Rents Only Cover Mortgage

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Rents Only Cover Mortgage

Stefan Gray
Member since 2017 · 23 posts · 12 votes

Hello bigger pockets community. After months of searching for a Duplex, I've finally found one. I plan on living in one unit and renting out the other eventually moving out and renting both units. Total income from both units is $2,700 but the mortgage is $2,600. I have about $10K in reserves. I am anticipating it to take a few years before the property will be able to cover (vacancy reserves, repairs, cap ex, property management etc). I'm anticipating 10 years before it will cash flow. This will be my first investment property. I plan on purchasing more in the years to come that have more favorable margins. What are you alls thoughts for a first time property? 

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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
4y

The members here probably own 10’s of thousands of properties. How many of those properties do you think they wish they  hadn't bought? 5? 50? On the other hand I bet there are 1000’s if not 10’s of thousands they wish they had bought but didn’t think he were “good enough” deals at that time. 

I assume you’re paying rent now and have no tax write offs. Add those benefits.  If this property only appreciates 5% per year you’ll make somewhere between 25% (20% down) and 100% (5% down) annually. 

Imagine you plan to hold this property for 20-30 years. The returns for the first year just don’t matter, even the first 5 years don’t really matter. Run the numbers 5 years from now after you’ve moved out. Calculate the increased rents providing more and more cashflow, decreased loan balances leading to more and more principle paydown. Don’t forget all this money will be tax free after depreciation, heck you’ll probably be carrying forward losses as you profit. If the property is currently fully rented you may get a lower property tax bill as an owner occupant. Sometime in the next 5 years interest rates will probably be lower than today making lower payments all but inevitable with the lower balance. 

There are markets where you need cashflow, markets where the properties will never appreciate and may actually depreciate. That’s why they cashflow, because nobody will pay more. It’s just a different type of investing where you may suffer from inflation (higher repair costs) while not benefitting as much as prices have caps. 

You forgot to put your location in your profile so we don’t know what your market is like. If your reply is that you’re in San Francisco or NYC, suddenly everyone will say yes, obviously this is a good deal. If you say something like northern MN, Ohio, or a small town in the Great Plains, I would join those saying no. 

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  • Eliott Elias
    Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
    4y

    Depending on what market you’re in you will be lucky to break even. House hacks don’t always have to cash flow. If you are even cutting your living expenses in half you’re winning

    1Reply
  • Curtis Mears
    Property Manager · Raleigh, NC · Member since 2014 · 728 posts · 596 votes
    4y

    @Stefan Gray

    If you are buying primarily for a place to live, and rent the other to cover the mortgage, then I would consider it. If you are doing it ad an investment, then you should find better numbers.

    1Reply
  • Stefan Gray
    OP
    Member since 2017 · 23 posts · 12 votes
    4y
    Quote from @Michael Paling:

    One thing that I wonder about with your original post is how are you running your numbers? Are you calculating them based off only having 1 unit filled since you're living in the other one? I just bought my first duplex and I'm doing the same thing, but I calculated my numbers as if I was my own renter, meaning that both units are filled. My income from the other unit will be $750/mo and that should cover or almost cover PITI. Then my "rent" to myself is responsible for maintenance, CapEx, vacancy, etc.

    and if it’s not cash flowing off the get go, move on. Have patience. You’ll find a better deal.

    Sure, my PITI would be reduced to $1,350 living in one unit. After I move out and have both units rented, my PITI would be completely covered as the income from both units bring in $2,700. I'm working with little money down so most deals I come across have these thin even negative margins. I'm curious, how much did you put down on your Duplex to make it work for you?

    0Reply
  • Kenisha B.
    Member since 2022 · 33 posts · 19 votes
    4y
    Quote from @Bill B.:

    The members here probably own 10’s of thousands of properties. How many of those properties do you think they wish they  hadn't bought? 5? 50? On the other hand I bet there are 1000’s if not 10’s of thousands they wish they had bought but didn’t think he were “good enough” deals at that time. 

