How to analyze a duplex that I will be house hacking

Question

I am a newbie at analyzing and just upgraded to Pro so I can use calculators. Yay!! I am trying to analyze a duplex that I would be house hacking in. What is a good cash on cash return or is there something else I should be looking at? If I move into the duplex I could rent the other unit for $1800/month and rent other assets on the property (office space and rv/boat storage garage) for $500. I am currently paying $1400/month for an apartment that I would love to get out of and into the duplex if I can analyze this correctly. Any insights? Thanks!!

Susan Grinde · Answer

Yes, it makes perfect sense. I think we need to have a better idea of what our intentions are with the property. Thanks for your insights!!

Jordan Grimstad · Answer

@Susan Grinde Whether or not it's a good investment depends on your goals/intentions with the property. If you intend to move out in 2 years and rent the portion you were living in out to another tenant, you'd likely want to evaluate the property as if you weren't living in it at all and make sure that it was hitting the returns you were looking for. That is - being able to cover the mortgage with someone else's money is great, it doesn't automatically mean that the cashflow on the property is hitting the rates to make it a great investment.

In contrast, if this was your forever home and being an owner-occupant was the plan in perpetuity, there are still clearly better or worse deals you could make. Since you're not making money on the cashflow, you will need to look to make money on some other piece (appreciation, tax benefits, or loan amortization; betting on appreciation is a gamble, and tax benefits aren't really a moneymaking vehicle [more just a money saving vehicle], so you're pretty much just left with trying to amortize the biggest loan possible).

Does that all make sense?

Susan Grinde · Answer

You are correct when you say at best I would be covering my mortgage. So I guess I can't look at it as a cash on cash return since there really won't be much positive cash flow. Would you consider it a good investment, however, if we just live cheaply by having the mortgage covered by our rents? This is a first purchase for my husband and I in a viable area, so being able to live cheaply is appealing. I would hope we could be diligent in saving the money we currently pay to our landlord ($1400 per month) for future investments that would have a positive cash flow.

Jordan Grimstad · Answer

• What's a good CoCR?This depends on your other opportunities for investment and your risk tolerance. For example, I've seen 12% CoCR as a particular target number that some investors go by (see below). You can go with a lower or higher rate of return as long as you feel like you're being adequately compensated for the risk you're taking, the time that it takes you to find the deal, and for the opportunities you're forgoing.See minimum acceptable rate of return, which includes the line: "Most companies use a 12% hurdle rate, which is based on the fact that the S&P 500 typically yields returns somewhere between 8% and 11% (annualized). Companies operating in industries with more volatile markets might use a slightly higher rate in order to offset risk and attract investors."
• This depends on your other opportunities for investment and your risk tolerance. For example, I've seen 12% CoCR as a particular target number that some investors go by (see below). You can go with a lower or higher rate of return as long as you feel like you're being adequately compensated for the risk you're taking, the time that it takes you to find the deal, and for the opportunities you're forgoing.
• See minimum acceptable rate of return, which includes the line: "Most companies use a 12% hurdle rate, which is based on the fact that the S&P 500 typically yields returns somewhere between 8% and 11% (annualized). Companies operating in industries with more volatile markets might use a slightly higher rate in order to offset risk and attract investors."
• Anything else you should be looking at?I think it's important to evaluate some of the qualitative characteristics of the property to ensure its long term viability as an income stream (i.e. is it in a good school district, low crime, near a corporate campus, etc. etc.). No one characteristic (or missing characteristic) is a dealbreaker as far as an investment goes - it just needs to be factored into the risk you wish to take on and the return you're expecting.
• I think it's important to evaluate some of the qualitative characteristics of the property to ensure its long term viability as an income stream (i.e. is it in a good school district, low crime, near a corporate campus, etc. etc.). No one characteristic (or missing characteristic) is a dealbreaker as far as an investment goes - it just needs to be factored into the risk you wish to take on and the return you're expecting.
• Other thoughtsWithout seeing your calculations or assumptions, it's hard to say if you're overestimating/underestimating expenses - can you share your thoughts?What are your expectations on when you'll see the return? Unless you've found an insane deal, I'd be surprised if you were seeing a positive cashflow net of all operating expenses while you were living in one of the units - at best, you're probably looking to cover your mortgage + some, but will still need to pay some out of pocket for maintenance and taxes. In other words, you will be living cheaply while you live in the house, but you won't be pocketing positive cashflow (again...unless you found an insane deal).How confident are you that you can secure the rents you're quoting?
• Without seeing your calculations or assumptions, it's hard to say if you're overestimating/underestimating expenses - can you share your thoughts?
• What are your expectations on when you'll see the return? Unless you've found an insane deal, I'd be surprised if you were seeing a positive cashflow net of all operating expenses while you were living in one of the units - at best, you're probably looking to cover your mortgage + some, but will still need to pay some out of pocket for maintenance and taxes. In other words, you will be living cheaply while you live in the house, but you won't be pocketing positive cashflow (again...unless you found an insane deal).
• How confident are you that you can secure the rents you're quoting?

