House Hack Numbers Not Working (Follow up with a deal analysis)
Hey BP,
I recently shared some of my woes in finding a house hack deal that works numbers-wise so I wanted to share the details. Trying to consider the long term wealth benefits of owning real estate and not just the numbers themselves. My goal is to pay less than I would renting and get my feet wet with REI and landlording without bleeding too much every month. Please scrutinize the crap out of my numbers!
I'm going to paste a photo of my analysis so I don't have to type everything out but wanted to call out a few things:
-This is a duplex house hack where my fiance and I would be taking over one of the units.
-Taking 10% reserve for vacancy, PM, and Capex
-5% for repairs
-All other numbers are standard values based on my area. Need to do some more digging into utilities though.
-Current market rent is $1,250 per unit
Here is what numbers look like when I live there:
We currently pay $1,450/month in rent right now so that's something to consider. We'd be paying less than we would renting after taking conservative reserves.
Here is what numbers look like when I move out:
Negative cash flow but
1. Rate is 7%
2. Only put 5% down
3. Cash on Cash return is 52.7% (obviously we will put more cash into things throughout the year which will make the COCR lower.
Would love to hear people's thoughts! Thanks for your time :)
-Ben, aspiring multifamily house hacker
Hey @Benjamin Sulka, I applaud you taking the time to analyze your deal! So few starting investors do.
First I would urge you to sanity-test ALL your assumptions (like "10% reserve for vacancy, PM, and Capex" and "5% for repairs") by speaking with experienced investors in your market with similar properties. Then you can adjust accordingly.
Second, and most importantly, your calculation of cash-on-cash return is incorrect. For example, post-move-out it will not be 52.7%. It actually will be negative!
Cash-on-cash return = Cash_Flow / All_In_Cash_Investment
Your formula is calculating NOI / All_In_Cash_Investment, which completely ignores Debt Service and Capital Expenditures.
Better you make these adjustments now in a spreadsheet, rather than later on in your bank statements!
Quote from @Benjamin Sulka:
Hey BP,
I recently shared some of my woes in finding a house hack deal that works numbers-wise so I wanted to share the details. Trying to consider the long term wealth benefits of owning real estate and not just the numbers themselves. My goal is to pay less than I would renting and get my feet wet with REI and landlording without bleeding too much every month. Please scrutinize the crap out of my numbers!
I'm going to paste a photo of my analysis so I don't have to type everything out but wanted to call out a few things:
-This is a duplex house hack where my fiance and I would be taking over one of the units.
-Taking 10% reserve for vacancy, PM, and Capex
-5% for repairs
-All other numbers are standard values based on my area. Need to do some more digging into utilities though.
-Current market rent is $1,250 per unit
Here is what numbers look like when I live there:
We currently pay $1,450/month in rent right now so that's something to consider. We'd be paying less than we would renting after taking conservative reserves.
Here is what numbers look like when I move out:
Negative cash flow but
1. Rate is 7%
2. Only put 5% down
3. Cash on Cash return is 52.7% (obviously we will put more cash into things throughout the year which will make the COCR lower.
Would love to hear people's thoughts! Thanks for your time :)-Ben, aspiring multifamily house hacker
I input your assumptions into my model, but leaned less punitively. I'm curious about the high cable expense and $2,400 in utilities. Additionally, why is your capital expenditure so high — is this an older property?
You have the flexibility to adjust the assumptions in the model. Underwriting assumes 48% NOI margin and your cap rate is significantly lower than your cost of capital, resulting in negative cash flow. Also, your 7-year IRR is negative, which is concerning. COC calculates cashflow after debt.
Hope this helps!
Quote from @Sean Haley:
Quote from @Benjamin Sulka:
Hey BP,
I recently shared some of my woes in finding a house hack deal that works numbers-wise so I wanted to share the details. Trying to consider the long term wealth benefits of owning real estate and not just the numbers themselves. My goal is to pay less than I would renting and get my feet wet with REI and landlording without bleeding too much every month. Please scrutinize the crap out of my numbers!
I'm going to paste a photo of my analysis so I don't have to type everything out but wanted to call out a few things:
-This is a duplex house hack where my fiance and I would be taking over one of the units.
-Taking 10% reserve for vacancy, PM, and Capex
-5% for repairs
-All other numbers are standard values based on my area. Need to do some more digging into utilities though.
-Current market rent is $1,250 per unit
Here is what numbers look like when I live there:
We currently pay $1,450/month in rent right now so that's something to consider. We'd be paying less than we would renting after taking conservative reserves.
Here is what numbers look like when I move out:
Negative cash flow but
1. Rate is 7%
2. Only put 5% down
3. Cash on Cash return is 52.7% (obviously we will put more cash into things throughout the year which will make the COCR lower.
Would love to hear people's thoughts! Thanks for your time :)-Ben, aspiring multifamily house hacker
I input your assumptions into my model, but leaned less punitively. I'm curious about the high cable expense and $2,400 in utilities. Additionally, why is your capital expenditure so high — is this an older property?
You have the flexibility to adjust the assumptions in the model. Underwriting assumes 48% NOI margin and your cap rate is significantly lower than your cost of capital, resulting in negative cash flow. Also, your 7-year IRR is negative, which is concerning. COC calculates cashflow after debt.Hope this helps!
Yes, this is very helpful! The $2,400 in utilities is $200 per month x 12 months. In my market, landlords are responsible for water. I honestly think it will be more than $200 per month.
Properties in my market are older. 1910-1930 range.
Thanks for your response!
Quote from @Mitch Messer:
Hey @Benjamin Sulka, I applaud you taking the time to analyze your deal! So few starting investors do.
First I would urge you to sanity-test ALL your assumptions (like "10% reserve for vacancy, PM, and Capex" and "5% for repairs") by speaking with experienced investors in your market with similar properties. Then you can adjust accordingly.
Second, and most importantly, your calculation of cash-on-cash return is incorrect. For example, post-move-out it will not be 52.7%. It actually will be negative!
Cash-on-cash return = Cash_Flow / All_In_Cash_Investment
Your formula is calculating NOI / All_In_Cash_Investment, which completely ignores Debt Service and Capital Expenditures.
Better you make these adjustments now in a spreadsheet, rather than later on in your bank statements!
Mitch, that makes perfect sense! Thanks so much for taking the time to reply :)