    I assume you’re paying rent now and have no tax write offs. Add those benefits.  If this property only appreciates 5% per year you’ll make somewhere between 25% (20% down) and 100% (5% down) annually. 

    Imagine you plan to hold this property for 20-30 years. The returns for the first year just don’t matter, even the first 5 years don’t really matter. Run the numbers 5 years from now after you’ve moved out. Calculate the increased rents providing more and more cashflow, decreased loan balances leading to more and more principle paydown. Don’t forget all this money will be tax free after depreciation, heck you’ll probably be carrying forward losses as you profit. If the property is currently fully rented you may get a lower property tax bill as an owner occupant. Sometime in the next 5 years interest rates will probably be lower than today making lower payments all but inevitable with the lower balance. 

    There are markets where you need cashflow, markets where the properties will never appreciate and may actually depreciate. That’s why they cashflow, because nobody will pay more. It’s just a different type of investing where you may suffer from inflation (higher repair costs) while not benefitting as much as prices have caps. 

    You forgot to put your location in your profile so we don’t know what your market is like. If your reply is that you’re in San Francisco or NYC, suddenly everyone will say yes, obviously this is a good deal. If you say something like northern MN, Ohio, or a small town in the Great Plains, I would join those saying no. 


    Thanks for your response. Very thorough. This is also helping me make an informed decision on REI.

    1Reply
  • Stefan Gray
    OP
    Member since 2017 · 23 posts · 12 votes
    4y
    Quote from @Curtis Mears:

    @Stefan Gray

    If you are buying primarily for a place to live, and rent the other to cover the mortgage, then I would consider it. If you are doing it ad an investment, then you should find better numbers.

    Solid advice, thank you.
    0Reply
  • Stefan Gray
    OP
    Member since 2017 · 23 posts · 12 votes
    4y
    Quote from @Eliott Elias:

    Depending on what market you’re in you will be lucky to break even. House hacks don’t always have to cash flow. If you are even cutting your living expenses in half you’re winning

    Awesome, thank you for this. Just recently thought about that.  It's not just about making money but saving money is also an option.

    0Reply
  • Stefan Gray
    OP
    Member since 2017 · 23 posts · 12 votes
    4y
    Quote from @Jonathan R McLaughlin:

    @Stefan Gray here are the conditions under which I can see it possibly being a good deal:

    1) you want to live there for a while and the 1300+ expenses/reserves that you would essentially be paying in  your locked in "rent" allows you to live better and more securely and in a better location than you would otherwise. You essentially have a partial subsidy for a nice primary. If that is the goal and lets say owning or renting an equivalent property would cost you $3000 a month or what have you, you are doing great.

    2) solid prospect of rent increase and appreciation with manageable capex. This makes your paydown another source of potential wealth. We are clearly at the top of a cycle here, so don't expect mindblowing increases...

    3) can you condo these at some point? Are the utilities split and do local laws allow it? Having that kind of exit possibility could make a real difference. You could sell both, hold onto one at almost certainly cash flow positive nature.

    4) good potential of income increase separate from real estate. Is this your only play? Does the $1300 subsidy for your mortgage allow you to accumulate another down payment?


     Very insightful a lot of really good questions to consider.

    0Reply
  • Michael Paling
    Rental Property Investor · Gwinn, MI · Member since 2016 · 174 posts · 103 votes
    4y
    Quote from @Stefan Gray:
    Quote from @Michael Paling:

    One thing that I wonder about with your original post is how are you running your numbers? Are you calculating them based off only having 1 unit filled since you're living in the other one? I just bought my first duplex and I'm doing the same thing, but I calculated my numbers as if I was my own renter, meaning that both units are filled. My income from the other unit will be $750/mo and that should cover or almost cover PITI. Then my "rent" to myself is responsible for maintenance, CapEx, vacancy, etc.

    and if it’s not cash flowing off the get go, move on. Have patience. You’ll find a better deal.

