Help with deal analysis on house hacking into a fourplex

[Steven DeMarco]

Hello everyone - wanted some help fleshing out my thoughts on this deal analysis for a fourplex in Utah. I'd be owner occupying one of the four units and using an FHA 3.5% down loan. Also, I may have the option to get a rate buydown from the seller, as that is mentioned in the agent remarks. Currently, I rent a 3BD/2.5BA apartment for $2,150/mo. This would be my second real estate investment. I currently own and operate a STR in Pittsburgh, PA.

Property Details:

- Current list price: $750K

- There are 4 units (3 1BD/1BA units and 1 2BD/1BA unit); I would owner occupy the 2BD/1BA unit

- There are leases in place for the 3 1BD/1BA units, total monthly rents: $3,185 (a bit under current market rents)

Year 1: House Hack

I would owner occupy the 2BD/1BA unit and keep the other renters in place.

- Loan Details: Up front Mortgage Insurance Premium would be 1.75% and Monthly Mortgage Insurance would be 0.55%

- Loan Amount: $736K @ 5.625% making my monthly mortgage payment: $4,853/mo.

- Annual Rent Avoidance: $5,784

Year 2: Rent all Four Units

I would adjust rent for all units to current market rents. In that area, Rentometer average rents are 1BD/1BA: $1,350/mo. and 2BD/1BA: $1,650. That brings total rental income to $5,700.

- Monthly Rental Income: $5,700

- Monthly Debt Service: $4,853

- Expenses: $1,143 (includes: Vacancy (3%) $171/mo., PM Fee (9%) $497/mo., Maintenance + Capex (8%) $475/mo.)

- Monthly Cash Flow: -$486

Using this free Rental Property Calculator, it shows that I would be negative cash flow from Year 2 - Year 5. If I sum up all the negative cash flow across these years, it would be about $14K in total. If you look into the details of that rental property calculator, I had to add the MIP (I would have to borrow $736K because there is a 1.75% tacked on to my loan amount) and PMI (added the monthly mortgage insurance to the "Insurance" field). I recognize that in these calculations, I'm not considering the loan paydown, appreciation or tax savings. I currently have strong W2 income and although the -$400/mo. figure is not terrifying, I'd like the property to float itself and not get in the way of future investments (negatively impacting DTI ratio for years to come).

So, is this a good deal? What else am I missing? Blow holes in this! Any and all advice/guidance would be very much appreciated.

[Carl Davis]

Hey Steve!

There’s some things that I do when I house hacks that determine if I want to buy or not, here’s my thought process:

1. Is it in a good area where people want to live. If you have this in place it’s a lot easier for me to have confidence moving forward through this list.

2. how can I make this a better deal for me? In this market I’m advising my clients that are house hacking to look at loan products that have them putting the least amount of cash down, and exerting the rest of their allocated funds to rate buydowns. Whether temporary or permanent. Your loan officer should be able to give you options but understand the differences between permanent and temporary ones. Seller can also contribute to this a bit as well depending on your product.

3. Can I add any value? Do the 1b/1b units have enough space to add a bedroom? If so if you added a bedroom in all 3 sounds like you’d have your cash flow right there.

4. Can I rent more creatively to increase cash flow? I know STR's are banned in SLC but still know people do them. Do what you would like at your own risk, MTR could be worth looking into as well.

5. Do I feel comfortable doing what’s most profitable? Go look at the Units and see if you wouldn’t mind living in one of the 1/1 units or if you could make it work. If you can AND you can do a combination of the other things on this list, you could potentially be cash flowing while living there.

When analyzing house hacks in this area I always think first if it’s in a good area and if so, HOW do I make this a good deal for me with as little effort as possible. I believe if you can do this when time goes on you’ll be cash flowing a lot more than you anticipate.

[Steven DeMarco]

@Carl Davis thank you so much for the thoughtful response. You gave me a lot to think about - here are my responses to your points specifically.

1. Short answer - yes. I think this is a good area that people would want to live. It is the "Ballpark" neighborhood of SLC, if you are familiar. It is a downtown feel that's walkable to nightlife, restaurants and shopping. Close proximity to airport, ski resorts and outdoor recreation.

2. I'm aligned here - only putting 3.5% down with FHA loan and pursuing options for seller credits and putting any of my own additional capital towards rate buydowns.

3. Might be tough to add more bedrooms due to square footage constraints. Each of the 1/1's are: 532 sq. ft., 576 sq. ft. and 715 sq. ft. This may be an option with the largest of the three 1/1's. I like the thought process here though.

4. Definitely not opposed to STR route, but would like to see the LTR fallback pencil out. I agree that there are inherent risks involved. MTRs would be a good middle ground.

5. This might be a tough sell with my partner. We both work from home and have a dog and a cat, so having a bit of breathing room is a priority but I wouldn't tank a deal over it.

All in all, I love your feedback and you helped me consider this from different angles. Thanks Carl!

[Carl Davis]

Glad to help!

With the units being so small it doesn’t seem like you can as much value besides raising rents to market value.

The benefit of this is you’ll be able to decrease your expenses. It’s really just taking a bet to see if rents will go up enough in the time you’re living there. 

Only you can really make the decision if you want to risk that.