Is negative cash flow on an owner occupied property typical?

Question

I am currently stepping into the world of "house hacking" and trying to calculate my potential cash flow on an owner occupied duplex financed through a 203k. I have a list of potential properties that i am going to see but the numbers are not working out how i hoped it would.

In the areas of Baltimore that i am interested in living in, multi family properties are ranging from $100-$150k...(detached with a 2 car garage is what im going for)

So heres a quick break down of an owner occupied duplex:

Gross Potential Income: $13,200/yr ($1,100/mo)

Vacancy @ 8%: $1,056

Repairs @ 8%: $1,056

CapEx @ 5%: $660

Property Tax: $3,600

Insurance: $1,500

Net Operating Income: $5,328

Debt Service ($140,000 @ 5% for 30 years): $9,996

Cash Flow: -$4,668/yr (-$389/mo)

Seeing that I will be using a 203k to rehab the place upfront, am i overestimating my repairs & capex percentages? Would you consider this a poor take on "house hacking"? If i move out and rent the second unit, ill be positively cash flowing...but currently, it looks like ill be taking a small hit every month.

Any input, advice, recommendations will be appreciated.

John Santero · Answer

So its going to cost you $389 per month to live there. You are currently paying 1050. didnt you just save $661/mo?

Where can you live for $389/mo in your city? Plus if you are living in one side your vacancy rate should be adjusted.

Kyle Gregg · Answer

@Wayne Brooks @Adam Morgan @Steve Babiak @John Santero @Chris Harkins @Ned Carey

I've read several other threads regarding this topic and there's several things that are pretty clear...People keep arguing the fact that no investment property should cash flow negative, and i agree. On the other hand, a primary residence is not an investment, its an expense. "House Hacking" is a way to lower your expenses of your primary residence to potentially free up your income for other investments.

Once you move out and rent the unit, the duplex will become an investment property that hopefully cash flows positive if you make the numbers work initially as an investment property.

Thanks again everyone. its all pretty clear now.

Wayne Brooks · Answer

Well, of course you should expect some "negative cash" flow if you're occupying a duplex.  You're starting with a 50% "vacancy rate", which no rental investment would have good numbers at.

Steve Babiak · Answer

So here is what I see you doing in this calculation. You are treating the entire house as an investment on the one hand, but on the other hand you are only treating half the house as an investment. Since you will be living in half of the house, during the time you live there you will only get to depreciate half the house on your taxes. So I suggest you do two separate calculations in your analysis - one where only half the house is a rental, and the second where the entire house is a rental. Then decide if you can live with those numbers.  I'm going to guess that it will look better that way. Of course it would look even better if you could live for free, but lowering your housing expense isn't bad either.

Adam Morgan · Answer

The way I see house hacking a duplex is that it is going to be negative cash flow on a 2% rule calculation. It would have to make a 4% rule if you only "counted" half of the total potential rent. If the numbers work as if both sides were rented then it would be a good deal, you just have to decide if you are willing to pay that sides worth of rent to live. (On paper)

Kyle Gregg · Answer

i appreciate all the input. It has definitely made my question pretty obvious!

Ned Carey · Answer

Well is certainly is for a duplex. At least the way you are calculating it.

Chris Harkins · Answer

@Kyle Gregg , You are "improving" your situation only until you have an extended vacancy or a major unforeseen repair.

Don't forget to factor in a property management fee.. Trust me a made this mistake my on the first few I did.. It will consume time and while you may never physically take that money out to pay yourself.. Need to budget for it. Figure 10% per month, and may want to call around to a couple local companies to see what their rates are.. Here they may take anywhere from 50%-100% of the first months rent for placement.

In the event that you ever had to move for whatever reason, or ended up in a position to where you couldn't manage it yourself.. you'll be way happier you planned for it on the front end. That's just my 2c though.

You can definitely make it work, just be sure you have enough of a financial reserve to cover incidentals, loss of a job, etc. "The unknowns."

Good luck man!

Kyle Gregg · Answer

@Chris Harkins definitely not looking to live with roommates. I am currently paying $1050/mo in rent, so in a sense ill be improving my situation.

Chris Harkins · Answer

@Kyle Gregg Could you rent out a bedroom or 2 in your unit to make up the difference? I don't recommend negative cashflow as an "investment".

Is negative cash flow on an owner occupied property typical?

Most Popular Reply