    Sure, my PITI would be reduced to $1,350 living in one unit. After I move out and have both units rented, my PITI would be completely covered as the income from both units bring in $2,700. I'm working with little money down so most deals I come across have these thin even negative margins. I'm curious, how much did you put down on your Duplex to make it work for you?

    I had enough for a 20% down payment, so I kept going back and forth on how much I wanted to put down. I started looking around with a 5% DP in mind, but like you said, everything seemed to have pretty slim margins and didn’t cash flow well. However, if I looked at putting 20% down, then the cash flow was enough to make the deal much more worth it. In the end, I decided 20% would help me sleep better at night and force me to take things a little slower as I learn more about REI. Plus the numbers looked better with 20%. 
    1Reply
  • Stefan Gray
    OP
    Member since 2017 · 23 posts · 12 votes
    4y
    Quote from @Michael Paling:
    Quote from @Stefan Gray:
    Quote from @Michael Paling:

    One thing that I wonder about with your original post is how are you running your numbers? Are you calculating them based off only having 1 unit filled since you're living in the other one? I just bought my first duplex and I'm doing the same thing, but I calculated my numbers as if I was my own renter, meaning that both units are filled. My income from the other unit will be $750/mo and that should cover or almost cover PITI. Then my "rent" to myself is responsible for maintenance, CapEx, vacancy, etc.

    and if it’s not cash flowing off the get go, move on. Have patience. You’ll find a better deal.

    Sure, my PITI would be reduced to $1,350 living in one unit. After I move out and have both units rented, my PITI would be completely covered as the income from both units bring in $2,700. I'm working with little money down so most deals I come across have these thin even negative margins. I'm curious, how much did you put down on your Duplex to make it work for you?

    I had enough for a 20% down payment, so I kept going back and forth on how much I wanted to put down. I started looking around with a 5% DP in mind, but like you said, everything seemed to have pretty slim margins and didn’t cash flow well. However, if I looked at putting 20% down, then the cash flow was enough to make the deal much more worth it. In the end, I decided 20% would help me sleep better at night and force me to take things a little slower as I learn more about REI. Plus the numbers looked better with 20%. 

    I appreciate it Michael. Is your CoC where you want it to be aswell or are you holding it a little longer to get where you want to be? If so, how much longer before you expect those returns? Just curious because I'm considering going that route too.

    0Reply
  • Michael Paling
    Rental Property Investor · Gwinn, MI · Member since 2016 · 174 posts · 103 votes
    4y

    I think for the CoC return, it goes back to that notion of "you make money when you buy". If the CoC or other metrics don't meet what you're looking for when you're buying, then I'd keep looking. Don't buy something with the hope that someday it'll be where you want it. Personally, I was more interested in good cash flow versus a high CoC, but it's important to consider both

    My CoC is about 10% and cash flow is about $300 (I'd have to look at my spreadsheet to know exactly what they are). However, A couple things to note:

    1. Just reiterating that since I'm living in one unit, My numbers above are looking at the property as if I had my unit rented out (I'm the renter). In reality, I'm just living for free with no cash flow due to the other unit covering PITI. Once I move out in the next one or two years, the above numbers will be true

    2. Since I inherited a tenant, I have to wait until their lease is up in September to increase rent to market rates. Their current rent is $475 and market is $750. So I’ll have 3 months that aren’t meeting the number I’ve stated. I’ve already informed the tenant of the rent increase, and they’re still sticking around. 
    3. My tenant gets Section 8 assistance and I’m still waiting for the government to get through their stuff, and I’ve been told the first month or two are typically paid late. With that, it’s important to have reserves. 
    3. My tenant gets Section 8 assistance and I’m still waiting for the government to get through their stuff, and I’ve been told the first month or two are typically paid later. With that, it’s important to have reserves. reserves.

    Lots of things to think about there, but I hope it helps. 

