First-time Philly House Hacker

[Jeremiah Belocura]

Hi all, first-time [future] house hacker.  My wife and I are moving back to Philly and have found a duplex we're interested in, both units being 2 bed/1 bath at roughly 750 SF.

I used the BP Rental Property Calculator, which honestly I'm not sure I'm even using correctly and/or might be over or underestimating various factors.

Does this look like a good deal?  Am I understanding correctly that our effective rent would be $1,767?

Even when we move out and rent out the other unit, currently I think this neighborhood would only get $1,400 each, so according to the calculator, it would still be burning cash instead of cash flowing.

Thanks for any help!

[Gerald Knott]

Just glancing at the numbers it’s pretty close. Just really depends on the neighborhood that you are selecting with rent. The city does has quite a few additional fees you want to factor. I know from experience when starting out. You may not see any cash flow for another three to five years. Aside from a few tweaks I’d suggest.

vacancy - I’d budget a bit more based on any potential evictions process and how long it may take to remove tenant you want a safe reserve for potential holding cost.

feel free to reach out for answers to any questions.

- Gerald Knott, 🇺🇸 Marine Corps Veteran, Buyers Agent @ Realty Mark Cityscape 🌎 

[Joshua Filkill]

Continuing off of @Gerald Knott I usually include management fees in my calculation for when. don't want to manage it on my own in the future when I move out, unless you plan on managing it yourself for awhile. Also, what type of loan are you planning to use? May want to budget for PMI if using FHA or another low down payment loan that requires PMI.

May want to also check on who pays utilities for that place.

[Michael Gussin]

@Jeremiah Belocura congrats on beginning your real estate journey! I have worked with beginner investors and house hackers for 5+ years now, if you have any questions on the financing side; pre approvals, programs, guidelines, etc. don't hesitate to reach out!

[Alan Asriants]

Hey Jeremiah, I have a feeling I know what duplex you are talking about lol! I invest in the phila area and would be happy to help you run some numbers on rentals and what I use to buy my properties. If my hunch is correct this is the one on Sumac. A solid renovation can get you closer to $1650/m. I'm not sure if you have accounted for it, but if youre using FHA you have to add in PMI, also homeowners insurance: around $1400/yr.
Reach out to me anytime if you want to run some numbers or just talk RE

[Eric Greenberg]

Just to add, when you move out there may be more expenses that you are not considering such as:

Rental license for each unit [$63/yr], 

Lead cert for each unit [Varies depending on #bedrooms in each unit]

Fire alarm monitoring (if needed) [$4-$600/yr]

Fire alarm cert (if needed) [$100-300/yr]

Sprinkler/standpipe cert (if needed)

Refuse Trash Bill [$500/yr] or private trash pickup

Electric bill for shared areas (Assuming everything is separately metered)

Water: Most older rowhomes do not have separate water meters. You can buy inline products to gage the usage but most of us use the number of people in a unit to charge the tenants a fixed cost. But some months you may eat some of the cost. Hopefully your numbers are close enough that you break even.

[Nicholas D'Andrea]

Good for you finding a duplex for 385k! Living for $300 as a couple is great. My house hacks's  I was 400 on my first and now 600 in the red.

[Ryan Thomson]

@Jeremiah Belocura 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.

[Jeremiah Belocura]

Quote from @Alan Asriants:

Hey Jeremiah, I have a feeling I know what duplex you are talking about lol! I invest in the phila area and would be happy to help you run some numbers on rentals and what I use to buy my properties. If my hunch is correct this is the one on Sumac. A solid renovation can get you closer to $1650/m. I'm not sure if you have accounted for it, but if youre using FHA you have to add in PMI, also homeowners insurance: around $1400/yr.
Reach out to me anytime if you want to run some numbers or just talk RE

 You got me, @Alan Asriants--it is that one!  Did it pique your interest, as well?

I'd definitely be looking to do cosmetic renovations, which hopefully is all this property needs.  Still trying to find out more from the selling agent through my realtor.

I'll factor in the PMI and will hopefully get a better sense of the whole mortgage picture when I hear back from my loan officer, but I'm glad to get a better sense of the annual home insurance, which I had higher per month.

[Jeremiah Belocura]

Quote from @Eric Greenberg:

Just to add, when you move out there may be more expenses that you are not considering such as:

Rental license for each unit [$63/yr], 

Lead cert for each unit [Varies depending on #bedrooms in each unit]

Fire alarm monitoring (if needed) [$4-$600/yr]

Fire alarm cert (if needed) [$100-300/yr]

Sprinkler/standpipe cert (if needed)

Refuse Trash Bill [$500/yr] or private trash pickup

Electric bill for shared areas (Assuming everything is separately metered)

Water: Most older rowhomes do not have separate water meters. You can buy inline products to gage the usage but most of us use the number of people in a unit to charge the tenants a fixed cost. But some months you may eat some of the cost. Hopefully your numbers are close enough that you break even.

I definitely didn't take these into account, so thank you @Eric Greenberg!  Are these for when I move out, or would I also need to take these into account when we would take possession?  The tenants have been long term, so I honestly wouldn't be surprised if the current landlord hasn't kept up with a lot of codes and regulations.

