New Investor: Looking for a woosah or eureka moment!

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New Investor: Looking for a woosah or eureka moment!

Ken Alce
Baltimore, MD · Member since 2021 · 12 posts · 2 votes

TL;DR: Why is buying a MFH at SFH prices looking like such a bad deal from jump?

Hi all. I'm planning on house hacking and I'm excited, but something isn't clicking re: rental analysis. I'm consistently getting negative cash flows/CoC ROIs despite what I think are reasonable estimates. Conceptually, how can that be?

Median rent in my city is about $1,300. I suspect owning a SFH is slightly pricier than that (mortgage + expenses). If I purchased a SFH and added a roommate at the median rent, the numbers should largely be in my favor just for the sacrifice of adding a housemate. Why does an MFH comparatively look like a loser?

Are expenses on a SFH *that* pricey that I'm not conceptually understanding? Does the average SFH owner really spend up to twice their mortgage in expenses and savings? Are the hidden benefits to homeownership (e.g., tax breaks, appreciation) so overwhelming that the average SFH owner is willing to eat such losses?

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  • Benjamin AakerPro Member
    Rental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votes
    5y
    For SFH the prices are usually based on the comparison approach. The market is hot right now with inventory low and interest rates very low. People are able to pay more for their shiny new house because their monthly interest rate is less. They rarely look at financials beyond that. Sellers can jack up the price and still get multiple offers. If you've ever bought a house for yourself, you probably didn't put together a spreadsheet of all the costs of home ownership (if you did, you're way ahead of the rest of us) - a SFH doesn't normally produce income, so it will always be in the negative.
    Rents have sadly not kept up with SFH prices so a landlord will likely be under water in most retail deals at least until the eviction moratorium ends. Rents tend to go up, but slowly, so it will be a while before they get to a level that justifies the high price paid for SFH. Don't bank on rent increases.
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  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    5y
    Originally posted by @Ken Alce:

    TL;DR: Why is buying a MFH at SFH prices looking like such a bad deal from jump?

    Hi all. I'm planning on house hacking and I'm excited, but something isn't clicking re: rental analysis. I'm consistently getting negative cash flows/CoC ROIs despite what I think are reasonable estimates. Conceptually, how can that be?

    Median rent in my city is about $1,300. I suspect owning a SFH is slightly pricier than that (mortgage + expenses). If I purchased a SFH and added a roommate at the median rent, the numbers should largely be in my favor just for the sacrifice of adding a housemate. Why does an MFH comparatively look like a loser?

    Are expenses on a SFH *that* pricey that I'm not conceptually understanding? Does the average SFH owner really spend up to twice their mortgage in expenses and savings? Are the hidden benefits to homeownership (e.g., tax breaks, appreciation) so overwhelming that the average SFH owner is willing to eat such losses?


    You are in a good company Ken!

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  • Ken Alce
    OP
    Baltimore, MD · Member since 2021 · 12 posts · 2 votes
    5y

    @Benjamin Aaker That's helpful. I've long heard that a house is a money pit, the ironic corollary to the adage that one's house is your best investment. I suppose that's exactly what you're saying. "A SFH will always be in the negative" does help my woosah because, technically, so is renting. The difference being that one ostensibly owns their own home and can recoup some of that investment.

    Maybe I need to rethink rental analysis in a seller's market. @Brandon Turner can we get a webinar on that? Lol  

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  • Ken Alce
    OP
    Baltimore, MD · Member since 2021 · 12 posts · 2 votes
    5y

    @Dmitriy Fomichenko Forgive me if it doesn't feel that way! Lol I want the numbers to work but I may have to adjust in this market. After all, we're expecting an appreciation boom in the near future. 

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  • Benjamin AakerPro Member
    Rental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votes
    5y

    @Ken Alce I'll clarify that a primary residence will always be in the negative! If you are renting it out you can certainly make a profit with the right deal. They are just hard to find right now.

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