Good Risk vs Stupid Risk: Buying Advice for Multifamily HouseHack

[Rachel Brewster]

My goal is to buy a multifamily as a house hack by spring 2019, so I have been diving into Bigger Pockets and other resources to educate myself on cash flow analysis.

Lately, I've been working on clarifying my ideal metrics for buying the multifamily. For example, one of my metrics is that I want my payment/house hack rent to be 30% (or less) of my take home income. 

I've always used the 30% rule of thumb when renting an apartment, so it seems to make sense to also do it for owning a home. 

And that's where my question comes in. When are thinking about buying a multifamily, how do you set up this equation? Is it:

A) Mortgage+expenses /income = 30%

OR 

B) MY portion of the rent /income = 30%

I like Option A because it makes me feel safe: If for some reason I am unable to find tenants, I will be able to cover the full mortgage and expenses on my own. 

Using Option B opens up opportunities for me to buy larger/nicer multifamiles. But I'm worried that it could cause me to buy too much property and overextend myself. 

Does that make sense?

Perhaps another way of asking this is: How do I decide how much property to buy? Where's the line between good risk and stupid risk?

[Bruce Runn]

@Lee Fahy

@Rachel Brewster

I've met with a lot of newer investors and have helped quite a few get a better understanding of how to go about buying a property.  The biggest issue I've seen is when people use a generic formula based on a book or podcast since those formulas have to cover a very conservative approach.  They often load every contingency known to man into their formulas so they'd never be able to come out with a positive cash flow and thus never be able to buy a property. 

You may wonder how some people are able to buy when you can't figure out how they did it? Your approach shouldn't assume they are just throwing money at something but rather what did they see or do that I didn't? I'm guessing they might know the current rent was too low and can they raise it so they make more money, maybe they can add a bedroom in each unit, or maybe they are going to house hack and can just pay more than you having figured something out that wasn't obvious. There's a big difference in profitability in putting 25% down and 3.5% for a FHA. Are you going to self manage or build in a 10% management fee? What vacancy rate are you putting in? Prime areas can carry a low vacancy estimate while rough areas have a much higher vacancy rate-Minneapolis has the lowest vacancy rate in the nation at 2.1%. What do you put in for repair/capex? How old is the property you are looking at and what is the age of the heating system/roof/water heater?

I wish you the best in your search and always advise people to get into a lot of properties to understand condition/rent/opportunity since you can't really run numbers off the MLS without getting inside places. As an FYI, I bought 7 properties in South Minneapolis in 2017 so there are still deals out there.

If you want to get together for coffee, connect with me and we can chat.