How do you find house hacks that make sense?

Question

Where I'm located, a duplex in a decent area is going to run you at least $125k. Fully rented, rents in said decent area might be $1500-$1600/month. Taxes in Cleveland are generally high, with some areas being downright absurd. Assumptions include 10% for property management, 5% vacancy, 5% for repairs, 10% for capex, $75 for insurance and $100 for utilities. Considering those numbers along with a monthly mortgage payment of $620 (on a $125k property), I'm yet to find a deal that positively cash flows, and I've looked at a lot. I know the market is tight nowadays, but how is anyone finding deals? Are my assumptions bad?

Apologies for the rant - I'm new at this, but it's getting frustrating analyzing over 50 properties and not one positively cash flows (and some people want over $100/door....?).

James Wise · Answer

Using your figures you are expecting to spend $57,600 over the next 30 years on a duplex. That is not something you'll be doing. Look at it pragmatically.

• A roof on a typical Cleveland duplex will run you about $6,000. A Roof will last 30 years.
• A Hot water tank is gonna be about $1,000. You have two in the property & they last close to 15 years so that's $4,000 over the next 30 years.
• Furnaces last 20+ years so over the next 30 years let's say you replace each one. That's about $6,000.

That's your major big ticket items that will need replacement. Total cost over 30 years $16,000.

After looking at it this way do you really think you'll need to spend an additional $41,600 in other capital improvements?

Griffin Myers · Answer

Account Closed I mean obviously it would be nice if Unit 1 covered all costs for me, but it's not required. When I'm analyzing the deals, I'm assuming both units are rented, as I won't be living in the property after a year of purchasing (I'd move on to the next house hack).

Griffin Myers · Answer

@John Leavelle thanks for the response John. Taxes are exactly the issue - I’ve seen maybe 1 or 2 properties with taxes less rhan $2,000 and most I’ve seen haven $3,000 or more.

John Leavelle · Answer

Howdy @Griffin Myers

I guess I am missing something.  The property fully rented with $1,500 monthly income.  Expenses = $150 PM + $75 Vacancy + $75 Repairs + $150 CapEx + $75 Insurance + $100 Utilities = $625 (No tax)

Cash Flow = $1,500 - $625 - $620 P&I = $255 (without Taxes)

So the question is how much is the taxes? Is that whats making this a bad deal?

If it Cash Flows without you living there then it should be a good deal.  Do not expect to have positive cash flow while you live there.  You would need a 4-plex to achieve that goal.

Griffin Myers · Answer

Always appreciate the response @James Wise . Without thought I've kind of just followed the rule of thumb of capex being estimated at 10% of rent; it seems like that input might play a large part in all of my negative cash flow deals I've analyzed.

Instead of estimating capex at 10% of rents, do you think it would be reasonable to back into capex by dividing $20k (a little more conservative than $16,000) by 360 months to get a monthly allocation towards capex? Obviously this number might need increased on the front end if the duplex is due for a new roof, hot water tank, or furnace?

Griffin Myers · Answer

@Kris F. I was assuming tenant pays for everything but water. I think that kind of reiterates the issue I mentioned - I just don't see how any duplex that costs over $125k can cash flow using reasonable assumptions, unless rents are crazy high (like $2,000 a month vs. $1,500, or something unrealistic).

How do you find house hacks that make sense?

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