Grade my first house Hack. How do my numbers look?

Question

Hi Everyone, brand new here and just made my first big purchase in a pretty expensive area (stable/growing property values, also a desirable seasonal vacation rental town).

Last week I closed on a completely gutted and renovated Two Family home in a Beach town in Monmouth County, NJ. I will be moving in to the 3BR 1.5B front house and I just leased the detached renovated 1BR bungalow for $1650/mo (tenant pays electric). I paid $649k and the house appraised at $665k. My plan is buy and hold.

My question here is about how you all would evaluate this scenario. I had been renting a smaller house for 4 years at $2,020/mo (plus gas/electric) in the same town and felt like I was wasting my money.

My initial math and logic went like this:

My mortgage + taxes/insurance on this house is $3508/mo -  $1650 in rental income = $1858/mo.  I'm now paying $162/mo less to live in a much bigger and better house (and building equity).

I plan to stay in this house for at least 5 years before I find a tenant to replace me.

How do I objectively evaluate this investment if I'm living in the front and not paying "rent" per se, rather just covering the rest of the mortgage. Fair market rent for my portion of the house is around $2,950/mo.

I did part with $109k down payment (including closing costs), but I've been saving for quite some time so I still have some fairly healthy cash reserves, and I'm actually looking get another property within the next 6-12 months (most likely out of my expensive market though).

Please be critical -- how did I do here? What could I have done better?

- Peter

Ryan Riches · Answer

@Peter Ricca hey peter! My wife and I also recently closed on our first house hack in Colorado Springs. We are taking the AirBnb route on our unit. In my opinion, the purpose of a house hack is to lower your housing expenses. If you wanted the BEST return, then sure - living in the 1br or renting out both units would get you more return. But it sounds like that’s not your goal! You were able to find a deal that you would want to live in AND would lower your housing costs while getting your first experience in landlording.

Well done!

Natalie Schanne · Answer

@Peter Ricca - Congratulations! Pick up a cool roommate or two to occupy the spare bedrooms short-long term (depending on how your girlfriend feels) and you’re golden. Or Airbnb out either spare rooms or the whole 3/1.5 house when you receive offers at prices in high season (vrbo, Airbnb) you can’t refuse and go travel together. I have several roommates in the house and I hardly ever see them. Obviously it’s important to pick the right people. For Airbnb I wouldn’t accept reservations far in advance unless it was for a week or more for the whole house at a high price. Pay attention to the normal periods like Sat-Sat or Sun-Sun to not block your high season weeks unnecessarily. One jersey shore friend told me he pays his agent 7-10% of the gross rental income, so 30k could be like 27k. I’m also assuming your loan and home insurance is for owner occupied so don’t violate any covenants and/or check your coverages.

John Callaghan · Answer

Peter,

I live in your neck of the woods in Ocean Township, NJ, just west of AP.

I’m very new – no real estate investments yet, so definitely feel free to take my comments with a grain of salt.

I like this move a lot.

1)  Housing costs similar, but now learning about landlording for 1st time and portion now going to principal

NJ housing cost are brutal, they’re an detriment on building cash within a household for future investing

Sadly, but goodly(?), at housing cost of $1858/mo, you’re on the lower end at least, as a new purchaser.

2)   Shore town purchase. I am admittedly concern with the future of NJ financially, but I’d argue shore towns will continue to be of high demand regardless of how NJ screws itself, ha.

I was going to critique if you ‘had’ to buy in a shore town, when you might have been able to house hack or buy cheap in a less expensive market to get housing costs even lower.  But again, the Jersey Shore is not going to lose value, certainly not in the long term, though short term could be rocky, but very likely not.

Don’t know living situation, but if single, I would argue with purchase right before summer, might have been better to live in bungalow and rent out bigger front house weekly/monthly for summer rental. Then in autumn, decide where to live - if summer rental income too good to pass up, might be able to live in front during off season and then rent bungalow to Monmouth University student during off season, then move into bungalow during summer for summer rental of front again.  A lot of moving, but might be worth it, at least for a year or so.

Like I mentioned, I’m new, but all about making connections as that seems to be the name of the game when it comes to real estate investing.  Would be cool to chat more.  Hope to connect up at some point.

Take care,

- John

Lizzie Carver · Answer

Agreeing with most here--definitely a great deal for you compared to continuing to rent, plus an upgrade on your housing. This was how I approached my first purchase as well.

It's hard to look at these sometimes when you occupy a portion and pay "below market rent" for what's remaining on the mortgage payment after rent from your tenant because there is a bigger picture (I do the same thing currently on a duplex btw). While you get a lower "rent" you also do so at the expense of potential income...there is a lot of potential income out the window in your portion, but that might be ok with you if that's where you want to live and you are spending less than you were renting, but you would certainly be making more if you were to live in the bungalow.

