Is this house hack a bad deal?

Question

Under contract on duplex in a great neighborhood. Purchase price is $276,000. Rent per unit would be $1200-1400 per month, likely on the higher end of that. I got my monthly payment yesterday, and now am having second thoughts, as I hoped the mortgage would be lower so rent would cover most of it because my agent led me to believe the mortgage would be roughly $1500/month.

The home is only 7 years old with likely minimal maintenance. The way I see it, renting out both sides would be profitable. However, living in one side still leaves me with likely $1,000 after factoring in maintenance/capex savings, plus utilities. Should I reconsider?

5% down @5.875% interest

P&I-$1551

Insurance~$185

Taxes~$260

Pmi-$80

Total-$2085

Jevon Shaw · Answer

@Mohammed Rahman is spot on. Whether or not it’s a bad deal is somewhat personal. If, for example, you’d be paying $1500 per month in rent for a similar unit, but in this house hack you're only paying $1000 net after expenses and debt service, that sounds like a decent deal to me, assuming it cash flows when both units are rented

Emma Vallery · Answer

Hey Taylor!

I am located in Columbus Ohio and I would consider that a decent deal! If the home is newer you are going to run into less problems down the line, so it may be worth the lower cashflow in the beginning. You also have to consider rent will most likely increase from year to year. I think ultimately you have to look at the opportunity cost here, is this a property you want to have money tied up in or do you think you can find something more worth your time.

Derek Brickley · Answer

Actually Freddie Mac’s HomePossible allows owner-occupied 2-4 unit properties with as little as 5% down.  Only catch is the income requirements, but can be a great way for well qualified buyers.

Ryan Thomson · Answer

@Taylor Robertson

House hacking is tough to cashflow in year one (with current house price run-ups and interest rates) for a couple reasons:

1. You are living in one of the rentable units

2. You are only putting 5% down so your loan amount is much larger and therefore your mortgage payment.

Lower your standards and get into a house hack that will allow you to avoid throwing rent money away every month. You know this, but don't forget all the other ways real estate makes you money. Paying down your mortgage and owning an asset that will appreciate over the long term.

If there is a lot of opportunities WAY better in your market than maybe wait. But if that's going to be true for most of your market then waiting comes at a large opportunity cost.

Simon Ashbaugh · Answer

It seems like a good deal to me. Im in Columbus Oh and its hard to find somewhere to rent in a good area for $1,000 so thatd be a good deal here. For me, as long as it cashflows when i move out, and its less than id pay for rent elsewhere, I'd count it as a win!

Derek Brickley · Answer

What I always recommend is that you run the numbers as if you will rent both sides, to see what you could expect.  In terms of a successful househack I think the most important thing is to reduce your current living expenses.  If rent in that area generally runs 1200-1400 and you’re living there for 1000 that can still be considered a success.  However it really depends what you’re looking for.  As mentioned above the payments really is something that your lender should have nailed down early on in the process.

Benjamin Aaker · Answer

Also keep in mind that you will be building equity in the project. It's easy to get discouraged when cash flow isn't where you want it to be. When living in the place you might be willing to accept negative cash flow, but you can't do that indefinitely when expanding. Low cash flow isn't always a bad thing, in fact, it might be good. Good in that you are putting that money into the property, avoiding tax, and building equity. That might make the deal worth it to you when you look at exit strategy.

Lawrence Potts · Answer

Hey @Taylor Robertson,

Are we looking for a home run every time we go up to bat, or can we live with base hits? What you think is a good deal is dependent on your goals and what you’re wanting the property to accomplish for you. To some, it’s a bad deal because some people want X amount of cashflow. Other people don’t even care about cashflow and would purchase with negative cashflow if it meant they would save on taxes, etc. So it’s dependent on you.

Now I can assume some of your goals based on the limited info. You’re house hacking your second property so cashflow seems important.

The way I see it, renting out both sides would be profitable. However, living in one side still leaves me with likely $1,000 after factoring in maintenance/capex savings, plus utilities. Should I reconsider?

If it’s going to be profitable when you move out and rent both sides, I’m not seeing why this isn’t a good deal? $1,000/month + depreciation + tax write offs for interest & repairs/maintenance on other unit + equity + principal paydown + appreciation seems like a good deal to me! Don’t get so stuck on one metric that doesn’t match a previous deal you got years ago. Comparing the two doesn’t make sense because you’re in two different markets (interest rates primarily). I would not reconsider.

So I do have some red flags though:

1. Your agent is NEVER going to be spot on with your monthly payment. They’ll have an idea, but your lender will let you know ahead of time if you ask them. If you’re already under contract, did you submit a preapproval letter with your offer and did your lender not go over estimated mortgage payments with you?

2. 5% down @5.875% interest

P&I-$1551

Insurance~$185

Taxes~$260

Pmi-$80

Total-$2085

I have hesitations with this: typically you cannot go 5% conventional on a 2-4 unit owner occupied. You either can go 3.5% FHA or go 20-25% down conventional. I highly encourage you to double check with your lender about this (unless they are offering a 5% down product that we should all know about!). This could break a deal if your lender doesn’t understand this. And I’m surprised the listing agent didn’t pick this up as well when reviewing the offer.

Mohammed Rahman · Answer

Hey @Taylor Robertson - I'm an investor & realtor. When you crunched the numbers on this deal before going under contract, were you not aware of your mortgage payment? This would be something your lender (and you) are supposed to work out together.

That being said, whether or not it's a bad deal depends entirely on you! For me personally, $1k/month in cashflow WHILE I'm living in the house and work in the area is a great deal.

For you, that might be a bad deal, and to others it might be a 'meh' deal. Just depends on what your goals are. If you were targeting a higher cashflow and end up hating it, you can always just walk away since you haven't closed on the property yet.

Good luck!

P.S. Don't forget that the rent you charge will go up every year but your mortgage payment will stay fixed, just something to consider.

Is this house hack a bad deal?

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