First house hack - too expensive?

[Brandon VanTuinen]

Hello! Rookie real estate investor looking for some advice:

I purchased a duplex in Grand Rapids, MI last October (2023). I bought the property at $365k, and its new *estimated* value after renovations is 390k-400k. The mortgage has gotten out of hand due to property tax increases, miscalculated escrow, and an increase in my interest rate from an initial buy down, increasing from $2600/mo to $3200/mo.

I owner occupy the home, renting a room to a friend at $650/mo, and the lower unit rents for $1850/mo - total rental income of $2500/mo. This leaves me $700/mo (plus $200/mo in reserves) to pay myself, which seems high for a “house hack”.

Hindsight being 20/20, I may have bought out of my price range. I am looking to progress my real estate investing career in a responsible and timely way, and it has been hard to save money for my next property while paying this much for my current property.

Any advice on strategies to move forward? Sell the property, buy cheaper, and have more cash to put into another? I am hesitant to sell because the property is in a GREAT area with high-quality renters, and theres lots of growth in the area… But I am open to any advice you may have.

Thank you in advance!

[JD Martin]

Quote from @Brandon VanTuinen:

Hello! Rookie real estate investor looking for some advice:

I purchased a duplex in Grand Rapids, MI last October (2023). I bought the property at $365k, and its new *estimated* value after renovations is 390k-400k. The mortgage has gotten out of hand due to property tax increases, miscalculated escrow, and an increase in my interest rate from an initial buy down, increasing from $2600/mo to $3200/mo.

I owner occupy the home, renting a room to a friend at $650/mo, and the lower unit rents for $1850/mo - total rental income of $2500/mo. This leaves me $700/mo (plus $200/mo in reserves) to pay myself, which seems high for a “house hack”.

Hindsight being 20/20, I may have bought out of my price range. I am looking to progress my real estate investing career in a responsible and timely way, and it has been hard to save money for my next property while paying this much for my current property.

Any advice on strategies to move forward? Sell the property, buy cheaper, and have more cash to put into another? I am hesitant to sell because the property is in a GREAT area with high-quality renters, and theres lots of growth in the area… But I am open to any advice you may have.

Thank you in advance!

 You're misreading your figures. You need to include how much it would cost you to live somewhere else in your figures. For example:

Current rental unit: you collect $2500 in rent. Let's assume both units would rent for the same price if you didn't live there. And let's assume if you didn't live there, you'd have to find a place to rent for the same money - or let's say you'll live in a cheaper place for $1500. 

Without house hacking, your figures would look like this:

$1850+1850 = $3700 - $1500 - $3200 = $-1000 net in your pocket (let's skip principal paydown and tax benefits for now).

With house hacking, your figures would look like this:

$1850+650+1500 = $4000 - $3200 = $800 net in your pocket. 

Without factoring in tax benefits and principal pay down, you're $1800 ahead of the game by house hacking. That's a serious win. House hacking doesn't necessarily mean you get to live for free, and if anyone gave you that idea they were fooling you. It depends on a lot of things, including how cheaply you *would* live without house hacking. If you'd live in a tent under the bridge if you weren't house hacking, well then it might be more expensive for you, but most people would live in similarly expensive housing, only have nothing to show for it. 

If you aren't able to save for your next property, then you really need a better job because without this house you'd have even less money. 

[Jonathan Greene]

JD nailed this for you. My question would be, what are you in such a rush for? You bought a good asset. You may have misjudged some numbers, but paying $700 a month to own an appreciating asset is pretty good. It could be better, but it's not the end of the world at all. The end of the world would be selling this to buy a cheaper asset than needs more work, do this all over again, to make the same money and lose a better asset.

Slow down and work on this property and the rents and the maintenance, and also enjoy living there. You don't have to buy another property tomorrow to be doing well.

[Nathan Gesner]

And to pile on, if you didn't own this property, then you would be paying $700 or more in rent each month to live somewhere else.

It's nice when you can find a hack that allows you to live rent-free, but that doesn't happen often. You're paying rent, but it's an investment that will pay handsomely down the road. In 1-2 years you could repeat this with another property, then rent out your current space and the property will pay for itself. Rinse and repeat and you'll have a little empire in 10 years.

[Brandon States]

I'd say it's a good deal considering you are in a location you want to be with a solid asset. To decrease the amount of money you pay out of pocket you could turn part of the home to a STR or MTR. That's what I did. I originally house hacked with a long term renter in the other unit of a duplex in a great location. They moved out in 2020 when interest rates were super low. I then turned their side into an Airbnb. The income is much higher but it does come with a more management.

[Julia Lyrberg]

I’d recommend holding onto the property if you can manage it. Paying $700 a month out of pocket isn’t too bad considering you’re in a great area with high growth potential. That’s a small price to pay for an appreciating asset that could significantly increase in value over time. As the market improves, you might also have a chance to refinance and lower your payments. In the meantime, focus on saving and building up reserves for your next investment.

[Jack Matthias]

Hi Brandon, 

That does seem bad for you to live there. I would keep the property and eventually refi to help get your payment down lower. What did your rate adjust too after the buy down?

[Marcus Auerbach]

You did good. Always buy the best quality property you can afford. In 10 years you will be happy you did. Nobody ever regretted buying a good property, but you find hundreds of stories where people deeply regret buying a cheaper property.

Maybe focus more on how to make more money, build a side biz, and let the real estate do what it does get better over time.

[Randy Charboneau]

@Brandon VanTuinen  FYI the appreciation rate in City of GR is around 6% right now, so you're making around $24,000 a year just living there.