House Hacking

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Sean Oliver Jr
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Negative CoC ROI and Negative Cash Flow

Sean Oliver Jr
Posted Nov 10 2022, 15:31

Planning on living in a duplex where we would have a negative CoC ROI and a negative cash flow for the first year. Only planning on living there for one year because of the FHA rules. From there, I estimate we would be cash flowing $200-$300 monthly. Silly idea or is it wise to pull the trigger?

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Justin Brickman
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Justin Brickman
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Replied Nov 10 2022, 15:39

Depends on your situation and if you can’t find any better deals that work for your living situation. Many investors think it’s a bad deal if it doesn’t cash flow or make sense right away, which isn’t always the case. If you can add value, and you see higher rents and appreciation in the near future, it can be a home run down the line 

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Jonathon Hunt
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Jonathon Hunt
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Replied Nov 10 2022, 15:43

I look at it in two ways. 

1) Will house hacking with the duplex reduce your current monthly spend on rent? If yes, then I would go for it. If no, when you factor in principal reduction, are you doing better than monthy rent? If yes, I would consider it still if you are able to meet your other financial obligations.

2) Can you get a better return on your investment today for $200-$300 per month with the same amount of risk? Real estate is just one of many ways to diversify your funds.

Just some simple questions to get you thinking and moving in the right direction.

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Sean Oliver Jr
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Sean Oliver Jr
Replied Nov 10 2022, 15:50
Quote from @Jonathon Hunt:

I look at it in two ways. 

1) Will house hacking with the duplex reduce your current monthly spend on rent? If yes, then I would go for it. If no, when you factor in principal reduction, are you doing better than monthy rent? If yes, I would consider it still if you are able to meet your other financial obligations.

2) Can you get a better return on your investment today for $200-$300 per month with the same amount of risk? Real estate is just one of many ways to diversify your funds.

Just some simple questions to get you thinking and moving in the right direction.

I got confused when you got to the part about the principal reduction. Doing this house hack would in fact raise our monthly expenses. But you would still consider the deal because of principal reduction? Could you clarify?

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Sean Oliver Jr
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Sean Oliver Jr
Replied Nov 10 2022, 15:53
Quote from @Justin Brickman:

Depends on your situation and if you can’t find any better deals that work for your living situation. Many investors think it’s a bad deal if it doesn’t cash flow or make sense right away, which isn’t always the case. If you can add value, and you see higher rents and appreciation in the near future, it can be a home run down the line 

I think higher rents and appreciation is in the near future for this neighborhood. It will raise our living expenses but we’re still saving a decent amount of money each month even with the raised living expenses.

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Peter Mckernan
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Peter Mckernan
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Replied Nov 10 2022, 15:55
Quote from @Sean Oliver Jr:

Planning on living in a duplex where we would have a negative CoC ROI and a negative cash flow for the first year. Only planning on living there for one year because of the FHA rules. From there, I estimate we would be cash flowing $200-$300 monthly. Silly idea or is it wise to pull the trigger?


 So, $200-$300 after you move out? Is that what you are saying? That is not too bad especially if you are buying now at a discount and living for a year. Is there anything on the property that you can fix up to force appreciate to get higher rent when you move out (laundry in unit or something else). Thoughts for sure would be to even get an extra $100 here or $75.00 there 

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Sean Oliver Jr
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Sean Oliver Jr
Replied Nov 10 2022, 15:58
Quote from @Peter Mckernan:
Quote from @Sean Oliver Jr:

Planning on living in a duplex where we would have a negative CoC ROI and a negative cash flow for the first year. Only planning on living there for one year because of the FHA rules. From there, I estimate we would be cash flowing $200-$300 monthly. Silly idea or is it wise to pull the trigger?


 So, $200-$300 after you move out? Is that what you are saying? That is not too bad especially if you are buying now at a discount and living for a year. Is there anything on the property that you can fix up to force appreciate to get higher rent when you move out (laundry in unit or something else). Thoughts for sure would be to even get an extra $100 here or $75.00 there 

I’ll have to ponder on that. I’ll already be upgrading the house using a FHA 203k loan. It needs updates already. I’m not sure what I could update in the future to get extra cash flow. But to answer the first question, yes, $200-$300 a month after I move out. 

