Is cashflow that important on my first owner occupied duplex?

Question

I am 19 looking to buy a duplex in southern Maine. I have been analyzing deals for about a week now and find that I often come up $400-500 short of a cash-flowing property. Since I would be financing using an FHA loan, I would need to live there for a year before I can rent out the unit I plan to live in to someone else. After the 1 year mark, most of these properties will have a positive cash flow. I just don't know how important cash flow is when it is my first property, when I will have cashflow after a year but my mortgage will be paid for during that year. Looking forward to reading people's opinions.

Joe Splitrock · Answer

Welcome to BiggerPockets. Keep in mind that you need to include your rent in the cash flow calculations. Always analyze the property as if all the units are tenant occupied. Your "free" rent is cash flow.

Anthony Wick · Answer

@Aaron Signore

Joe already explained it, but I’ll give you the example of when I lived in my duplex.

I was paying $1,250 rent when I bought a duplex. I, of course, moved into one side and rented the other side out. My mortgage (PITI+ PMI) was about $1,600. The rental unit rented for $1,100. Hence, I needed to pay the $500 out of pocket for the mortgage. $500 is certainly lower than my old $1,250 rent!

What I did was, I continued to “pay” my $1,250 rent, only to myself. My lifestyle did not change, but I was now banking money and paying down a mortgage.

Then, after a year, I moved. That duplex now has rents of $1,150 and $1,325, and that same $1,600 mortgage (well, a little higher due to taxes going up).

So, again, analyze the deal as if you are not living there and you are getting full rent from tenants.

Aaron Signore · Answer

Thank You Anthony!

Colin Reid · Answer

@Joe Splitrock nailed it, and @Anthony Wick's numbers look very similar to mine. My "rent" is cheaper than anything in my neighborhood, because my tenant is paying about 2/3 of my mortgage. Once I move, it'll cashflow, but in the meantime I've cut my own housing expense in half.

Dan Weber · Answer

Hi Aaron,

During your first house hack, if your entire mortgage, insurance and taxes (PITI) is covered by one unit's rent allowing you to live rent free, I consider that a win for a house hack. Usually for your first deal, you aren't aiming for a home run of a deal, but hitting a single or a double is plenty good. I live in Portland and would be happy to talk more about it - DM me.

Tyler Bushey · Answer

Just make sure it cashflows once you move out!  What areas are you looking to buy in?

Theresa Harris · Answer

How can a property cash flow after 1 year, but not at the start?  Is that because you'd be moving out?  If so, that's normal.

It is rare to buy a property and be able to live in it while renting part out and cash flow.  For the time you are there, you are paying a reduced rent and almost living for free, but not quite.  Anthony's suggestion of continuing to pay your regular rate of rent once you move in is a good one.  It will also help you save for your next place.

Joshua S. · Answer

I don't think cash flow is important at all at first. When I was single I bought a house and got a roommate. I considered him my first tenant, we just shared the place. The whole point of real estate investing is getting access to OPM - Other Peoples' Money. If you're getting OPM AT ALL, you're in a better position than before you were getting OPM. The reason is because they are spending their time / effort earning the money and then handing it over to you because you own something they want access to. If you have a roommate, a duplex, single family, multi family, it doesn't matter as long as you're getting OPM. Once you START the process you can refine your techniques, become more efficient, increase your cash flow, etc. and become profitable, but basically ANY FIRST STEP TO GETTING OPM is a good first step, in my opinion. Having to live in your first deal for a year - especially at your age when you have that flexibility - is not a big deal. I envy you in that way. Try living in a duplex for a year once you have a wife and kids. Personally, if I were you, I would do this deal and after the first year do it the exact same way and get another one. Someday you won't really be able to live in them. Later.

Steve Morris · Answer

Spend another week looking.

Having to feed a property when you have no prior experience is foolish.  Idea is for property to stand on its own and gererate income so you can buy more.

However, I'd get someone that knows what they're doing to look at your numbers first.  You may have made some wrong assumptions.

Aaron Signore · Answer

Hi Tyler! I am looking to buy in Biddeford or Saco.