@Susan Grinde Hi Susan, here are my thoughts:

• What's a good CoCR?This depends on your other opportunities for investment and your risk tolerance. For example, I've seen 12% CoCR as a particular target number that some investors go by (see below). You can go with a lower or higher rate of return as long as you feel like you're being adequately compensated for the risk you're taking, the time that it takes you to find the deal, and for the opportunities you're forgoing.See minimum acceptable rate of return, which includes the line: "Most companies use a 12% hurdle rate, which is based on the fact that the S&P 500 typically yields returns somewhere between 8% and 11% (annualized). Companies operating in industries with more volatile markets might use a slightly higher rate in order to offset risk and attract investors."
• This depends on your other opportunities for investment and your risk tolerance. For example, I've seen 12% CoCR as a particular target number that some investors go by (see below). You can go with a lower or higher rate of return as long as you feel like you're being adequately compensated for the risk you're taking, the time that it takes you to find the deal, and for the opportunities you're forgoing.
• See minimum acceptable rate of return, which includes the line: "Most companies use a 12% hurdle rate, which is based on the fact that the S&P 500 typically yields returns somewhere between 8% and 11% (annualized). Companies operating in industries with more volatile markets might use a slightly higher rate in order to offset risk and attract investors."
• Anything else you should be looking at?I think it's important to evaluate some of the qualitative characteristics of the property to ensure its long term viability as an income stream (i.e. is it in a good school district, low crime, near a corporate campus, etc. etc.). No one characteristic (or missing characteristic) is a dealbreaker as far as an investment goes - it just needs to be factored into the risk you wish to take on and the return you're expecting.
• I think it's important to evaluate some of the qualitative characteristics of the property to ensure its long term viability as an income stream (i.e. is it in a good school district, low crime, near a corporate campus, etc. etc.). No one characteristic (or missing characteristic) is a dealbreaker as far as an investment goes - it just needs to be factored into the risk you wish to take on and the return you're expecting.
• Other thoughtsWithout seeing your calculations or assumptions, it's hard to say if you're overestimating/underestimating expenses - can you share your thoughts?What are your expectations on when you'll see the return? Unless you've found an insane deal, I'd be surprised if you were seeing a positive cashflow net of all operating expenses while you were living in one of the units - at best, you're probably looking to cover your mortgage + some, but will still need to pay some out of pocket for maintenance and taxes. In other words, you will be living cheaply while you live in the house, but you won't be pocketing positive cashflow (again...unless you found an insane deal).How confident are you that you can secure the rents you're quoting?
• Without seeing your calculations or assumptions, it's hard to say if you're overestimating/underestimating expenses - can you share your thoughts?
• What are your expectations on when you'll see the return? Unless you've found an insane deal, I'd be surprised if you were seeing a positive cashflow net of all operating expenses while you were living in one of the units - at best, you're probably looking to cover your mortgage + some, but will still need to pay some out of pocket for maintenance and taxes. In other words, you will be living cheaply while you live in the house, but you won't be pocketing positive cashflow (again...unless you found an insane deal).
• How confident are you that you can secure the rents you're quoting?

• This depends on your other opportunities for investment and your risk tolerance. For example, I've seen 12% CoCR as a particular target number that some investors go by (see below). You can go with a lower or higher rate of return as long as you feel like you're being adequately compensated for the risk you're taking, the time that it takes you to find the deal, and for the opportunities you're forgoing.
• See minimum acceptable rate of return, which includes the line: "Most companies use a 12% hurdle rate, which is based on the fact that the S&P 500 typically yields returns somewhere between 8% and 11% (annualized). Companies operating in industries with more volatile markets might use a slightly higher rate in order to offset risk and attract investors."

• I think it's important to evaluate some of the qualitative characteristics of the property to ensure its long term viability as an income stream (i.e. is it in a good school district, low crime, near a corporate campus, etc. etc.). No one characteristic (or missing characteristic) is a dealbreaker as far as an investment goes - it just needs to be factored into the risk you wish to take on and the return you're expecting.

• Without seeing your calculations or assumptions, it's hard to say if you're overestimating/underestimating expenses - can you share your thoughts?
• What are your expectations on when you'll see the return? Unless you've found an insane deal, I'd be surprised if you were seeing a positive cashflow net of all operating expenses while you were living in one of the units - at best, you're probably looking to cover your mortgage + some, but will still need to pay some out of pocket for maintenance and taxes. In other words, you will be living cheaply while you live in the house, but you won't be pocketing positive cashflow (again...unless you found an insane deal).
• How confident are you that you can secure the rents you're quoting?