Seems like the key with any sort of house hacking depends on willingness to live in the least desirable space--you don't have to live in the basement/smallest bedroom/bungalow in your case. but if you do, then you can get the higher rent on the master bedroom, main house. It's a combination of cash flow and personal preference. What works for Peter, LLC as an investment company may not work for Peter as a tenant!

Congrats on the deal!

Kirby Davis · Answer

Agree with Ray on this. Not at all bad given the whole picture. If the 'less valuable' part of the house suits you, I'd go with that and rent the larger portion. This is just from a numbers standpoint, though. Lots of options on this in a strong market. Nice set up for a longer strategy.

Peter Ricca · Answer

@Jaysen Medhurst all excellent points - I considered this before I purchased and figured the immediate reduction in cost of living plus appreciation, tax shelter, and equity building was worth it.

If I move out in 5 years the plan is to maximize the house income as a vacation rental (or sell if it had appreciated enough). Yearly rentals won’t provide the cash flow I need as you said (although I might be under estimating the rental rate for the 3BR house).

At $5101/mo total I’m on the hook for about $62k/year. I should be able to generate around $4500 week in the summer for both combined units, so I’m going to have to hustle hard to keep it filled for 13.7 weeks to cover that nut.

Winter rental I can draw about $2700/mo between both units which would be $18,900.

With the winter income I only need to rent the house for 9.5 weeks in Summer to cover my nut.

All great points and exactly the type of feedback I was looking for. I won’t let this be a disaster since I can always stay put! :-)

- Peter

Jaysen Medhurst · Answer

@Peter Ricca, as a primary residence, I think this suits your needs and lifestyle. You clearly love living near the beach (as I do, too). You've found a way to do that at a lower cost than you would otherwise, while building equity, and hopefully some appreciation.

Here's the flip side: as a pure investment property, this is not a good deal. Certainly not from a cash flow perspective. If you analyze it as a straight rental (we'll look at the vacation-rental scenario in a moment), this will negative cash flow every month. Let's look at the numbers:Expenses:$368 Vacancy (8%)$345 Repairs (7.5%)$345 CapEx (7.5%)$460 Management (10%)$75 Sewer/water (my estimate)$3508 PITI$5101 Total Expenses

With a $4600 GSR that leaves you ($501) per month. You're losing $6k a year.

Now if you rent the front house for the Summer season at $30k, you get cash flow positive, about $15k/year. But you're going to have $10-20k to furnish it and a lot of increased expenses due to agent costs, more wear and tear, etc. NJ also recently passed a new tax on short-term rentals, which is driving down prices and demand. So, that's something to keep in mind. Perhaps you can drive up income by doing Air BandB during the off-season, instead of a 9-month lease, but again that comes with additional costs and less security.

Not properly accounting for the expenses above is the kiss of death for RE investors. Please take a cold, hard look at the numbers when you're ready to move out and ask yourself if this is really an investment worth holding. I'm very worried that you're setting yourself up for a potential disaster

Peter Ricca · Answer

@Lizzie Carver @Kirby Davis @Ryan Murdock @Ray Fisher

Wow everyone, thanks for the awesome feedback and tips, I'm definitely feeling more confident about the purchase.

I am single, but moving in with my girlfriend (she will be chipping in too towards mortgage) so I really wanted some more space (plus I work from home a few days a week so I need a home office).

@John Callaghan -- It's so cool I didn't think there would be local neighbors on here. Yes all great points, I figured the shore town would be shielded from major downturns (wealthy New Yorkers will still come and rent our houses during the summer even during a down turn). Let's grab coffee soon, shoot me a DM.

I did consider living in the back house and running an AirBnB in the front, but that would require CapEx on furnishing both houses. Plus the time commitment to manage a vacation rental isn't really an option for me since I travel a ton for work.

Once I move out this place (plan is 5 years) I will definitely be on the Summer Rental MLS listing. Realtors have told me I can get ~30k for the entire season if I find the right tenant (usually from Connecticut or New York) so I'll be giving that a shot at some point.

Thanks again everyone, looking forward to hearing about your real estate ventures!

- Peter Ricca

Ray Fisher · Answer

Peter, I don't know your living situation, single?, married?, family?.

option 1

mortage                                                     3508 month

front house potential income                2950 month

difference                                                     $558  month expense to live in 1 bedroom ,

currently paying   1858 month

less potential           558 month

savings of               1300 month, x 12 months  = 15,600 annual savings toward the next investment.

this is a payout of  558 x 12 = $6690 year

Option 2

rent front house     2950 rental income

rent back house      1650. rental income

total rental income   4600, month

less mortage              3508.

positive cash flow     1092.00 month. x 12 months  = 13,104 positive cash flow income.

option 1

now take that 1092.00 month toward another purchase  in that less expensive market and live rent free....

option 2

or use to drop rent at preexisting house

2020.-1092.= 928 rent and two others are paying off your home .

that is the options I see in 15 minutes of planning.  There are probably a hundred other options out there,

by the way "Nice deal" .

Grade my first house Hack. How do my numbers look?

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