Please help me analyze this deal

11 Replies

Greetings everyone.

Currently I am analyzing multiple Duplex properties in the Dallas Fort Worth (DFW) area to buy my first deal via FHA loan and house hack it the first year. I have analyzed over 25 deals using the 50% rule and quite frankly I thought finding a good deal was going to be easier in this market. The properties I analyzed came from the MLS and personally none of them are worth pursing (using the 50% rule). I would like to walk you through my analysis to see if I am doing something wrong with my numbers.

Property: Duplex in San Rafael ST, South of Edgecliff Village in Fort Worth

Asking Price: $155,000

Down Payment (3.5% via FHA): 5,425

Loan Amount: 149,575

Loan Period: 30 yr

Interest Rate: 4.38%

Monthly Mortgage Payment (using BP mortgage calculator): 747.24

Income:

Unit A --> 695

Unit B --> 895

50% Rule:

Cash flow = (Income)*50% - (Monthly Mortgage Payment)

Cash flow = (895) *50% - 747.24 = -299.74*

* This computation was made only leasing unit B and living in unit A (house hack).

A few thoughts regarding this analysis:

1.The schools surrounding the area are below average schools (according to greatschools.org).

2.I am not including the monthly taxes, nor the monthly insurance in my analysis (I have not searched for this information. Is it important in this brief analysis?).

3.The Income information was taken from the MLS. Currently both properties are leased by that amount. If this property were to be a positive cash flow I would greatly consider removing these tenants from the property. I have read that most of evictions are caused by tenants already living in the properties.What are your thoughts on this? Also, should I take the Income information from the MLS or do you think this is not a good source of information (please go to "income" in the above analysis)?

@Juan Rosado

#1 on FHA loan you have to occupy the property. On Duplex you can live in one and rent the other side to help with your payment. They do ask for the leases. In this case one lease just renewed and the other is on a two year lease. You do have to honor the leases....so you can't get FHA loan on it. You have to find one either with month-to-month tenants or with one side vacant.

Unexempt taxes on this building is $3500/year.  So I estimate your monthly payment on $155,000 value and $150,000 loan is somewhere around $1165/month.  That includes your insurance and taxes.   So to me the house hack is not that you can live for free, or even get cash flow, but you can live cheaper. I would say this is the normal deal you will find around here.  Maybe even better than most.   Of course it would be a dream to find one like this for $100,000, but those seem to be very rare occurrences.

So you rent the expensive side, leave in the cheap side for $200-$300/month....not accounting for vacancy, repairs, reserves, leasing.   That's the hack....not to many places you can live around here for that cheap.  I'm not sure you can even rent a bedroom for that?

Howdy @Juan Rosado

When you analyze the properties make sure you do so as if you are not living there. Only use the 50% rule based on the full income potential. Not while living there. Use the FHA mortgage payments in the analysis. You want to know if the property will Cash Flow after you move out. If it will not there is no need going any further. Example:

Monthly Income (both units). = $1590

X 50% = $795

Cash Flow = $795 - $747.42 = $47.76

This deal will provide minimum Cash Flow once you move out.  Now you subtract the income loss from the unit you would live in.  $47.76 - $695 = ($647.42).  You have negative cash flow (which is normal while House Hacking).

To improve the deal you would need to have a lower purchase price and/or be able to increase rents.

Originally posted by @Bruce Lynn :

@Juan Rosado

#1 on FHA loan you have to occupy the property. On Duplex you can live in one and rent the other side to help with your payment. They do ask for the leases. In this case one lease just renewed and the other is on a two year lease. You do have to honor the leases....so you can't get FHA loan on it. You have to find one either with month-to-month tenants or with one side vacant.

Unexempt taxes on this building is $3500/year.  So I estimate your monthly payment on $155,000 value and $150,000 loan is somewhere around $1165/month.  That includes your insurance and taxes.   So to me the house hack is not that you can live for free, or even get cash flow, but you can live cheaper. I would say this is the normal deal you will find around here.  Maybe even better than most.   Of course it would be a dream to find one like this for $100,000, but those seem to be very rare occurrences.

So you rent the expensive side, leave in the cheap side for $200-$300/month....not accounting for vacancy, repairs, reserves, leasing.   That's the hack....not to many places you can live around here for that cheap.  I'm not sure you can even rent a bedroom for that?

