First Deal - House Hack property

[Sarah Kartsher]

Going to be honest here - I am not sure this is a great deal... Maybe a good deal, maybe an acceptable deal but not a great deal as it stands.

If I decide to buy this - it will be my first investment property, my first house hack. Basically, I am going to be okay if I break even. The phoenix market seems to be scarce in quality duplexes at the moment.

Specs:

Duplex- built in 1945

Price - 235K

Down PMT - 8k

2bed 1 bath units

In a good neighborhood - value has gone from $160k to $230 in 4 years

Duplex - two free standing units

Needs a little TLC/updating

rents from past landlord - $650 and $750, but I hope to raise rents after units have been renovated. 

Guessing my debt service and expenses will come out to around $1,700 each month?

I appreciate any tips or thoughts on this as it could be my first deal!

[Llewelyn A.]

@Sarah Kartsher

Hi Sarah, you will find me a dissenting opinion on the majority of those who will answer because most people are concerned about cash flow.

I did exactly what you are doing now, house hacking and breaking even or even paying slightly into my costs.

I don't buy for Cash Flow NOW. I but for Cash Flow in the Future. That also has the added bonus of Appreciation in Value.

That being said, doing the necessary calculations is NOT Easy, but is absolutely necessary.

For instance, every area has it's appreciation rate. NYC, for example, is much better than the national average of 4% per year Appreciation. We get somewhere around 8% to 10%. If you picked the right areas of NYC,  you will get even better than that.

As a REAL example, in the year 2000, I bought a 2 Family building for $140k Purchase Price, 15% down or $21k down with a Mortgage of $119k. So the total Investment was $21k plus $9k in Closing for $30k.

Today, I can sell the building for $1 Million conservatively.

The rents for each unit was $500 back in 2000. Today, it's $1,850 EACH.

I also like to use the disclaimer that Past Performance is NOT indicative of Future Performance.

However, people need to use their Intellects to take into account ALL the parts of a Real Estate Investment, including Cash Flow, Appreciation, Mortgage Balance Reduction and Tax Savings.

For the above property, the appreciation rate was 12.26%. I put together a chart here:

Obviously, not all markets are going to be like Brooklyn, NY and especially in my area, Windsor Terrace. BUT, as great as my neighborhood was for appreciation over the last 17 years (which, btw, included 2 BIG downturns), it was far less than the appreciation rate in Williamsburg, Brooklyn. So I really missed the boat on buying in Williamsburg. Oh well.... I'm still doing great.

So, giving the above appreciation rate and the dynamics for this property, the ROI is crazy and I calculated it here:

So I invested $30k in the year 2000. If I were to sell today I would get back $845k after paying off the Mortgage, Commission at 5% and some seller's closing costs.

YES, I made a 2,717% ROI.... or a 160% per year ROI per YEAR. NOTE... this is NOT a Compounded Rate of Return but a Straight Simple Interest Calculations. I use this calculation because many Investors don't really understand Internal Rates of Return (IRR) and how to use it. So I stick with the simple calculations.

I would also like to mention that I've achieved these kinds of results not once, but 8 times throughout my 2 decades of experience.

Also keep in mind having a discount on the Purchase Price is not NECESSARILY the important thing. The FUTURE VALUE is much more important. Too many are focused on a Discount and turn away great properties that could be a gold mine in the future.

HOWEVER, there is a lot to analyze because determining the Appreciation Rate and calculating your ROI is NOT an easy task!

You need to know the following:

- Economics of your area that will affect it's future value. Things like Migration of people, placing demand on housing needs versus the supply of housing. Knowing things like New Permits, etc. helps. Also knowing the local companies and their impact on housing. For instance, Detroit was 90% dependent on Domestic Auto. The Companies failed and Detroit went bankrupt. It's REALLY Important.

- City Planning. Finding out how the areas are being rezoned to meet demands. Are parks being created? What about public Transportation such as subways, buses, etc?

- Amenities such as upscale restaurants, dog walks, cafes, etc.

- National and Global economics. For instance, the crash of 2008 followed by most of Europe declining. So anywhere where Europeans had a vacation presence would have been affected, especially European vacation spots. Now we have Climate change problems causing migration of people. Just today I got a call from a Puerto Rican Lawyer asking about vacancies because he is moving his family to NYC.

There are a lot of things to know in order to determine what the future looks like.

While this is very difficult for most people, if you really did your homework, you can only imagine how much the rewards will be for your hard work.

ANYWAY..... I'm one of a very few of us who buy based on Future Value (FV). In great cities like SF, NYC, and I believe, Phoenix, you cannot just use Cash Flow NOW calculations. So please research Phoenix! Look especially at it's future potential and what money is flowing to where in Phoenix!

Hopefully this posts is helpful and gives a different opinion than the standard Cash Flow NOW!