Investment Variables for House Hacking Oakland, CA

[Hassan Karaouni]

Hello everyone, my name is Hassan and I'm defining investment strategies to House Hack in Oakland. I'd appreciate if anyone can provide input on variables I'm using below. What adjustments, if any, should I make? If it helps to have more concrete details, we could consider a 700K-1M purchase that I occupy with 4-5 rooms that I rent. All feedback is welcome and hopefully this helps others too!

Variables

- Interest Rates: 7%. If I'm calculating correctly, this really hurts for investment potential but I'm hopeful that sometime in the next 3-5 years I can get to 5%.

- Vacancy Rates: 8%. I started with 5% but bumped up to account for having 4-5 rooms.

- Annual Rent Increase: 3%. I'm really not confident on this estimate since I've seen some recent updates that CPI also factors in (might reduce rent increases) but there also might be ways to increase rent by up to 10% with 60-days notice.

- Annual Expenses Increase: 3%. I considered that 4% or 5% might be better due to high inflation, but I'm not sure how you all think about this.

- Annual Appreciation: 4%. I'm not sure what to input here.

- Property Taxes: 1.4%. I believe there is also a 2% cap on increased cost per year because of Prop 13. My understanding is that Property Tax is reassessed each year to be 1.4% of the home's newly assessed value that year but also the net annual cost increase is capped at 2%.

- Property Management Fees: 10% of Rent Revenue. Is there any way to get a better rate here? I think I've heard of 8% in the past.

- Expenditures: 10% of Rent Revenue

- Insurance: $1,500 Annual. I'm not sure here and saw a lot of different estimates online from 1-2.5K.

- Utilities: $600 Monthly. I thought $300-400 might be more standard, but $600 could help to account for multiple renters.

- Closing Costs: 3.5%. I was not sure how to best calculate this. I've also read that Transfer Tax is covered by sellers, so I'm not including that in my costs.

[Ryan Thomson]

@Hassan Karaouni It seems like you have really put some thought into this. Well done. I would recommend that you get out of the analysis phase now and connect with a realtor in your area who focuses on house hacking. 

They can give you more accurate numbers for your area and probably have a spreadsheet you can use. No need to reinvent the wheel!

I have a great house hacking ROI calculator for Colorado Springs. With a few tweaks it could be used in any market. I'm sure an agent in your area would have a great one for you to use.

[Ryan Thomson]

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 another investment opportunity.

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 that? 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 hack to get started with only 5% down.

(see screenshot below).

Screenshot saved in “images for investor emails” folder. File name “Spreadsheet duplex net worth roi”

[Laura Shinkle]

@Hassan Karaouni you've definitely put a lot of thought into this! 

All your numbers look about right to me (or at least I have no argument for anything different). 

Annual Appreciation is always unknown. 3-4% is the average, so you're spot on. 

Property Management Fees: Are you going to be wanting a property manager while you're living there, or only once you moved out? In my experience, it would be tough (impossible here) to find a property manager to manage tenants in a home that you live in. Also, how will you be renting if/when you move out? By the room, furnished/unfurnished, long term, short term? The PM fees will vary based on your rental strategy then. Also consider that you get what you pay for. A PM that is willing to lower their rate to 8% may not be the best person to be managing your biggest asset. A PM is worth their weight in gold if you find a good one. 

Expenditures: Do you mean utilities, wifi, etc or things like soap, paper towels, etc? Or cap Ex/maintenance? If you are househacking rooms in your home, you may want to decide now whether you'll be charging for utilities month by month based on usage, or if the rent will include utilities. For cap ex/maintenance that's fine. 

Insurance seems low to me for a $1M home, but an insurance agent or Realtor in your area would be the best person to check with on that.

Hope that helps!

[Hassan Karaouni]

Thank you all!

- @Ryan Thomson: I appreciate you sharing your breakdown and I have two questions. Vacancy Rate: what's your process like for filling vacancies and do you find that 5% is an accurate reserve rate? I feel like 5-10% is low, but I've never tried to fill a vacancy before so I really don't know. Maintenance and CapEx Budget: do you have a strong opinion that these should be reserved separately? In my calculation, I just put one lump sum of 10%.

