Example of Househack #'s I Almost Put An Offer On
Good morning my sweet people. This is a real example of a property that I checked out with a client - and I believe it provides insight into how the numbers can look on these type of deals.
I will breakdown the spreadsheet in 3 ways:
Figure 1 - While Living There
Figure 2 - When Moved Out
Figure 3 - After Private Mortgage Insurance (PMI) (This deserves its own article, I shall write on this in the near future. In the meantime, I linked a general description of what PMI is and how it works)
OK...I am going to show you a picture of the spreadsheet...promise me you won't freak out or get overwhelmed. Promise? Let's begin...
Figure 1 (While Living There)
Hey! You told me you weren't going to freak out. But it's ok. I will break it down for you. I don't mean by dancing either. For those that know me are well aware dancing has never been one of my strong suits. But enough of my nonsense.
Also, I must give credit where it's due - this spreadsheet was in large part created by Will Rawlings, one of my best friends. So we can blame Will for this stress inducing piece of art.
At the end of the day, the main things to keep in mind are Cash ROI (also called Cash on Cash Return) and Total ROI. Learn more about CoC and ROI here.
Oh, I forgot to mention that the dark blue boxes are the fields that require inputs to spit out the final numbers we care about.
Here are the assumptions we make:
Purchase Price: $485,000
Improvements: $3,000
Interest Rate: 2.6%
Downpayment: 3.5% (this is the downpayment for an FHA loan)
Vacancy Rate: 3% (usually 5-10% but this was an area of Boston that is almost guaranteed to always be occupied)
Total Rent: $3,000 (this isn't an assumption - this is what it's currently getting per month)
Here are the related expenses:
Taxes: $2,500
Insurance: $1,700
Maintenance and Repairs: $1,000
CapEx (Reserves): $270/mo
Private Mortgage Insurance (PMI): $500/mo
Note for PMI, this is only paid until you have 20% of equity in the home. Can you guess the amount of equity you have at the beginning of acquiring the home? 3.5% - the initial downpayment - and this increase every month as you (& your tenants) pay your mortgage.
When you get 20% equity, you stop paying for PMI - which will be a huge factor into turning this into a cash cow.
So, if you were to move into this house, the initial Cash on Cash would be -7.36% (assuming our assumptions are correct). But what really matters is that you would be paying $167/mo to cover the rest of the expenses related to the property after the tenants paid rent. This essentially means you are living for $167/mo - so you're not exactly cash flowing quite yet, you are living in Boston for next to nothing. OK. Time for Round 2.
Figure 2 (After Moved Out)
Congratulations! You've lived here for a year as your primary residence and you are now allowed to live elsewhere (and house hack another property!!!)
The main thing we changed here was increasing the rent from $3,000/mo to $3,600/mo.
There were 6 tenants in this home, including yourself. You charge an extra $25/tenant/mo which is $125/mo and rent out your old room to another tenant for $475/mo. And bam - $3,600/ mo.
And now look at our Cash ROI - higher than 20% in Year 2. Things are starting to look good. Oh, and a 116% return is just bonkers. This is because you only put 3.5% down on a ~$500,000 property and had the tenants pay the mortgage for the most part. Welcome to real estate!
But wait... the best is yet to come...we haven't even gotten rid of the PMI payment yet.
Figure 3 (After Private Mortgage Insurance)
Good things come to those who wait. Based off of these assumptions, around Year 6 or 7, you will have paid the 20% of your mortgage that is necessary to remove the PMI payment (this is assuming you don't use your extra cash flow towards paying off the mortgage quicker, so in reality you can probably get to 20% equity by Year 4 or 5). But at this point, the numbers just look ridiculous - nearly 56% Cash ROI in Year 7. The numbers yield $14,463/year or about $1,205/mo of straight cash flow. That's a pretty good deal!
Now take into account, there may be years where you have to use some of this cash flow to maintain the property.
Overall, this is how I run the numbers at a higher-level overview and gives a good gauge of what to generally expect.
It's clear that this is a pretty good deal, assuming our numbers are correct. In fact, it might be one of the best deals I've seen so far. However, we ended up not placing an offer for a few reasons. We learned that it would be difficult to attain financing because of the leases that were already locked in and wouldn't be able to close on this until late June. On top of that, the house was pretty crammed and didn't come with any parking. But oh well, there's plenty of deals out there.
In a nutshell, that's how it's done. I understand it might be a bit overwhelming, but like anything, it becomes a lot more digestible the more you practice.
I hope this article helps!