[Jeremiah Belocura]

Quote from @Ryan Thomson:

@Jeremiah Belocura 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.

Definitely good perspective, thank you @Ryan Thomson.  Admittedly, I do have expectations of being able to live for less than what rent would cost, but the BP Calculator has been good insight into the additional expenses beyond the mortgage payment alone.

As for cash flow, that I was taking into account for the future after we move out, which the calculator seems to say it doesn't even after then.  But yes, I'll try to remember the rent avoidance and have more realistic expectations!

[Ryan Thomson]

@Jeremiah Belocura you are welcome. Cashflowing when you move out after year 2 is also a big expectation with current interest rates. Historically (before 2009) real estate was not a cashflow instantly game. It took years. Remember that when you are hearing stories on bigger pockets. The market has changed big time even though the podcasts and stories are from a different interest rate environment. 

I wouldn't wait to buy a house bc it won't cashflow when you move out based on current interest rates. 

Here is how I see it potentially playing out for you:

1. Interest rates drop, you refinance and it may cashflow

2. You live in the house longer than a year and let rents rise. You move on to the next one when the amount you are losing each month is affordable to you. If you are buying in an appreciating market the appreciation will vastly outperform any sort of cashflow you get. If you can afford the negative cashflow and have a safety net/reserves, then negative cashflow is just part of the long term investment. 

[Ryan Thomson]

This is a long post. Its a blog I wrote on the topic. And I would add to this, if your exit plan maximizes rental income for your area then don't wait on the first great investment just because you can't currently scale the next one. 

It has become increasingly difficult to cash flow with house hacking. Despite this fact, the return on your investment (ROI) is incredible enough that it still warrants exploring buying real estate with the house hacking strategy. Home prices have increased substantially in the last couple years and interest rates have doubled. It is difficult to cashflow in year one of your house hack for a couple additional 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 is higher.

In this article we will dive deep into the 4 big ways that house hacking makes you money, even if it doesn't cashflow. You need to consider how much the down payment returns to our net worth. To calculate your Net Worth ROI for house hacking, you'll need to consider four factors: appreciation, loan paydown, tax benefits, and rent avoidance.

Appreciation:

Appreciation is the increase in value of your property over time. On average, real estate appreciates at a rate of around 3-4% per year, although this can vary greatly depending on location and other factors. For example, if you buy a house for $500,000 and it appreciates at a rate of 4% per year for five years, it will be worth $608,280. This increase in value would add $108,280 to your net worth.

Loan paydown:

Loan paydown is the reduction of your mortgage balance over time. Every time you make a mortgage payment, a portion of it goes towards paying off the principal balance of your loan, which increases your equity in the property. Over time, your mortgage payments will consist of less interest and more principal, which means more of your payment is going towards building equity. This reduces the amount of debt you owe and increases your net worth. For example, if you have a 30-year mortgage for $500,000 with a 6.4% interest rate, after five years you will have paid off around $31,807 of the principal balance. This reduction in debt would add $31,807 to your net worth.

Tax benefits:

Tax benefits are the deductions you can take on your income for expenses related to owning and operating a rental property. This includes things like property taxes, mortgage interest, repairs, and depreciation. These deductions can significantly reduce your taxable income and increase your net worth. For example, if you own a rental property that generates $20,000 in rental income per year and you have $15,000 in deductible expenses, your taxable income would be reduced to $5,000. In the 40% tax bracket this reduction in taxable income could save you around $2,000 in taxes per year, which would add $2,000 to your net worth. You have to actually be cash flowing for this benefit to take effect. Or be a real estate professional and be able to deduct against your professional source of income (another topic for another day).

Rent Avoidance:

Rent avoidance is the amount of money you save by living in one of the units you own instead of paying rent elsewhere. One of the most significant advantages of house hacking is rent avoidance. When you own a house hack, you are not only generating rental income, but you are also avoiding paying rent. When running numbers on a house hack include how much you are currently paying for rent (or how much you would pay to rent a comparable property) vs how much of the PITI and budgeting expenses are left for you to cover. For example, let's say your alternative to buying a house hack is renting a one-bedroom apartment for $2,000 per month. Let's say that once your tenants pay you rent you still have about $971 in PITI. You need to budget and an additional $929 to set aside for future budgeting items (vacancy, maintenance, and capital expenditures). Your total expenses to live in this house are $1900/month. Renting would cost you $2,000/month. Your rent avoidance is $100/month, $1,200/year, and $6,000 over 5 years.

Taking these four factors into account let's calculate your net worth ROI for house hacking.

Your net worth ROI calculation over 5 years would look something like this:

Appreciation: $108,280

Loan Paydown: $31,807

Tax Benefits: $0 (b/c you aren't cash flowing)

Rent Avoidance: $6,000

Total Net Worth Increase: $146,087

To calculate your net worth ROI over 5 years, you would divide your total net worth increase by your initial investment (your down payment of 5% or $25,000). $146,087/$25,000=584% This is an incredible return on investment. You will be hard pressed to find a better return elsewhere in the world. Simple Interest Rate of Return = 48.67%/year.

