Negative CoC return/Cash Flow... Could This Still Work?

Question

What's up BP fam!

I am looking to move and buy my first house-hack soon in Columbus, OH (and rent out a room or two). When going through some numbers on many properties, I always have a high negative CoC return and negative cash flow. I understand this is due to the low down payment and properties not meeting the 1% rule. However, it seems that Columbus is a great appreciation market which I am okay with in order to pull out that equity in the future via a HELOC for another investment property. Since I am using FHA, it has to be a turn-key property which won't allow for me to do a value add. Does anyone have some advice about the numbers when dealing with an appreciation market instead of a cash flow one? Or any pointers on what I could possibly do differently? I really don't want to mess up on my first deal.

Thanks to all who respond!

Charles Carillo · Answer

@Thomas O'Donnell

In all house hack deals I have been involved with, there is negative cash flow. Especially when you factor in ALL expenses/reserves (not just your mortgage payment). Yes, it would be great to cashflow but if you can decrease your living expenses from $1,000 to $250 and you are building equity; I feel it is a win-win. Just make sure you are including all expenses and reserves in your calculations. Also keep in mind that interest rates might drop in years to come; at that point you can refinance. Hopefully by then you will have 20%+ in equity and you can also avoid paying PMI.

Thomas O'Donnell · Answer

I appreciate this take on it! But I do not work in tech and I wouldn’t come close to having a 6 figure salary over here. I do not currently have a degree either. Also for reference, the jobs I could get where I’m at are $23-$26 and in Columbus it’s $20-23… so in reality yes I may make a couple dollars less, but even then with Columbus being so much more affordable, not only can I get into a property via house hacking but also have a good chunk of change left over each month. In the Bay Area of you don’t work In tech or work for a big company, you’re living check to check or working multiple jobs.

Osazee Edebiri · Answer

Yes that makes sense, Just wanted to make sure that you weren't basing your move on the amount you are making here, but the amount you are making there.

I have talked to numerous people who have moved and made several thousands less, realizing that the lower cost of living didn't cover the lower wage difference.

Since you know your number difference you are prepared.

Reggie Powell · Answer

@Thomas O'Donnell

Fair enough. California has treated me well. If you are ready to move to Columbus and make it happen, I’d say go for it. Just make sure you do the research and know the market before you move your life over there. The swings in California are huge. When everyone gets afraid of buying real estate, prices go down significantly and then come back up hard. I looked up U.S. census bureau stats on this:

Columbus has a population of 906,000. Poverty rate of 19% (pretty high). Median household income of 54,000. Median home value of $160,000.

San Jose was the closest in population to Columbus, so I used that to show the difference. In San Jose:

Population of 983,000. Poverty rate of 8%. Median household income of $117,000. Median home value of $925,000.

As you can see, huge difference. I myself would not have been able to afford a SFR in San Jose when I started. Too expensive. But you can look just outside of San Jose and find deals. Good deals. That bring in good rents and will appreciate well.

Everyone has a different plan and different goals. I myself would rather own less doors worth more money per door than more homes but less money per door. Not to say one way is better than the other. That’s just how I do it. I’d rather have 10 $100 dollar bills than 1,000 $1 dollar bills.

If you are ready to move to Columbus and build your portfolio, then do it. I think it’s a great opportunity. I would just caution you to look at local opportunities before moving out of state.

Nathan Gesner · Answer

Are you including the value of your living space in the calculation? If the unit you occupy would normally rent for $800 a month, that should be counted as income. In fact, I recommend you actually charge yourself $800 rent each month so (a) you force yourself to save for the next investment and (b) you get a clear picture of how the property performs as an investment and can demonstrate that to a lender, buyer, etc.

Michael P. · Answer

I’m not familiar with the c0lumbus market, up in Toled0 you could get a fourplex to house hack and cash flow. Not as much appreciation though.

Chris Webb · Answer

Hi @Thomas O'Donnell, I am unclear on your negative cash flow. Is this because you will be living there and not be collecting rents? If so that is fine, just analyze the deal as if you are collecting rents. If you were not living there, you would be paying rent/mortgage somewhere else. Analyzing the deal based on possible rents should allow you to see if the deal earns cash on day one when you move out. I would not bet on appreciation like we had over the past few years. I do not think prices are going to collapse like 08, but I also do not see 20% appreciation like some markets saw recently. Best of luck and always look at Cash-on-Cash to see how hard your money is working.

Jonathan Cai · Answer

Hi Thomas,

I see that you are interested in doing a house hack, a great strategy, indeed. Low down payment and reduce monthly expenses. From the scenario you described, the deals you've analyzed are all negative cash flow and you are expecting the market you are investing in has great appreciation potential. I would advise you to compare the cost of your current living and the expense you will be expecting after purchasing this property. If you are having less overhead then that should allow you to save your downpayment for the next deal at a faster rate. Since you are moving to a new location, is your income still the same? Otherwise, you should factor that into consideration. The goal of the house hack is to help you get started in REI and decrease monthly expenses.

Although, the ideal scenario is that you will be able to house hack every year. You can also look into selling the house after living in it for 2 years. The proceed from the sale will be tax-free and allow you to invest in other higher-performing properties. This can be a great alternative if the current deal does not cash flow even after you move out. Be conservative when estimating the appreciation, treat it as icing on the cake.

Patricia Berman · Answer

Hi Thomas,

I guess we would need more information. What do you mean by negative cashflow?  If this is a house hack where you are living in the property and renting rooms and sharing space does that mean that simply your overhead on this property is greatly reduced but not completely covered by the rent you collect?  If that is the case, then perhaps it is worth a go.  Would you cashflow when you move out of the property and are able to rent out your room or rent the property out as a whole?

I would be careful banking on appreciation. I say this as an investor who has really gotten quite a step up by riding the appreciation wave.  It is a great tool and if you have a long period of time to wait, then go for it.  My belief is that most real estate appreciates over long periods of time and sometimes short periods of time.  I only throw the word caution out there because of the current market slow down, and possible flattening out of the appreciation we have seen even in high appreciation markets.  However, back in 2020 when COVID lockdowns first hit, I thought the real estate market was going to tank, so what do I know?! right?!

I think if house hacking is your strategy, and a great strategy it is, the question has to be does the property cashflow if and when I move out of it and purchase the next one.  Is the overhead reduction enough to allow me to save for my next opportunity?

I hope this was helpful!

Patricia

Osazee Edebiri · Answer

Many people move out of state for affordability, and while yes things are typically cheaper out of state, average wages are less too. One of the reasons many people in California can invest in large amounts out of state is because they have high paying jobs, like the numerous tech workers, that live here in the Bay.

Double check that your income isn't going to be lessened by moving out of state. If it is, compare saving to house hack here vs Columbus.  I have a house hack in San Jose, if I add the money I am saving not paying rent, I cash flowing about $200 a month. Once my PMI comes off (Have had this house two years) I will be around $480 a month. The house has appreciated over $300K, that's almost double the median home value in Colobums.

Californian house hack = Scale faster

Negative CoC return/Cash Flow... Could This Still Work?

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