow these numbers. 

Insurance - $ 1000 per year  Property Taxes: $ 3000/ Year

Now if you we take the 2100 and all the expenses into account you can buy up to a $ 334,645 property and still hit all your numbers. You should be able to buy a 3 flat for that all day long all your numbers will be better. 

If you buy a 2 flat. When you are living in the your property it will cost you $ 700/ per month out of pocket to own it. When you move out you will have $ 700 in cash flow. 

If you buy a 3 flat. You will break even and make money. You will make even more money once you move out. 

I have attached the pics and calculation. Hope that helps. 




It should definitely cash flow upon move out but typically doesn't when you live there. There are quite a few things that can come up with these old Chicago properties. Be sure to have reserves for this as it may eat into savings you expect/project from rents. I have a house hack in Irving park currently. Happy to share my experience and help out in any way that I can!

@Jaclyn Spinelli I think it is all about your hold period and finding a great asset. If you can buy one of the beautiful masonry or stone buildings here in Chicago then you are likely to do well over time. It sounds like you have already been scoping out areas that are gentrifying. Don't expect major cash flow while you are there and don't expect to live for free while there unless you are dipping your toes into a tougher area. 

Originally posted by @Jaclyn Spinelli :

Hey!

I'm thinking about house hacking in the north side of Chicago (Avondale and the surrounding areas).  I've used a couple calculators to assess cash flow and stuff, but I'm wondering if there is a rule of thumb or something to determine how good a deal is?  Like, am I expecting cash flow while I'm living there?  Or just when I move out?

Thank you!

Jaclyn

 One thing you want to consider is timing. The market is really competitive now because of the foreclosure moratorium. You might (keyword is might) find a better cashflowing deal later this year with more foreclosures on the market. 

That said, if you search enough you can find a great deal in any market.

Hey Jaclyn, I just closed on my first house hack in Avondale at the beginning of the month. I recommend checking out the House Hacking calculator @Tom Shallcross and @Mark Ainley put together on the Straight Up Chicago Investor website. That's what I used to run my numbers. In Avondale you probably aren't going to be living for free unless you find a really killer deal or do a lot of work. 

My deal was a framed 2 flat(each 2 bed 1 bath) + garden unit and unfinished attic. If I had put no work in and didn't get a roomate then I was coming out at the same Hard Costs (not accounting for Maintenance, Vacancy, and CapEx) for my new 2 bed that I was previously paying for my rent share of a 3 bed 2 bath in lakeview. Then after a good mount of sweat equity and getting a roomate I'm expecting to be breaking even to maybe netting ~$50/month before putting aside savings for contingencies. So overall not living totally for free, but definitely a lot better off than I was before when I was renting.

@Jaclyn Spinelli

I think to answer your question, you are looking for the 1%/2% rule...  Depending on your market, If the monthly rent is say 1% of the purchase price then its potentially a good deal.  For example, purchase $200k and rent 2k a month.  That meets 1% and so run the detailed numbers on it.  You change your percentage depending on your expectations / market.  This lets you quickly pre-screenproperties without having to run all the numbers.

As far as cashflowing, it depends on your market and depends on your investing goals...

I hope this helps.  Good luck.