How to analyze house hack

[Libby Louer-Thompson]

I'm wondering how you all would analyze a duplex house hack. My market has only one duplex on the market every other week that is big enough for myself and my 2 kids and that is in a neighborhood where I would I feel safe enough to live in. Houses here are going for $100k over asking. I don't think the market here will support growth long term IMO. We don't exactly have a thriving business community or economic growth, but I just got divorced and am in a rental right now, so this market is unfortunately what I'm stuck with. Based on Bigger Pockets calculators, the duplex I am looking at tomorrow will not be a good deal for an investor at the price it is likely to go at. But there is value in it as my primary residence, being something that is big enough for my family and in a great neighborhood. I just don't know how to calculate that value. Am I just looking at if I can afford this as my primary residence, taking into account all the costs that go into owning a home with the benefit of some rental income? Or there some more sophisticated way to analyze this? I might be overthinking it, but welcome your thoughts.

[Jonathan Aversano]

If the goal is to be your primary residence, and you're currently renting, stack up your current rent to your prospective duplex's mortgage payment + expenses (insurance, maintenance, CapEx, vacancy) - the potential rental income you could bring in. Obviously a home run deal is one that cash flows positively, but it could still make sense if you can add value, build equity, and do this for less money/mo than you were spending on rent.

[Daniel Kaplan]

If the numbers work the numbers work. However, a big consideration is scalability. If you intend to refi and continuously house hack your way to financial freedom, make sure you will still positively cash flow. Make sure to have a clear vision on your goals.

[Ryan Thomson]

House Hacking: What to Look for and How to Calculate ROI

When looking for a good house hack I consider a couple things.

1. Will it reduce my cost of living when compared to renting?
2. What is my net worth ROI on my downpayment and is this better than other investment opportunities I have access to.

Your Net Worth ROI calculation takes into account the appreciation, loan paydown, tax benefits, and the rent avoidance (the difference in what you pay towards your mortgage compared to your rental situation). The total of that number over the year divided by your 5% down payment is your net worth ROI. Because you are getting the home for 5% down and hopefully holding for the long term, you will almost certainly be get a better ROI than the ROIs you can get elsewhere in the investing world.

That is what I look for. Now, how do I calculate the Net Worth ROI? I have a great calculator to help figure this out.

The inputs for the image in this screenshot are as follows:

500k purchase price duplex.

Rent each side for 2k/month (this is after you move out)

5% down payment

Closing costs: 7k

6.4% interest rate

Insurance: $250/month

Utilities (paid by owner): $400/month

Vacancy budgeting: 5% of monthly rent

Maintenance budgeting: 8% of monthly rent

CapEx budgeting: 7% of monthly rent

Even though you are negative $312/month after budgeting for future expenses, your net worth ROI is massively positive. Real estate is one of the best ways to build long-term wealth. And house hacking is an incredible way to get started with only 5% down. Your net worth ROI over 5 years is 425% and your ROI in year one alone is 84.9%. Where can you beat those returns?!

[Ryan Thomson]

@Libby Louer-Thompson ^^^ here is how I look at those numbers

[Ryan Thomson]

@Daniel Kaplan I would add a caveat to what you are saying. It is important to think about cashflow if you want to scale. However, cash flowing is OUT in a lot of markets right now. So avoiding one great investment bc you can't buy a second one a year later is not a strategy to scale. 

Buying now and scaling when you're able is a strategy that will scale to more properties.