Let's change things up a little bit and say your situation isn't so rosy. Let's say you can only rent the other side for $1500 and that your current rent is only $1,000. The payment you still need to pay (after rental income) for PITI and budgeting items is no longer $1900 but $2,400/month. Your alternative to buying is renting for $1,000/month. If you decide to buy this house, you are negative $1400/month for five years. Does it still make sense to house hack? $1,400 x 12 months x 5 years = -$84,000.

Net Worth ROI Calculation (new situation):

Appreciation: $108,280

Loan Paydown: $31,807

Tax Benefits: $0 (b/c you aren't cash flowing)

Rent Avoidance: -$84,000

Total Net Worth Increase: $56,087

ROI = 56,087/25,000=224.35%

Simple interest rate of return = 18.7%/year

House hacking can be a great way to build wealth and get into the real estate game. While it may not always provide immediate positive cash flow, the long-term benefits of owning a property that is generating rental income while also providing a place to live can be significant.

When considering the ROI of house hacking, it's important to look beyond just the monthly cash flow. By factoring in appreciation, loan paydown, tax benefits, and rent avoidance, you can see a substantial return on your investment in the long run. Additionally, when compared to the alternative of paying rent every month and not building any equity or wealth, house hacking is a clear winner.

Of course, everyone's financial situation is different, and it's important to run the numbers and make sure that house hacking makes sense for you. But for those who are willing to put in the work and make some sacrifices in the short term, the potential rewards can be well worth it. So if you're considering buying a home, don't overlook the possibility of house hacking as a way to get started on your path to building wealth through real estate.

[Nazanin Boojar]

Quote from @Jeremiah Belocura:

Hi all, first-time [future] house hacker.  My wife and I are moving back to Philly and have found a duplex we're interested in, both units being 2 bed/1 bath at roughly 750 SF.

I used the BP Rental Property Calculator, which honestly I'm not sure I'm even using correctly and/or might be over or underestimating various factors.

Does this look like a good deal?  Am I understanding correctly that our effective rent would be $1,767?

Even when we move out and rent out the other unit, currently I think this neighborhood would only get $1,400 each, so according to the calculator, it would still be burning cash instead of cash flowing.

Thanks for any help!

 It's all about the location, location, location.
We gotta make sure that it has the potential to be occupied all year long with a reasonable rate if you're thinking about STRs (which you should be). So, without knowing where it's located there's not much I can help you with.

Feel free to DM me if there's anything I can help you with.

[Alan Asriants]

Quote from @Jeremiah Belocura:

Quote from @Alan Asriants:

Hey Jeremiah, I have a feeling I know what duplex you are talking about lol! I invest in the phila area and would be happy to help you run some numbers on rentals and what I use to buy my properties. If my hunch is correct this is the one on Sumac. A solid renovation can get you closer to $1650/m. I'm not sure if you have accounted for it, but if youre using FHA you have to add in PMI, also homeowners insurance: around $1400/yr.
Reach out to me anytime if you want to run some numbers or just talk RE

 You got me, @Alan Asriants--it is that one!  Did it pique your interest, as well?

I'd definitely be looking to do cosmetic renovations, which hopefully is all this property needs.  Still trying to find out more from the selling agent through my realtor.

I'll factor in the PMI and will hopefully get a better sense of the whole mortgage picture when I hear back from my loan officer, but I'm glad to get a better sense of the annual home insurance, which I had higher per month.

 It wasn't my favorite deal. I think that it needed a lot in cosmetic renovations to get to $1650. I was estimating around 80k. I don't think after the renovations that it is a 465k duplex. 2 just came out in my area that will fetch higher rents, and are turnkey listed both for $400k. I would've grabbed those if I had the capital. 

[Eric Greenberg]

Quote from @Jeremiah Belocura:

Quote from @Eric Greenberg:

Just to add, when you move out there may be more expenses that you are not considering such as:

Rental license for each unit [$63/yr], 

Lead cert for each unit [Varies depending on #bedrooms in each unit]

Fire alarm monitoring (if needed) [$4-$600/yr]

Fire alarm cert (if needed) [$100-300/yr]

Sprinkler/standpipe cert (if needed)

Refuse Trash Bill [$500/yr] or private trash pickup

Electric bill for shared areas (Assuming everything is separately metered)

Water: Most older rowhomes do not have separate water meters. You can buy inline products to gage the usage but most of us use the number of people in a unit to charge the tenants a fixed cost. But some months you may eat some of the cost. Hopefully your numbers are close enough that you break even.

I definitely didn't take these into account, so thank you @Eric Greenberg!  Are these for when I move out, or would I also need to take these into account when we would take possession?  The tenants have been long term, so I honestly wouldn't be surprised if the current landlord hasn't kept up with a lot of codes and regulations.

You would need some of them such as a single rental license, and others would be a maybe depending on the mechanicals of the property. Some like the trash refuse bill you may need to prove you reside in a unit to opt out of paying but once you leave youll have to start paying the $500/yr few or get a private company.