Bruce, does the $3500/year taxes apply to every property in the Metroplex, or just in that area? How did you estimate the $1165/month?

Thank you in advance :)

Originally posted by @John Leavelle :

Howdy @Juan Rosado

When you analyze the properties make sure you do so as if you are not living there. Only use the 50% rule based on the full income potential. Not while living there. Use the FHA mortgage payments in the analysis. You want to know if the property will Cash Flow after you move out. If it will not there is no need going any further. Example:

Monthly Income (both units). = $1590

X 50% = $795

Cash Flow = $795 - $747.42 = $47.76

This deal will provide minimum Cash Flow once you move out.  Now you subtract the income loss from the unit you would live in.  $47.76 - $695 = ($647.42).  You have negative cash flow (which is normal while House Hacking).

To improve the deal you would need to have a lower purchase price and/or be able to increase rents.

Howdy @John Leavelle,

Thank you for your analysis. You caught my attention when you said "You have negative cash flow (which is normal while House Hacking)"? So its "normal" to have a house hack with negative cash flow at least in the DFW area?

@Juan Rosado The property taxes are based on the TAX value of the home and the tax rate for the location. TAX values are all over the place...sometimes too high, sometimes too low, but the best way for analysis is to use either list price or what you expect to pay and multiply by the tax rate. Typically the tax rate will be between 2-3% of the value of the home per year. For the payment I also estimated the insurance. I can send you a list of the tax rates. For any listing I can also quickly look and see if the taxes are listed. For insurance I know typically use about .75%/year. That could change depending on where you buy, what you buy, and some other factors...but that is probably a good ballpark. I'm also estimating your monthly MIP to be .8% based on 3.5% down payment and this price range. You can always check with your lender to get current interest and MIP rates.

@Juan Rosado what John is saying is that while you live in your house hack property, it’s okay if you don’t have positive cashflow, most people don’t. While you live there, the real advantages are you get owner occupied financing terms and you significantly lower your housing expenses. The property having positive cashflow matters when you move out of the property and it’s a 100% investment property. So when you buy, you first want to calculate as if it’s a straight up rental property to figure out what the positive cashflow will be. After that, you want to calculate how much it will reduce your housing cost and if it’s significant, then it’s worth a deeper look.

@Juan Rosado

Yes, from what I’ve seen, most House Hacks result in negative cash flow while you live there.  The exception is usually a 4-Plex or sometimes a Triplex.  The main thing you need to do is make sure it cash flows without you living there.

This thread helped me a lot! I'm in the Omaha area and have been looking into Duplex's, tri-plexes, and 4-plexes. I've been discounting the duplexes because most provided a negative cash flow and I've heard Brandon say once or twice if you don't make money on the day you buy, you bought a bad deal. But you guys are saying it's ok if the first year provides negative cash flow because you still get to live for super cheap (maybe a few hundred a month) and as long as it cash flows with both sides rented out, it's a good deal. I get all that right? I'm military so I'll most likely be using the VA loan process which doesn't require PMI. Still have to live there for a year, but can move out afterwards.

@Colby Fuller

Yes you understood things correctly.

@Juan Rosado

When I look at your numbers with both sides rented out, pm, taxes, ins, repairs, cap ex, and vacancy; this does not cash flow and is a bad deal in my book.  In the big picture you need to look at both sides rented out as the end result.  Excluding taxes and ins is what is throwing off your numbers.  Ignore the equity as its wrong.

Originally posted by @Bruce Lynn :

@Juan Rosado The property taxes are based on the TAX value of the home and the tax rate for the location. TAX values are all over the place...sometimes too high, sometimes too low, but the best way for analysis is to use either list price or what you expect to pay and multiply by the tax rate. Typically the tax rate will be between 2-3% of the value of the home per year. For the payment I also estimated the insurance. I can send you a list of the tax rates. For any listing I can also quickly look and see if the taxes are listed. For insurance I know typically use about .75%/year. That could change depending on where you buy, what you buy, and some other factors...but that is probably a good ballpark. I'm also estimating your monthly MIP to be .8% based on 3.5% down payment and this price range. You can always check with your lender to get current interest and MIP rates.

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