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Jonathon Hunt
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Jonathon Hunt
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Replied Nov 10 2022, 15:59
Quote from @Sean Oliver Jr:
Quote from @Jonathon Hunt:

I look at it in two ways. 

1) Will house hacking with the duplex reduce your current monthly spend on rent? If yes, then I would go for it. If no, when you factor in principal reduction, are you doing better than monthy rent? If yes, I would consider it still if you are able to meet your other financial obligations.

2) Can you get a better return on your investment today for $200-$300 per month with the same amount of risk? Real estate is just one of many ways to diversify your funds.

Just some simple questions to get you thinking and moving in the right direction.

I got confused when you got to the part about the principal reduction. Doing this house hack would in fact raise our monthly expenses. But you would still consider the deal because of principal reduction? Could you clarify?

 Sure. If you are purchasing this property with a loan, you will be making monthly payments. Part of this is interest you are paying on the loan, the other is principal paydown (paying down the total amount of the loan, usually over a 30 year period).

Here is some simple math:  

Duplex costs $300,000. 

Down payment: 20% ($60,000)

Total Loan: $240,000

Interest Rate: 7%

Term: 30 Years

Monthly Payment: $1,597 

This monthly payment, you are paying down a small amount of principal each month. In Month 1 in the example above, you would be paying down $197 of the loan amount. The remaining $1,400 would be interest. This will change over time where principal paydown increases (paying down the loan) and interest payment would decrease.

Below is a table looking at the total principal paid down per year for the first 10 years of this loan. You can also use this free calculator here to plug in your own assumptions: https://www.calculator.net/amo...

Beginning Balance Interest Principal Ending Balance
1 $240,000.00 $16,722.77 $2,437.99 $237,562.06
2 $237,562.06 $16,546.53 $2,614.23 $234,947.87
3 $234,947.87 $16,357.54 $2,803.22 $232,144.71
4 $232,144.71 $16,154.90 $3,005.86 $229,138.91
5 $229,138.91 $15,937.64 $3,223.12 $225,915.82
6 $225,915.82 $15,704.62 $3,456.14 $222,459.73
7 $222,459.73 $15,454.77 $3,705.99 $218,753.79
8 $218,753.79 $15,186.88 $3,973.88 $214,779.96
9 $214,779.96 $14,899.60 $4,261.16 $210,518.86
10 $210,518.86 $14,591.60 $4,569.16 $205,949.72

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Peter Mckernan
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Peter Mckernan
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Replied Nov 10 2022, 16:00
Quote from @Sean Oliver Jr:
Quote from @Peter Mckernan:
Quote from @Sean Oliver Jr:

Planning on living in a duplex where we would have a negative CoC ROI and a negative cash flow for the first year. Only planning on living there for one year because of the FHA rules. From there, I estimate we would be cash flowing $200-$300 monthly. Silly idea or is it wise to pull the trigger?


 So, $200-$300 after you move out? Is that what you are saying? That is not too bad especially if you are buying now at a discount and living for a year. Is there anything on the property that you can fix up to force appreciate to get higher rent when you move out (laundry in unit or something else). Thoughts for sure would be to even get an extra $100 here or $75.00 there 

I’ll have to ponder on that. I’ll already be upgrading the house using a FHA 203k loan. It needs updates already. I’m not sure what I could update in the future to get extra cash flow. But to answer the first question, yes, $200-$300 a month after I move out. 

 Yeah, that is a good move with that, the 203K loan is a higher interest rate loan due to the lender charging more for it so I would look at refi before you move out. Just a thought, might help that cashflow 

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Justin Brickman
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Justin Brickman
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Replied Nov 10 2022, 16:48
Quote from @Sean Oliver Jr:
Quote from @Justin Brickman:

Depends on your situation and if you can’t find any better deals that work for your living situation. Many investors think it’s a bad deal if it doesn’t cash flow or make sense right away, which isn’t always the case. If you can add value, and you see higher rents and appreciation in the near future, it can be a home run down the line 

I think higher rents and appreciation is in the near future for this neighborhood. It will raise our living expenses but we’re still saving a decent amount of money each month even with the raised living expenses.

