House hacking in Brooklyn seems impossible

[Jesse S.]

A little background..... I live in Brooklyn with my wife and 2 kids. We love real estate but find ourselves priced out of our local market. We own two out of state SFRs that we bought turnkey and they are performing well, but we're on the fence about investing more OOS or trying to do something locally. As we are quickly outgrowing our 2 BR and we're thinking about the future, the prospect of moving to the Long Island or Jersey burbs is really unappealing; we want to stay here and the only way I can think about doing that is with some sort of multi-family or Commercial/Residential house hack. I'm not even looking for some sort of CoC return; I just want the rents to offset my mortgage and allow me to afford more space than I normally would. Put another way, if I could rent out a multi-family and have my out of pocket costs be less than what I am paying in rent today, I would be interested. While I'm not banking on Brooklyn appreciation, I do think homes here are a good store of value.

So that bring us to prices... while there are obviously area in Brooklyn we could afford do this, I really value my 30 minute commute to work and don't want to move far out, double my commute to work just to afford a place. So my personal decisions aside, lets talk economics. 

I found this great building that had a 3 BR duplex over a commercial/office space. I absolutely loved it, but it was listed at $2.9M with a 5% cap rate. I'm waiting to hear back from the agent about if the cap rate is hypothetical (i.e. what renting the entire building would return) vs actual economics of the current rented office space. Based on an old advertisement I saw on LoopNet and some rental comps, I think the commercial space rents for $3,500-$5,000. You don't have to be good at math to know that the commercial rent doesn't do much to offset your total debt obligation. So for this one, I don't think the economics make sense.

However, how can a 5% cap rate be attractive to anyone? Possibly as an owner occupant where you aren't looking for a "cash return", but in my example above the numbers didn't makes sense. And if they don't make sense as an owner occupant, how could they ever for an investor??  

I haven't touched on the down payment yet, which I obviously don't have. I'm trying not to make the downpayment be a limiter as I know there are ways for creative financing, but I'm struggling to see how to make anything work (even assuming I can figure something out around the initial cash outlay).  

If you live locally and want to chat about this or have ideas, please post here or shoot me a DM. I'd love to talk.