calculating house hacking yield correctly
Hi there, I'm trying to (properly) calculate the yield for a potential ADU build that would allow me to house hack my second primary residence. I purchased a new primary residence 4 months ago. I'm looking at a construction to perm 10/6 ARM refi, so I can build an ADU. This will greatly increase my revenue and allow me to House Hack. My questions are is these:
1) If I borrowed the funds to close on the new Refi loan (from my HELOC from property #1), do I include those payments as an expense when calculating the yield?
2) Should I include the original cost to acquire the property (the new primary loan taken out 4 months ago) when calculating the yield?
Thanks so much
Jill
Thanks for the question, Jill!
First, I'd zoom out and analyze the property debt free.
What's the total income from rents (long or short-term) while you are living there? What is the market value of the rent you'd be paying if you were a tenant)?
What are the total expenses (imagine you had a full-time property manager charging 10% of rents, and you've moved away). Include vacancy (7-10% of rents) CapEx (NO less than $250 per month unless your property is brand, BRAND new), Maintenance (NO less than $1,000 per unit per year), etc.
Run these conservatively to get the yield of the property.
Now, layer in the debts. You'll have a primary mortgage, which will layer in principal and interest.
Then, if you are using a secondary debt, layer that in. For something like an interest only HELOC, assume a reasonable payback period. For example, if you borrowed $60,000 on an interest only HELOC, plan to pay it back over 5 years ($1,000 per month), acknowledging the reality of the HELOC as a short-term debt source. Take the $1,000 per month, plus the interest, out of your cash flow calculation.
The original cost to acquire the property is useful. Know it, but run your analysis assuming all previous expenses are "sunk costs" and you are moving on, starting today, with a new investment decision. It's what will happen from this moment onwards that counts.
thank you so much for your advise!
Hey @Jill Rene Petik,
I'd also look into your ARV after the house hack ADU build. Do you have comps to support the cost of the ADU to recoup your expenditures to build? Have you talked to lenders on the refinance side about recapturing the costs in regards to appraisals supporting the value of the property after construction?
it might be worth running comparables to see if the cost of construction will be supported. I'd hate to see you drop $60k and then not be able to refinance because your equity only increased $40k and you can't refinance out to pay off the HELOC which will eat into your cashflow with interest-only payments.
I know most oregon counties are pushing for ADU's to be allowed for all SFR homes due to lack of inventory for housing, but we don't have a lot of comparables right now to support new builds. Most ADU's are from older additions that were grandfathered in or were permitted a long time ago. I'd bet that 90% of ADU's that are currently rented out right now are not permitted too. And a lender may only look at ADU's that are legally permitted.
I hope that helps! I think 10 years from now, we'll see a lot more ADU's enter the market and enter transactions that will support the costs of adding them, but it's hard to say today if you will achieve the highest ROI on the build. It's not a bad idea, I just don't know if there are enough supporting comparables to get you to the refinance portion successfully.