 Awesome! Well best of luck my man!

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Sean Oliver Jr
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Sean Oliver Jr
Replied Nov 10 2022, 17:03
Quote from @Justin Brickman:
Quote from @Sean Oliver Jr:
Quote from @Justin Brickman:

Depends on your situation and if you can’t find any better deals that work for your living situation. Many investors think it’s a bad deal if it doesn’t cash flow or make sense right away, which isn’t always the case. If you can add value, and you see higher rents and appreciation in the near future, it can be a home run down the line 

I think higher rents and appreciation is in the near future for this neighborhood. It will raise our living expenses but we’re still saving a decent amount of money each month even with the raised living expenses.

 Awesome! Well best of luck my man!


 Thank you!!!

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Sean Oliver Jr
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Sean Oliver Jr
Replied Nov 10 2022, 17:04
Quote from @Peter Mckernan:
Quote from @Sean Oliver Jr:
Quote from @Peter Mckernan:
Quote from @Sean Oliver Jr:

Planning on living in a duplex where we would have a negative CoC ROI and a negative cash flow for the first year. Only planning on living there for one year because of the FHA rules. From there, I estimate we would be cash flowing $200-$300 monthly. Silly idea or is it wise to pull the trigger?


 So, $200-$300 after you move out? Is that what you are saying? That is not too bad especially if you are buying now at a discount and living for a year. Is there anything on the property that you can fix up to force appreciate to get higher rent when you move out (laundry in unit or something else). Thoughts for sure would be to even get an extra $100 here or $75.00 there 

I’ll have to ponder on that. I’ll already be upgrading the house using a FHA 203k loan. It needs updates already. I’m not sure what I could update in the future to get extra cash flow. But to answer the first question, yes, $200-$300 a month after I move out. 

 Yeah, that is a good move with that, the 203K loan is a higher interest rate loan due to the lender charging more for it so I would look at refi before you move out. Just a thought, might help that cashflow 


 Thanks for the advice! I appreciate you!

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Leo Ray#3 General Real Estate Investing Contributor
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Leo Ray#3 General Real Estate Investing Contributor
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Replied Nov 11 2022, 08:51

@Sean Oliver Jr when you say that it will cashflow $200-300 per month after the first year, I assume you mean that it will have that cashflow because you'll move out and rent the 2nd unit after the first year (correct me if I'm mistaken).

Is $200-300 month cashflow on a duplex "worth it"?  ...depends on a lot of factors.

If this property is a turnkey A class property, in an A or B neighborhood, in an area that has good appreciation, and you expect that the tenants will all be highly qualified (e.g.; traveling nurses, doctoral students, etc.), and your DP is minimal...then yeah--200-300 cashflow might be OK (but, you'll need to run your CoC numbers to know for sure).

But if the property is C or D class, in a C or D neighborhood, and the tenants will cause you endless headaches, and the property requires rehab and/or has looming capex, etc....then, no, $200-300 may not be worth the hassle.

There are properties that I know would cashflow THOUSANDS per month, but I wouldn't touch them with a ten foot pole because I know that the headaches the property and tenants would produce just aren't worth the money...

Also, you mentioned that you think higher rents and appreciation are in the future for this neighborhood...if your plan DEPENDS on higher rents/appreciation in the future, you're not investing, you're speculating. Your financial models need to stand up to stress tests where there's not only no appreciation, but where there's some depreciation (it can and does happen). ...everyone in 1965 Detroit assumed that future RE appreciation was a lock...well, not so much.   ...although you can (and should) try to find places you think will appreciate, at the end of the day, your financial models should not depend on unknown future outcomes that nobody can predict.

Good luck out there!

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James Wise#1 General Real Estate Investing Contributor
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James Wise#1 General Real Estate Investing Contributor
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Replied Nov 19 2022, 06:48
Quote from @Sean Oliver Jr:

Planning on living in a duplex where we would have a negative CoC ROI and a negative cash flow for the first year. Only planning on living there for one year because of the FHA rules. From there, I estimate we would be cash flowing $200-$300 monthly. Silly idea or is it wise to pull the trigger?


