Duplex House Hacking - Rental Income

20 Replies

Morning BP!  

I'm analyzing small multifamily properties (primarily duplexes) for my first owner-occupied investment.  

I have a general question about rental income: should the rent from the vacant side completely cover the mortgage, or is it feasible for the rent to only cover 70-80% of my mortgage?

Am I expecting too much from the rented side?  

Thanks so much !

Mark Douglas

Originally posted by @Mark Douglas :

Morning BP!  

I'm analyzing small multifamily properties (primarily duplexes) for my first owner-occupied investment.  

I have a general question about rental income: should the rent from the vacant side completely cover the mortgage, or is it feasible for the rent to only cover 70-80% of my mortgage?

Am I expecting too much from the rented side?  

Thanks so much !

Mark Douglas

It is really going to depend on your area. In some parts of the country you can find properties where one unit covers the mortgage all day long, in other areas you will be lucky if both sides cover the mortgage. It also depends on your loan type. A conventional loan will be a $400/mo payment for every $100k purchase price (with 20% down) VS a FHA loan will be $555/mo payment for every $100k purchase price (with 3.5% down)

Realize that the taxes and insurance included in your mortgage payment are only two of the many expense you incur with a rental. To be cash flow positive with a rental, the rent needs to be a lot higher than the PITI payment.

When evaluating a house hacking duplex deal, I would start by looking at the rent from both halves vs. the purchase price. And do the normal evaluation. That is, start with assuming 50% of gross rents go toward all expenses, then subtract the P&I part of the payment from the remaining 50% to estimate cash flow. Divide a year's cash flow by the total cash invested to determine ROI. If that's a good number (whatever you consider good), then it's a deal. If you're willing to self manage, drop that 50% for expenses to 35-40% because you will be doing the PM's job and earning what you would have paid the PM.

Now, consider the effect of you living in one half.  You will get no rent from that half.  OTOH the tenant in your half probably won't make you evict him, nor will he wreck the place.  But he may incur higher expenses than a normal tenant as he fixes the place up.  I'm talking about you, if that's not clear.  I'd also assume that you being right next door would deal with property management.   So, I'd keep the expense estimate at that same 35-40% number.  Total gross rents are just from the one rented unit.  Your cash flow estimate is then:

Cash flow = Rent from one unit - expenses - P&I

The determination about whether or not it's a deal is more complex than just COC = cash flow / cash invested because you're getting "free" rent out of the deal. I would argue you should add the rent you're not paying into the cash flow. Which is the same as I say in the first place - evaluate it as if both sides are rented. The cash flow estimate does matter, though. If that's negative, as is likely even with a good deal, can you handle it? That negative cash flow is really your "rent".

Great discussion. I'm doing the same, Mark. Currently looking for my first investment as a owner-occupied house hack. John, thank you for the in-depth explanation, as well. There really are more factors that go into a deal than you may initially think.

Thanks everyone for the input.  Brie, I'm in an over-priced Nashville, TN market.  Slim pickings for a "good deal", still searching though! Mikael, yes I definitely know where you're coming from..we've got to make sure we account for all these costs ...

Jon, Thanks for the in depth review!  It sounds like it's going to be difficult to cash flow...guess it comes down to the sale price.  I'll definitely refer to your advice, thanks again!

Mark, it's always possible to find a good deal but Nashville right now is pretty tough. Perhaps you could find a good wholesaler to get you a deal. Most likely the property will need some work, or you could create your own marketing campaign to find a deal. Finding anything on the MLS in Nashville is not really easy.

In terms of the one side covering the entire mortgage-very possible! You just have to pay the right price for the property.

Mark,

I would listen very closely to @Brie Schmidt and @Jon Holdman

Trying not to make a mistake can all be overwhelming if you let it.  At the end of the day you just have to pull the trigger. 

I have been looking at the Gross Rent Multipliers (GRM) for only duplexes in Nashville-Davidson County dating back to March-2015. In nice areas the rent multiple is around 130-140. The highest I have seen is 160-180. In Antioch it has been running between 114-136. In Hermitage and Madison high 80's - 103. And everywhere in Nashville is generally over 100.

Those are market rates and I would be looking to be at the low end or below the market rate - as an investor.  You have to be taking some risk to get a below market rate on most any piece of real estate. (In commercial real estate this is called a gross income multiplier (GIM) which is the inverse of a overall capitalization rate...anyway).

Here is how the GRM works. Lets say we have a duplex that rents for $500 a side ($1k per month gross) and it sold for $100,000. $100,000 / $1,000 = 100 GRM. Conversely, lets say you had a duplex that rents for $1,600 a month and everything was selling at 120 times rent, it would be worth $192,000 (or $1,600 month gross rents X 120 GRM = $192,000).

Deals are a matter of perception and what your individual goals are.  And this is exactly what Brie was saying.  People paying high GRMs are doing so in parts of Nashville where they anticipate the value of the property to appreciate organically creating equity for them or higher rents soon.  And when people pay lower GRMs it is because they are getting better cash-on-cash returns like Jon was describing.

Start looking at these numbers in your area.  I am not saying many buyers necessary consider this formula or this is the only thing to consider when purchasing a property - it is an appraisal tool, to be certain, and is one way to look at the market prices.

You should definitely be considering what Jon said.  And he has some other post about it.  The typical management cost in this area for something like this is 10% of gross rents per month and you need to include it in your expense calculations.

