Does this deal make sense? Househack

Question

Hi all,

For the past few months, I have been looking for a house hack with a multi unit property. Already preapproved and working with an agent. One lead just popped into my radar, but I’m not sure if it makes sense. As a house hack, it makes perfect sense, and will save me money month to month over renting. My concern is that when I run the numbers given I’d move out and rent the other unit, the numbers don’t pencil out at all.

In the house hack scenario, I would be living for about $750 per month, which is significantly less than market. When I move out and take into consideration repairs, capital expenditures, vacancy, and possible management fees. The numbers come in at -$500 per month for a cash on cash of like -40%. Of course I would be using a low money down strategy, but I don’t know if this one makes sense to go through with given the long term play. There is not significant appreciation potential in the sub market where it is located.

Any thoughts are appreciated, thanks!

Ryan Thomson · Answer

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.

I would consider your net worth ROI. What I mean by this is considering how much your down payment returns to your net worth (appreciation, loan paydown, tax benefits, AND rent avoidance). Don't forget to include rent avoidance in your numbers! You have to live somewhere.

You may need to lower your return or cashflow expectations so you can 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.

Chris Seveney · Answer

Can you provide more information. What does the other unit rent for? What is your mortgage?

Reason i ask is something does not make sens, you are saying you can live there for $750 but if you move out you have a negative $500 per month. The only costs you will not have from living there now to when you move out is property management fees, which one could argue to still have a PM on the one unit so they know the building so when you move out they already know the property and tenant.

Nazanin Boojar · Answer

Are you talking about LTR? Because in STRtenants do not pay for utilities.

House hacking is all about STR and that's where the numbers make sense and the income pays off the expenses. Records show that an STR generates around 150% more money.

Derek Brickley · Answer

For me it makes sense to use conventional 5% down for this deal and then save my FHA loan for future use so with time PMI will drop off on its own.  If I end up refinancing when rates drop I will most likely have to refinance as an investment property which would have its own obstacles.  I was thinking of using seller credit to buy down the rate which could save $200 per month.  If I use a buy down for the rate and reduce repairs to $75 per unit.  I would be very close to breaking even (and as a househack first home purchase I would be happy with that).

John Warren · Answer

@Derek Brickley so here is the issue. You are using an FHA loan most likely, and you are baking in really high repairs, CapEx and management fees. I would quietly admit that you will self-manage this building and remove that. Then I would look long and hard at your repair and CapEx numbers. We on BP are sometimes so conservative, that we push ourselves out of a good deal. Can you budget $50 per unit per month for repairs and still make the deal work? What about $75 per unit?

I would also ask other investors in the area if the deal makes sense. Here in Chicago, I would push you to buy in this scenario as long as the building was in solid shape. Once you refinance in the future and remove the PMI, the deal will make a lot more sense.

Derek Brickley · Answer

Right, I guess I should clarify that when I run numbers for house hacking I am only including the expenses from the second unit.  The expenses for the unit I would live in I take as a cost of living.  Units rent for $750 but market is closer to $900.  My mortgage would be about $1,500.  Separately metered and tenants pay all utilities.

Does this deal make sense? Househack

Most Popular Reply