 Very wise...You're going to have to pay for the roof over your head, doing it this way is a great way to reduce that cost.

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Eric Fernwood
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Eric Fernwood
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Replied Nov 29 2022, 11:58

Hello @Sean Oliver Jr,

Rents and prices are related. Depending on the study, rents lag prices by 2 to 5 years. So, rents today reflect property prices 2 to 5 years prior. Rents lag prices because most rentals have a 1-year lease, so rent changes lag price changes. Initial returns are higher when prices have not kept up with inflation. The opposite is also true. The initial return is lower when prices keep pace with inflation. See the diagram below.

You have two basic options when you buy a property.

  • High initial cash flow and ROI - Such properties will not appreciate significantly. Due to the buying power erosion caused by inflation, the first rent check you receive will have the highest buying power you will ever receive.
  • High appreciation and rent growth - Such properties will have a low initial cash flow. However, cash flow and ROI will increase over time.

With 7% interest rates, finding a positive cash flow property in any high-appreciation location is unlikely. However, as rents increase in high-appreciation locations, so do cash flow and ROI.

Below is an example of a property with a negative initial cash flow, with an 8% rent growth.

https://www.lasvegasrealestateinvestmentgroup.com/nwassets/images/20220706-615.png

Buying a good property in a high-appreciation location makes sense, even if the initial cash flow is negative but acceptable. Real estate is a long-term investment.

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Christian Funicelli
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Christian Funicelli
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Replied Dec 6 2022, 14:39

Awesome response Eric, I just left LV yesterday :) 

That said, I'm in a very high appreciation market and low initial cash flow and ROI.

Even the bad neighborhoods have the same issue.

As someone looking for my first investment, any quick pointers on finding that balance? 

I'm seeing 4-7% CoC around here. on the high end. Using traditional financing terms. (20% down bank loan)

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Eliott Elias#2 All Forums Contributor
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Eliott Elias#2 All Forums Contributor
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Replied Dec 6 2022, 22:11

Wrong way of thinking about it, does it eliminate your living expenses compared to if you were to rent? If you're cash flowing when you move out you are in a good position 

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Mike Webber
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Mike Webber
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Replied Dec 13 2022, 09:03
Quote from @Sean Oliver Jr:

Planning on living in a duplex where we would have a negative CoC ROI and a negative cash flow for the first year. Only planning on living there for one year because of the FHA rules. From there, I estimate we would be cash flowing $200-$300 monthly. Silly idea or is it wise to pull the trigger?


In the DC market, having a duplex cashflow after 1 year is great. Especially if you are using an FHA loan with a lower down payment. I say go for it!! If you want another set of eyes on it, I'd be happy to take a look.

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Sara Frank
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Sara Frank
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Replied Dec 16 2022, 11:39
Quote from @Sean Oliver Jr:

Planning on living in a duplex where we would have a negative CoC ROI and a negative cash flow for the first year. Only planning on living there for one year because of the FHA rules. From there, I estimate we would be cash flowing $200-$300 monthly. Silly idea or is it wise to pull the trigger?


Very hard to cash flow on most properties using FHA loan, no matter asset class. But negative cash flow is not always a bad thing when you are house hacking, particularly if youre in an area where you might benefit from appreciation. $100-300 of negative cash flow is exponentially better than paying rent at any level IMO.

Real Estate Agent District of Columbia (#SP40001442) and Maryland (#5009910)

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Rick Albert
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Rick Albert
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Replied Dec 16 2022, 15:13

A couple of things to think about:

1. Could you live there longer if necessary to wait it out?

2. Are you really negative cash flow? Did you factor in tax benefits and loan buy down? I had a house hacking client almost cancel on a deal until she realized she was saving about $600/month in taxes after speaking with a CPA. 

3. The alternative is still renting, so you have to compare.

4. Is there an appreciation play where you could sell in two years, take the tax free money and reinvest in a better producing property?