Negative Cash Flow on House Hack

[Mike Bean]

Hi BP! Looking for advice on my first deal. I'm going to be using an FHA loan for my first deal which will obviously require PMI on top of my reserves for vacancy, repairs, and CapEx. I'm wondering how many or if any of you had put up with negative cash flow on a first deal while owner occupying. The problem is that my market is becoming very competitive and finding deals that will be cash flow positive is pretty difficult. I'm considering finding deals that would be slightly negative in cash flow which would essentially just be paying a very low rent to myself.

Say for example I find a $300k 3 family unit (two 3 bedroom units and one 2 bedroom). The market rent I would probably be able to get for the 3 bedrooms is $1300 and I would charge a friend or another tenant $500 for the extra bedroom in my unit. That brings gross rent to $3100 which is above the 1% threshold but after all the costs previously mentioned, monthly cash flow would be just under (-$350).

Yes it's negative cash flow, but I'm paying MUCH less than I would in rent plus I have the added benefits of debt paydown and other wealth generators. assuming I move out after year one, I could then rent the vacant unit at $1100 and it would then be cash flow positive.

What are some thoughts/ stories? and keep in mind that this is just an example but numbers are relatively accurate for my market. Thanks in advance!

[Christopher Giannino]

@Mike Bean

As some of the others have already stated, it's hard to be cash flow positive (at least in the North East markets) when occupying the property.  My thought would be if you can reduce your living expenses (I'm sure paying ~$350/month in your market is dirt cheap for rent), get some valuable experience as a landlord and start working on your systems to be able to scale up (assuming you want more rentals) then that's a win and should be something to consider even though you're not cash flow positive while living there.

Typically for house hacks, I run the property evaluations 2 different ways...  

1. Like how you did..  this will show you how much you will have to pay out of pocket while you live there.

2.  What the scenario will be when I move out.  If your intention is to only live there for a year or two, I would definitely put more weight on this calculation to make sure it makes sense as an investment.

Hopefully you find this helpful.  Best of luck!