- @Laura Shinkle: I'm trying to learn more about property management options, so I appreciate your deep dive there. Live In: can you share why property managers might be reluctant to manage tenants in a home that I live in too? I would plan to live in the home. Rent Style: I'm not sure on renting by room vs unit, long vs short, etc but I'm generally thinking that I will rent by room, prioritize medium- and long-term rentals (except for sometimes Airbnb'ing my own space if I'm not there), and fully furnish the space.

[Laura Shinkle]

Quote from @Hassan Karaouni:

Thank you all!

- @Ryan Thomson: I appreciate you sharing your breakdown and I have two questions. Vacancy Rate: what's your process like for filling vacancies and do you find that 5% is an accurate reserve rate? I feel like 5-10% is low, but I've never tried to fill a vacancy before so I really don't know. Maintenance and CapEx Budget: do you have a strong opinion that these should be reserved separately? In my calculation, I just put one lump sum of 10%.

- @Laura Shinkle: I'm trying to learn more about property management options, so I appreciate your deep dive there. Live In: can you share why property managers might be reluctant to manage tenants in a home that I live in too? I would plan to live in the home. Rent Style: I'm not sure on renting by room vs unit, long vs short, etc but I'm generally thinking that I will rent by room, prioritize medium- and long-term rentals (except for sometimes Airbnb'ing my own space if I'm not there), and fully furnish the space.

Live IN: I'm not sure and I don't want to speak for all property managers. That said, I can speculate and hopefully a PM will shout out here too. Most PM I deal with want the investor/owner to be as hands off as possible. You know the phrase, "too many cooks in the kitchen"? I think that would apply here. It gets messier when the owner is around a lot, wants to fix things themselves, etc (whether they live in the home or just nearby) It makes it challenging to be the manager of the property and the tenants when the tenants and owner know each other and may inadvertently (or on purpose) do things without the PM knowledge. (ie tenants say, "well the owner said I could just take the cost of repair off the rent" and then as the PM you are chasing around trying to figure out what happened). Again, that's speculation. That said, what would the benefit be for you as the owner to have a PM if you live in the house? You'll know if the dishwasher stops working and needs repair, etc. You may also want to be more selective with people you live with vs just letting the PM pick your roommates for you. 
Rent Style: Once you're ready, talk to co-hosts and PM for STRs to see what demand they're seeing in your area. And, of course, what they'd be comfortable doing (only entire home vs room rentals). Trends can change between now and then, so I wouldn't put too much of an emphasis on this, but know that you have options. 
This is all just my two cents, I hope it's helpful and at least bringing up questions to ask yourself as you find a home. Best of luck!

[Hassan Karaouni]

Thanks for that @Laura Shinkle! I really appreciate you and the community for actively sharing on these forums. Hopefully your time on these posts can help future people on their journeys too.

Live In: why do I want to Live In but still seek a property manager?

- Delegation: I'd like to delegate as much of the property management as possible so that I can focus my time on any property value-adds and ultimately keep focusing my time outside of the property (career, family, etc). 

- Assumed Benefits: I assume the benefits of the property manager would be that they coordinate repairs, drive tenant screening, find tenants, follow up to get rents, etc. I'm assuming those end up taking a significant amount of time that I'd rather delegate to a professional focused on those.

- Ideal Outcome: I'd be welcoming to tenants, but we wouldn't be day-to-day friends. I might especially help on final tenant screening such as a quick call to check-in with the tenant but that's probably it.

[Ryan Thomson]

Quote from @Hassan Karaouni:

Thank you all!

- @Ryan Thomson: I appreciate you sharing your breakdown and I have two questions. Vacancy Rate: what's your process like for filling vacancies and do you find that 5% is an accurate reserve rate? I feel like 5-10% is low, but I've never tried to fill a vacancy before so I really don't know. Maintenance and CapEx Budget: do you have a strong opinion that these should be reserved separately? In my calculation, I just put one lump sum of 10%.

