House Hack vs Multifamily investment in tough markets

[Louis L.]

Ive been struggling with the following situation and would love other's input. What i've been reading so far regarding house hacking seems to not address the following situation. I live in NYC where we all know its a bit more difficult to househack in the true sense. Living in the outer boroughs isn't the most attractive given long commutes, less vibrancy etc.

Lets say im considering house hacking a 3 unit multifamily in the bronx or deep brooklyn for example. For simplicity each unit is equal in size and rents for a fictional amount of $3000/month/unit. For the moment, ignore by how much the property will be cash flow positive. If all three units are rented, that $9000/month.

Now this is where i'm stuck. Lets say my current small apartment in Manhattan with a roommate only costs me 1000$/month to live in. In this situation I can collect the full $9000/mo from my multifamily and pay my $1000 rent. Here i end up with 8000 for debt and operating expenses as opposed to 6000 if i had lived in one of the units.

In more concise terms, the spread between what my "househacked" unit rent is and what i could pay in rent in Manhattan (and not sacrifice quality of life) is positive.

I'm trying to determine if I am missing something here. Obviously there are financing benefits of the FHA or 203k loan, but as a millennial in a tough real estate market, this is my natural progression of thought.

Thank you all in advance for your input and advice. Much appreciated.

[Nicole (Dunlap) Pendergrass]

Hi @Louis L.

I recently (2 years ago) bought a 3 family house in the Bronx (Morris Heights section). I completely agree with the commute and vibrancy of the area not being the best, but I also consider it short term sacrifice for long term gain. And although your income rents are hypothetical, the rent you currently pay is not... so you're basing the benefit of house hacking vs renting all the units on a $2k spread that is not realistic. I live in one of my units and the rent from the other two (plus rent from 2 parking spaces) covers my PITI+PMI with a few hundred left over toward expenses. While I still technically need to come out of pocket to cover the remaining expenses + reserves... its still less than $1,000. Let me give you my real numbers just as an FYI

Income:

Apt 1 (2 bed) - $0 (I live there)

Apt 2 (3 bed) - $1,750

Apt 3 (3 bed) - $1,750

Parking Spot 1 - $150

Parking Spot 2 - $150

Total Income = $3,800

Expenses:

PITI - $3,260

Water - $400

Vacancy @ 5% - $190

Maintenance @10% - $380

Total Expense = $4,230

So the difference I need to pay is $430, which I basically consider my rent... I now split this amount with my husband but before he moved in I did have a roommate for a few months at $700 p/month rent for the room (even more income!).  Also the 3rd floor tenant recently moved out so I'm in the process of renting to a new tenant for $1,950.  

But to not give you a one-sided view, there are problems you have to just have know are possibilities and have the gumption to deal with. House was supposed to be move-in ready, but I ended up having to put out thousands a few months after closing to fix water and electrical issues. Plus, the 2nd floor tenant I've had issues with non payment and am currently doing court proceedings to get months of back rent (I know saving at a 5% vacancy rate wont cover this, but ideally you should have some PITI reserves on closing).

Since I am an owner-occupant, my total closing costs were btwn $20k-$23k, my annual insurance is $1,800 (included in monthly PITI above) and my rate is 3.85%.

So all in all, not perfect and have def hit some rough waters, but its all a learning experience and I still fully believe that this is a great investment long term!  If you have the money upfront to pay a higher down payment and are willing to do the traveling back and forth to manage it (and trust me, you will need to do this very often in the beginning) and the numbers make sense for you to still pay your current rent so you can keep your lifestyle than I say go with it.  But personally I wanted to stop throwing my money away in rent for someone else's investment :-)