GRMs can help you gauge what is a deal and what isn't in a market.  It can help you figure out what someone would pay you if you wanted to sell.

You can see how finding something with below market rents, where you can raise the rents, can raise the value of your property.  So you are also looking for potential in an investment property.

Good Luck!

Definitely see your point about doing the math to analyze a deal;  I'll practice running the numbers a little more closely , rather than just looking at cash on cash returns.. 

I just bought my first owner occupied multi family house. I haven't yet rented out any unit, I'm debating on whether to rent the apt that would yield a larger rent or to be comfortable in the larger unit. 

@Mark Douglas My first house was a duplex, owner occupant.  Unless you buy something that needs alot of work, and I mean alot, I don't think you will find anything that you can rent out only one side and cover all of your expenses. My house needed alot of work, and there was not way I could have covered the expenses with one rent.

I have three duplexes, and my expenses run about $200 to $450 (80% to 68% of expenses) more than one units rent (rents range from $900 (2bed) to $1250 (3bed) per month. That's is only the reoccurring monthly costs (mortgage payment @ 75% or less LTV, lawn care, common utilities, etc). Any repairs, capital expenses would be on top of that. That works out to one units rent covering 68% to 80% of the reoccurring expenses.

Also, some banks will not count rental income since you are a new landlord, which may effect you.  I have heard that they are looking for at least two (2) years rental income records to count it in your total income, but that may very by bank.

The good thing is that multifamily sell for less $/ft2 than single family homes.

sofia, congrats on your first deal! Must be exciting :)  I'm 22, unmarried, no kids, so I don't need much space,  but if you've got a need for the space, I guess I would say use the extra room..  My first inclination is to go for the rental income, but whatever works best for you.  Congrats again on a big step :)

Mike, 

Sounds like I need to lower the bar just a bit....I can find a property with higher cash returns, but I'll be looking in a C class neighborhood... This first deal will be FHA owner occupied, so I'm having to be a little more "aware" of the location..

Trying to find a happy medium between a property in decent shape, in a decent neighborhood, and at a price that will cash flow $100/door ...or at least break even...

This is exactly what I'm seeing as I run the numbers on particular properties. It's just seemingly very difficult to cashflow house hacking a duplex. My best conclusion is to have the rented unit break even with expenses. Perhaps a triplex or 4 unit may be the better play if you're actually trying to cashflow?

Unless your market is crazy expensive, you should be able to analyze the deal with both units getting market rate rent and be cash flow positive.  Multifamily cash flow much better than single family homes.  I would not recommend looking at C or lower neighborhoods just to get the cash flow. Remember that you need to live there and be a landlord there also.  My rentals are in B/C areas, but as I continue, I am focusing on better areas.  Dealing with marginal tenants in C or D areas gets old.

Remember that you are getting to live in an area that want, for less than it would cost for a single family house.  Just cause you are not living for free, does mean that its a bad deal.  And when you decide to move, you can keep the duplex, rent both sides with good cash flow, and really start being a real estate investor. 

Mikael,

I'm definitely keeping my eyes open for 3s and 4s as well!  Let me know how your search is going, I hope you can snatch up a great deal!

Mike, 

I see your point...I shouldn't let a deal pass just because it doesn't cover the entire mortgage.. 

Trying to run the numbers here....just don't want to get impatient and buy something off of impulse.

I came across a duplex with PITI of $904, with one side renting for $750. I drove through the area a couple days ago.. I don't think it's an "A" neighboorhood, but it's definitely not a "C" either. I suppose a mortgage of $154 is better than my $690 apt rent! :)

You're right though, I'm excited to really see some cash flow on 100% rentals. 

Mark

Originally posted by @Mark Douglas :

Mike, 

Sounds like I need to lower the bar just a bit....I can find a property with higher cash returns, but I'll be looking in a C class neighborhood... This first deal will be FHA owner occupied, so I'm having to be a little more "aware" of the location..

Trying to find a happy medium between a property in decent shape, in a decent neighborhood, and at a price that will cash flow $100/door ...or at least break even...

 You're young and hungry, so here's my suggestion: set up a craigslist alert for duplexes for rent, and then start calling them every day to see if the owner would be willing to sell. It's a terrible time to be placing tenants, and you might find a tired landlord who'll work with you on a deal. 

Originally posted by @JT Spangler :
Originally posted by @Mark Douglas:

Mike, 

Sounds like I need to lower the bar just a bit....I can find a property with higher cash returns, but I'll be looking in a C class neighborhood... This first deal will be FHA owner occupied, so I'm having to be a little more "aware" of the location..

Trying to find a happy medium between a property in decent shape, in a decent neighborhood, and at a price that will cash flow $100/door ...or at least break even...

 You're young and hungry, so here's my suggestion: set up a craigslist alert for duplexes for rent, and then start calling them every day to see if the owner would be willing to sell. It's a terrible time to be placing tenants, and you might find a tired landlord who'll work with you on a deal. 

 JT -  I'll definitely try that, thanks for the tip!  You're right, I'm hungry for this!  I want to go this going!  Thanks again.

Mark

Originally posted by @Tok Im:

@Brie Schmidt thanks for the tip on VA and FHA 555 per 100K. That makes so much easier to run the potential numbers. The amazing rules of thumbs you learn on BP! :)

No problem. And conventional is $500 per $100k financed and FHA is $575 per $100k financed