Am i crazy or is -$900 a month out of pocket still a great deal ?

Question

spoke with my lender today and we agreed on allowing me to buy a multi-family home with a primary Resident Conventional loan using 10% down. of course, I would have to house hack the property the first year, meaning I would rent all units except one of the units " the one I would live in". So I've been analyzing every deal comparing the loan options between 10% down (Primary Residents) vs 25% down (Investment property).

--bear with me I'm pretty new at this --

I found a 4 plex list for $600,000 roughly 6k closing. I plugged all the numbers into the Rental Property analyzer calculator, as modest as possible trying to determine what my unit would cost me after subtracting all other expansive, for example, 5% on Maintenance, vacancy, capital ex, and 11% management fees. that number is roughly $900 a month or $10,800 yearly that I would be responsible for. both scenarios look like this

A) Primary Resident: 69k (10% down + closing) +10,800 = 80k the first year

Vs

B) Investment Property: 159k (25% down +closing) - $4704 ( $392 monthly cash flow) = $154,296 first year

I feel that option A is the better option in year 1, but I can not figure out a true representation moving forward after the house hack is done and I replace myself with a tenet? I tried simply subtracting 80k from the principle and running the Calculator over a 29-year mortgage, but that can't be it because that 80k includes expansive ( cap-ex, Management fees, ext,) that don't go to the principle.

any help is appreciated. thanks, y'all

Brandon Rush · Answer

Hey Jason,

At first glance, the numbers don't look great on this property. If you are looking at $392 cashflow with 25% down as investment on a quad, what would cashflow look like after you vacate with a 10% owner occupied down payment? I am anticipating it would be very low to negative.

For me, when it comes to evaluating an owner occupied house hack, I look at what it will cashflow after I leave. If you are only planning to stay for a year, then as long as you are paying significantly lower than you would in a rental, then no need to worry too much about how much you are contributing monthly.

My advice to you is be careful on this one. Lower down payment options are great in some situations but in this one you are running a few risks such as buying this property at a high price (assuming), having little equity in the property, and having a high PITI payment every month with low cash flow. What happens if two of your tenants vacate at the same time, will you be able to cover the vacancy?

I am not trying to scare you away, just preaching from my personal experiences. This sounds like a tight deal, so if you decide to move forward, make sure you have some reserves in the bank for a rainy day.

Good luck on your journey!

Jon Kelly · Answer

@Jason M. Your option A and B analysis just shows your cash output in year 1. That's not really helpful when it comes to making a decision. Most people will consider IRR, CoC return or monthly cash flow per unit so they can compare different opportunities.

In scenario B your monthly cash flow is $98/unit and CoC return is 3% ($4,704 / $159k). Does $98/unit and 3% CoC meet your goals? I'm sure you can find better deals out there.

Most people analyze a house-hack using numbers after you vacate the property. You can still assume 10% down, but you should add fair market rent for the unit you occupy.

Joe Splitrock · Answer

Option A should be hands down be a better option due to lower cash invested and lower interest rate. The problem most people make in the deal analyzer is not including the rent value of their house hack unit. Your person living expenses are not part of the investment evaluation. It is just a bonus if you end up with reduced living expenses. Also be aware that Option B is cash flowing more partly because of higher down payment. You are "buying cash flow" in this situation. It is far better to have less cash invested. If you do Option A, you can buy another property at the end of one year with 10% down. That is the power of owner occupied terms.

Sam Smith · Answer

@Jason M.,

Generally, I agree with Jon here. Unless you are looking at an appreciation play where you fix up the house while you are living in it, 3% CoC is not a great deal.

BUT, if you plan on living in the house for the next few years it could turn out to be a good situation! There still might be better deals. It really just depends on what your goals are.

Good luck with it!

Am i crazy or is -$900 a month out of pocket still a great deal ?

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