House Hacking 4 Units Close to Downtown – Deal Deep Dive

Dude!!! Can you believe that in 2016 this fourplex was bought for $382,000!? Now the same buyer wants to sell it for $700,000!? Are they crazy, can a property really appreciate $320,000 in 4 years!? – Oscar

WOW, can you imagine what that’ll be worth 4 years from now??!! – Andres

This conversation took place around May-June 2020, we were discussing if Oscar should place an offer on this property. Oscar knew what to expect, he knew that in Austin, multi-family properties are very scarce, he also knew that the likelihood of cash flowing while living in the property was slim to none. SO, what game was El Patron, Oscar, playing? Doesn’t House Hacking entail making a cash flow while living for free? Not at all, remember my last blog post? I talk all about the importance of YOUR strategy and in Oscar’s case it was comfort, proximity, and appreciation. In other words, he didn’t mind not cash flowing, he rather pay part of his own mortgage as opposed to paying for someone else’s mortgage (renting), he also wanted to live close to DT and live alone. VIOLA! Multi-family will be perfect for you, my friend!!

The Home

This particular fourplex consists of 4 separate 1bed/1bath units. Each unit is 2 stories, has its own backyard and is around 600 s/f. The area is absolutely booming, the 78704 zip code has been exploding for the past several years, another huge factor that we took into account was the location of the property (1 minute drive from St. Edwards University and 7 minutes from downtown ATX). Once Oscar leaves after a year, he should have no problem finding additional tenants. Remember, the beauty of house hacking is that you can keep buying properties as a primary resident every year. Now to answer the $680,000 question, how would this be financed?!

(I negotiated it down from $700,000 to $680,000)

How it was Financed

The maximum amount allowed for a conventional loan is $510,400 and once you reach this limit you have to finance with a jumbo loan. In short, these loans usually entail higher interest rates, stricter lender requirements, and higher down payments. Well then why don’t we just look for multi-family under $510,400?? Hold up there bub! Did you forget that when you’re utilizing a conventional loan to purchase multi-family property, the minimum you can put down is 15%! Lucky enough, there’s a solution and it’s called the Federal Housing Administration (FHA). The government created the FHA loan and these loans CAN be used to purchase a property by putting as little as 3.5% down! How amazing is that?! Not only did we find an amazing solution for Oscar, but his initial investment for such a large purchase would be slim in comparison to the purchase price.

FHA Loan Limits

The Numbers

Purchase Price$680,000Cash to Close (Down Payment + Closing Costs)$22,859.97 (3.5% Down – FHA Loan)Mortgage Payment$4,598.92 (Principal & Interest + Property Taxes + Insurance)Gross Monthly Income$3,700 ( 2 units rented for $1,250 another $1,200 )Monthly Expenses/ Vacancy$275

Monthly Breakdown: $3,700 – $4,598.92 – $275 = (-$1,173.92)

Let’s step back a minute, he’s negative?! Yes that is correct, there is no cash flow and Oscar has to pay money out of pocket, but remember, Oscar’s strategy was paying HIS mortgage rather than someone else’s, living close to DT, and living alone. Let’s delve deeper into what these numbers truly mean!

In Austin, renting a 1bed/1bath apartment in the 78704 zip code will cost you no less than $1,500 per month. Oscar is paying $1,173.92, AND it’s all going towards his loan paydown! Remember our good friend Appreciation? Well we closed on this property on July 7, 2020, now this property is worth around $23,275 more than he paid for.

Let’s look at what his Net Worth Return on Investment (NWROI) is.

The formula for calculating NWROI is: (Cash Flow + Rent Savings + Principal Loan Paydown + Appreciation) / Initial Investment.

In the equation, I will include his (-$1,173.92*12) which is his “cash flow”. Before buying this fourplex, Oscar was renting a room in a 2bedroom/1bathroom apartment in New York City for $1,600 a month. Insane right?! On top of that, he was sharing a bathroom with 2 other roommates in a 800 s/f box, PEACE OUT NY! House hacking allowed Oscar to save up to $19,200 per year because he was no longer paying that rent ($1,600 * 12). The principal loan paydown per month is around $1,200 which would be $14,400 per year. The principal is the amount of money you borrow when you take out a loan, you your tenants pay a portion of this balance each month, this lowers your principal amount and thereby increases your equity in the property. In Oscar’s case, his principal is now $641,800 (Purchase Price: $680,000 – Down Payment: $22,800 – Principal Loan Paydown: $14,400). The appreciation thus far is around $23,275 in 4 months! Oscar’s NWROI is:

(-$14,087.04) + $19,200 + $14,400 + $23,275 = $42,787.96 total net worth gained

$42,787.96 / Initial Investment ($22,859.97) = 187.17% net worth return on investment!

WOWZERS! 187.17% return! INCREDIBLE! For every dollar Oscar invested he’s getting $1.87 back! THE STOCK MARKET’S HISTORICAL RETURN AVERAGES 10% ANNUALLY! This means that if I were to invest $100 in a stock, historical returns would indicate I get $0.10 for every dollar invested, bye bye stocks!

Dear Diary:

November, 25th, 2020:

Oscar’s appreciation strategy has so far worked wonders! It doesn’t go without saying that appreciation is a speculation game! Nobody ever truly knows what will happen in a market. The assumption that inherently high risk = high reward in real estate is not true. I believe in low risk high reward as long as you have exit strategies and have done your due diligence. We did all of the above and most importantly Oscar took action! Big kudos to you my friend!!

If you have any questions about this deal or want to chat about house hacking, let us know in the comments or schedule a call with us here.

Cheers to your house hacking success!

Sincerely,

Andres Bustamante