    1Reply
  • Account Closed
    Jacksonville, NC · Member since 2021 · 16 posts · 10 votes
    4y

    I’m going to go against the grain here and say that it might be worth it. I’m in San Diego and wouldn’t at all mind owning a multi family that breaks even. Reason being is even though I’m not making money on cash flow (yet), I’m still building wealth through loan paydown, rising rents, and appreciation. 

    3Reply
  • Stefan Gray
    OP
    Member since 2017 · 23 posts · 12 votes
    4y
    Quote from @Account Closed:

    I’m going to go against the grain here and say that it might be worth it. I’m in San Diego and wouldn’t at all mind owning a multi family that breaks even. Reason being is even though I’m not making money on cash flow (yet), I’m still building wealth through loan paydown, rising rents, and appreciation. 

    Thanks for the feed back. Great point, I'm still building wealth. I'm ok with breaking even for a little while. 

    0Reply
  • Stefan Gray
    OP
    Member since 2017 · 23 posts · 12 votes
    4y
    Quote from @Michael Paling:

    I think for the CoC return, it goes back to that notion of "you make money when you buy". If the CoC or other metrics don't meet what you're looking for when you're buying, then I'd keep looking. Don't buy something with the hope that someday it'll be where you want it. Personally, I was more interested in good cash flow versus a high CoC, but it's important to consider both

    My CoC is about 10% and cash flow is about $300 (I'd have to look at my spreadsheet to know exactly what they are). However, A couple things to note:

    1. Just reiterating that since I'm living in one unit, My numbers above are looking at the property as if I had my unit rented out (I'm the renter). In reality, I'm just living for free with no cash flow due to the other unit covering PITI. Once I move out in the next one or two years, the above numbers will be true

    2. Since I inherited a tenant, I have to wait until their lease is up in September to increase rent to market rates. Their current rent is $475 and market is $750. So I’ll have 3 months that aren’t meeting the number I’ve stated. I’ve already informed the tenant of the rent increase, and they’re still sticking around. 
    3. My tenant gets Section 8 assistance and I’m still waiting for the government to get through their stuff, and I’ve been told the first month or two are typically paid late. With that, it’s important to have reserves. 
    3. My tenant gets Section 8 assistance and I’m still waiting for the government to get through their stuff, and I’ve been told the first month or two are typically paid later. With that, it’s important to have reserves. reserves.

    Lots of things to think about there, but I hope it helps. 


     Good read and very informative. That helped a lot. Thank you!

    0Reply
  • Luka Milicevic
    Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes
    4y

    @Bill B. THIS X1000000000000000000000000000000000000000000

    The amount of deals I passed because they didn't exactly meet my criteria. I saved myself $5000 at the cost of $200000. 

    The most important ingredient in real estate is time. 

    3Reply
  • Twana RasoulBusiness Member
    Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
    4y

    @Stefan Gray Simply looking at your numbers without knowing the location or how much money you are putting down makes it difficult to know if its a deal worth pursuing or not. Most are only Looking at initial cash flow on paper to give you feedback...in some areas of the country and based on down payment that would be a great first property to get going and in other areas of the country, that would be a terrible deal. For instance, if that was a deal in my market in San Diego or other areas of Southern CA like Orange County or Los Angeles and it was being purchased with a VA loan (0% down) or FHA loan (3.5% down) this would be a great way to start, even though you are not initially cash flowing...those markets have great long term value appreciation as well as rent appreciation. In some markets, in the middle of the country, this would be a terrible deal especially in those markets with very little to no appreciation, or even depreciation. In areas with no long term appreciation, you have to have significant cashflow right out of the gate to make up for that.

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  • Ricardo Hidalgo
    Real Estate Agent · Member since 2019 · 569 posts · 257 votes
    4y

    Property should cashflow from the first day you purchase. This situation seems better for house hacking then selling it when you could make a good profit. 