- @Laura Shinkle: I'm trying to learn more about property management options, so I appreciate your deep dive there. Live In: can you share why property managers might be reluctant to manage tenants in a home that I live in too? I would plan to live in the home. Rent Style: I'm not sure on renting by room vs unit, long vs short, etc but I'm generally thinking that I will rent by room, prioritize medium- and long-term rentals (except for sometimes Airbnb'ing my own space if I'm not there), and fully furnish the space.

 The reserve rate has been more than enough for vacancy, maintenance and cap ex. I have an easy 10k saved up for all of my properties. Which is the most I set aside for any one property at a time. 

[Michael Smythe]

Your vacancy rate really should be thought of as a, "Vacancy & Tenant nonPayment" rate.

It would then depend on the Class of property and tenant. The lower the Class, the higher the rate should be.

Also, you may want to use 0% rent increases to be safe as more & more markets are actually starting to see rents decrease.

[Hassan Karaouni]

Thanks for the input @Ryan Thomson and @Michael Smythe!

[Laura Shinkle]

@Hassan Karaouni I get the reasons why, I just think you'll have a hard to finding people to do those things for you with you living in the property. Depending on the type of tenant, it likely won't take that much time from your year to do those things. Ideally things aren't breaking all the time, and once you find the tenant it should be fairly easy. For example, I manage my own MTR (which I don't live in) and it takes maybe 3 or so hours from me a month. 

If you do find someone willing to do PM with your househack, let us know! I'd be interested to learn how your search goes

[Osazee Edebiri]

Hey @Hassan Karaouni

Love the research you have put in to investing in my stomping grounds. I have helped quite a few house hackers in Oakland and I also own property there.

@Ryan

@Ryan Thomsonundefined and @Laura

@Laura Shinkleundefined

Have provided some great incites.

As a house hacker here in the bay doing the room rental model which is what you appear to be going for, I will add these things. I have never had vacancy. Now that doesn't mean you don't factor it in, but I find the room rental model to be the easiest segment to fill. As roommates/tenants have moved, I have always had a new lease signed prior to them leaving. This means you need to be vigilant with your notices and maintain a solid relationship with the people who live in your home. 

With that being said, unless you really want to be hands off, I wouldn't hire a PM for a house I live in. Even if you do, you will still have to manage the PM company anyway, so for me it makes little sense. Managing a home you live in is super easy. I would say, I spend max average 3 hours a month working on it. The most time spent when you have to find a new renter. If you get good at providing a place they like to stay, less turnover and rental increases, keeps it even better.  Plus, it is better for you to learn how to successfully run your first investment yourself, so you know what to manage when you hire someone to take over later.

Let me know any more questions you have, hope this helps.

[Laura Shinkle]

Last thought and then I'm done! I know you don't intend to befriend the tenants. That said, you'll still want to be friendly and a good relationship with anyone you live with. Like @Osazee Edebiri said, it really isn't a big deal to manage a home you live in. You're not commuting across town to get there, dealing with tenant schedules, etc. With as many tools as there are now for background/credit/criminal checks and rent payment systems, it's really not bad. 

[Osazee Edebiri]

Quote from @Laura Shinkle:

Last thought and then I'm done! I know you don't intend to befriend the tenants. That said, you'll still want to be friendly and a good relationship with anyone you live with. Like @Osazee Edebiri said, it really isn't a big deal to manage a home you live in. You're not commuting across town to get there, dealing with tenant schedules, etc. With as many tools as there are now for background/credit/criminal checks and rent payment systems, it's really not bad. 

Funny enough, I just ran into a tenant I had a couple years ago, in the mall yesterday. He was the most challenging one I had. Despite not seeing eye to eye when he left, we still had a good enough relationship that we talked for 15 minutes last night to catch up.

When I say challenge, he still maintained the basic requirements, he paid on time and the place was perfect when he left. We just didn’t see eye to eye on how used the house while the rest of us were also sharing the space, but with that said he was still overall fine.

[Hassan Karaouni]

Thanks @Laura Shinkle and @Osazee Edebiri - you've helped me to see that self-managing might be more feasible than I thought (plus other learnings too). I'm currently reviewing my learnings from these posts and will likely follow up with some direct outreach to each of you. Thanks again!