Wanting to House Hack in High Priced Area, How Do I Cashflow?

Question

I am looking to invest in a multifamily property in central Washington, in the Yakima area. While it is not as expensive as Seattle, a 3-2 single-family home in a B neighborhood can still run around 4-500,000. This seems very overwhelming. My question is: what is the best way to make a cash-flowing deal in this kind of market?

Drew Sygit · Answer

Another option is finding "ugly" properties that need work, which scare off a decent percentage of the buyer-pool.

Of course, your biggest competition will be flippers, but there are less of them than owner-occupant and landlord buyers.

Minho Lee · Answer

In a high-priced market, I’d consider it a win if I can live in one unit below the market rent and have the other unit/units help with the mortgage.

You may not get strong cash flow upfront in a market like that, and that’s okay—especially if you’re house hacking. The focus early on is reducing your living expenses and getting into the market.

But most importantly, do the math and make sure it will cash flow when you move out. Even if it’s not a home run on day one, it should at least make sense as a rental long term.

Rick Albert · Answer

Think about it, why would almost any property putting less than 20% where you aren't receiving rent from one of the units (the one you are living in) would cash flow?

What I would be looking for:

1. Path of Progress: Go just outside of desirable areas so as people get priced out, they have to come to you.

2. Can you add units or bedrooms? Converting dining rooms into additional bedrooms can add value and increase cash flow. Assuming the dining room already meets most of the building code requirements to be a bedrooms (check your area but generally a window, adding a closet, and heat source) it is fairly inexpensive to do it.

3. Could it be a vehicle to leverage and buy more rentals? My properties didn't always cash flow, but I leveraged them (HELOC or sell) to buy more rentals. It is a start to get your foot in the door.

Good luck!

Kerlous Tadres · Answer

@Benj Burnside the only way to make cash flow work is to stop thinking like a single-family buyer. From my experience, small multifamily (think duplexes, triplexes, or fourplexes) is where the numbers actually start to make sense because you are stacking rents against one purchase price instead of one. I would also recommend targeting value-add properties where rents are below market, since even a $100-$150 bump per unit after a light rehab can completely change what the deal looks like on paper.

Robert Ellis · Answer

One thing I've noticed is that there are really two separate questions. One is, "Can I reduce my housing expense?" The other is, "Would I buy this property as a long-term rental after I move out?" Those don't always have the same answer.

We've compared quite a few workforce housing markets over the past year, and some higher-priced areas had perfectly good properties but the acquisition basis made it difficult to recycle capital into a second deal. The markets that kept rising to the top for us weren't necessarily the ones with the highest rents—they were the ones where conservative underwriting still left room for a refinance and another purchase later.

Out of curiosity, if the property only broke even after you moved out, but had strong appreciation potential, would that still fit your investing goals, or are you specifically looking for positive cash flow from day one?

Alfath Ahmed · Answer

That will be very tough to do in Washington @Benj Burnside. You should look into investing into the midwest. Connect with a good investment realtor that can connect you with a good lender/bank, contractors, and property managers than can manage and lease the property for you.

Aaron Zimmerman · Answer

I would house hack personally. You're not going to get cash flow with low down payment in this market. Save money compared to renting and break even upon move out. That would be the strategy

Chris Watkins · Answer

Hi Benj,

I own a 3/2 SFR in a B neighborhood in Yakima. When we bought it as a primary, it certainly wouldn't have cashflowed, but time has brought rents up and values up and has made it a good investment property. The point is that cashflowing out of the gate is going to be difficult in the NW, even Yakima, but time in the market will make it a much better performer if you can hold a while.

My preferred strategy is to value add, rehab or expansion, in order to make something attractive. That's the surest way to get in for cheaper and get where you want. It's not for everybody, but even learning to upgrade a house is going to pay dividends down the road as an investor.

Happy to chat more about the Yakima market, value-add, and financing options! DM if you'd like to go deeper.

Wale Lawal · Answer

@Benj Burnside

In premium markets, it is better to get it right rather than be in a hurry. I will concentrate on small-sized multi-family or value-added properties where there is the opportunity to increase the rents or efficiency levels, and ensure that the project cash flows using conservative assumptions. At times, the best approach would be to take the deal when it comes around.

Good luck!

Ryan Spath · Answer

Often times with househacking a goal can simply be to limit the expense of housing, however in the best ways, we want the first one to be able to stand on its own. Meaning, when we move out it at minimum breaks even after considering vacancy, capex, repairs, etc.

A quick view into Yakima. I found 1716 S 10th Ave a triplex for 425k. Looks like these units may rent for $1300 (according to rentometer) using a 6.5% rate, 3.5% down taxes at $2732, insurance at $1200, MIP $205, all in payment is $3,125, this one would not pass the self sufficiency test with 2/3 units paying for mortgage but it would pay for itself when you move out $1300*3= 3900.

Also, this has been on market for 81 days, i would guess there is room to wiggle on the price or ask for concessions to help lower rate and or pay for closing costs. Does this help at all?