    0Reply
  • Steven Foster Wilson
    Rental Property Investor · Columbus, OH · Member since 2017 · 3k+ posts · 3k+ votes
    4y
    Quote from @Stefan Gray:
    Quote from @Steven Foster Wilson:
    Quote from @Stefan Gray:

    Hello bigger pockets community. After months of searching for a Duplex, I've finally found one. I plan on living in one unit and renting out the other eventually moving out and renting both units. Total income from both units is $2,700 but the mortgage is $2,600. I have about $10K in reserves. I am anticipating it to take a few years before the property will be able to cover (vacancy reserves, repairs, cap ex, property management etc). I'm anticipating 10 years before it will cash flow. This will be my first investment property. I plan on purchasing more in the years to come that have more favorable margins. What are you alls thoughts for a first time property? 

    Honestly, the cashflow is not sounding the best on this but would you be open to also renting out rooms on your side? That could bring you more $$$. On my most recent BRRRR here in Columbus is a duplex my mortgage is $1,824, we rented out the other side for $2,350 then I decided to rent out rooms in my side to a friend for $450 so I am not making a ton although I am happy with it. When I move out it will be even more, +this property has appreciated tremendously. 

    I always say the only thing I regret is not buying a property or trying to make it work. 
    Wow so one side covers the mortgage and then some.. that's awesome. How much cash did you put down on your hard money loan? Did you anticipate the returns to be as good as they were going into it?

    It was actually a Champ loan %3 down, no PMI (personal mortgage insurance) like on FHA but only in low-moderate income areas. I knew rents would go high because the area I purchased in was a up and coming area. I also went all out to make it a high end rental. I did a huge bathroom that is the size of a bedroom, I think that really sells it for renters.

    0Reply
  • Kristen Roberson
    Real Estate Agent · Houston, TX · Member since 2021 · 1 post · 0 votes
    4y

    One thing to remember is that when you go to buy the second property lender will only account for 75% of the rent payments as income. Meaning the other 25% counts as a deficit to your overall money that you're bringing in when looking at your DTI.

    You could rent the by the room, get roommates, and stay put until you earn your initial 10K back then you are essentially near $0 in the deal (high COC) but its a long term play. Most people want to come out ahead faster. Negotiate the deal for numbers that work for you, not the other way around.

    0Reply
  • Rick Albert
    Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
    4y

    Where is this property? 

    There are a couple of ways to look at it:

    1. It's a bad one because there isn't enough skin on the bone to turn a profit after you move. However, that's how many house hacks are when you are putting such a low down payment. The reality is, if the numbers worked putting 3.5% down, why wouldn't someone putting 20% down just snatch it up? We have to be realistic in our expectations.

    2. How else can you use the property? For example, instead of scaling by moving out, can you later on pull cash out and invest that money? Basically your property becomes the vessel to invest further. That's what I'm doing with my current house hack here in Los Angeles.

    3. What is the alternative? If options are limited and you are paying rent now, at least you are building equity (either through appreciation or mortgage pay down). It's still a win.

    4. Maybe it makes sense to sell it in two or more years and then scale up. You don't have to keep the property forever. 

    5. Your margin is $100 now, but can you refianced later on to open up that cash flow? I did that and saved me about $1,400 a month. That opened up the cash flow needed.

    I hope this helps. 

    0Reply
  • Devron Goodwine
    Member since 2019 · 34 posts · 11 votes
    3y
    Quote from @Stefan Gray:

    Hello bigger pockets community. After months of searching for a Duplex, I've finally found one. I plan on living in one unit and renting out the other eventually moving out and renting both units. Total income from both units is $2,700 but the mortgage is $2,600. I have about $10K in reserves. I am anticipating it to take a few years before the property will be able to cover (vacancy reserves, repairs, cap ex, property management etc). I'm anticipating 10 years before it will cash flow. This will be my first investment property. I plan on purchasing more in the years to come that have more favorable margins. What are you alls thoughts for a first time property? 


     Good luck my man. $100 profit is a small window of breathing room for repairs. 10k is a roof now of days. I would love to hear the updates and hope everything goes how you invision it.

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