Thoughts on a house hack with a duplex?

Question

Hey fellas,

I went to see a duplex today near the very desired to live area of downtown today. This is potentially my first investment.

I wanted to buy it as house hack it. I run the numbers on it and they seem ok i think... I was looking for some feedback and get some suggestions from fellas that are steps ahead of me.

Here are some details.

Asking Price: $380,000
Potential Rent: $1,300-1,350 (2 units total, but 1 for me to live in)
Initial Investment = $38,000 (down payment) + $5,000 (closing costs) = $43,000

SCENARIOS

1) While I live there:

Monthly Expenses:Management: $0 (only property that I would have, so i can solo it)Repairs Maintenance: $100Taxes: $175 (4% tax, SC law)Insurance: ~$100Reserve: ~$100Mortgage: $1,584 (w/ 10% down @ 3.75%)Total Monthly Expenses = $2,058Monthly Income:Rent: $1,35010% Vacancy (being conservative) = $-135Total Monthly Income = $1,215Net Cash = $-843Comments: Note that current I pay $1,500 in rent which I am getting out of in March. This house-hack would save me about half of my monthly living expenses which is why I find it very attractive. This way I can save up more capital and go towards the next deal in a year or a bit more.2) After I move out:Monthly Expenses:Management: $0 (only property that I would have, so i can solo it)Repairs Maintenance: $100Taxes: $350 (6% tax, SC law)Insurance: ~$100Reserve: ~$100Mortgage: $1,584 (w/ 10% down @ 3.75%)Total Monthly Expenses = $2,234Monthly Income:Rent: $1,350 x2 (after a move out, maybe 1-2 years)10% Vacancy (being conservative) = $-270Total Monthly Income =  $2,430Net Cash = $196

Cash on Cash ROI = 5.47%

Comments: In all these calculations I tried to be conservative. I used high reserves and maintenance I believe as the properly was just rehabbed and "should" have too many things to fix. Also the 10% vacancy is a big excessive i believe. I know 5.47% CoC ROI is not considered great in the rental world but i really like the deal due to the house hack potential which will allow me to get into the next deal a lot quicker. Also note that this assumes I will pay the full asking price of $380,000 which I will of course try to offer around $350,000 which will bring the CoC ROI to a healthier 9.64%. This property is also located on one of the best school districts in the area.

Edit: Forgot to mention this lot has permission to add another structure in the back side of it like a 2/1 down the road.

Bryan Noth · Answer

@Aris Alexiou if everything is new then you would probably be safe lowering your capital expenditures and repair costs, but I would still keep it at 5% minimum for your evaluation.

Regarding the vacancy rates I would either ask BP on your market specific forum or ask local property managers, they are the best resources.

Aris Alexiou · Answer

@Bryan Noth

Hey Bryan, thank you for taking the time you read and comment on my post.

1) I agree that is a little confusing with the cap ex and reserves. The property was just rehabbed by another investor. No one has lived in it yet. It's in the final stages of completion which a few remaining finishing touches.

To my understanding, of course, if I end up going thru with this I will have a professional inspection done, it has totally new electrical and plumbing systems. Same goes with water heater, but I will double check. Roof seemed is pretty good shape too.

2) regarding the vacancy, I am really unsure how to obtain representative data from the local area'

. That why I called it 10% as in my mind that seemed conservative. The population here in the city is booming. The downtown area is very desirable to live by so I was thinking, if priced correctly, it should rent out somewhat fast.

3) regarding the PMI, I went to talk to the mortgage officer and she run me thru all the costs of the mortgage and such and offered the option to pay around $1000 in advance for the insurance of the mortgage in case of default and avoiding the monthly premium for the lifetime of the loan or until 20% equity. It seemed a trade off between initial capital and cashflow.

Bryan Noth · Answer

@Aris Alexiou nice and detailed rundown.  From what you present it looks decent.  All in all you are going from $1500 rent for a complete liability to $843 rent for a property you own which can also include tax benefits, appreciation, and already looks to cash flow once you move out (provided you continue to self manage).  That's $657 a year savings and comes to $7884 annually you gain on rent alone, not a bad raise!

Let's examine a few possible hurdles, if you will humor me.  The 'reserves' part of your calculations would probably best be put under capital expenditures.  The $100 for repairs and $100 for reserves / cap ex could be misleading.  That's 3.7% of gross rent for both data points (assuming both sides rented).  That is quite low.  Is the property in terrific condition?  Roof / AC / water heater fairly new?  If those have some life on them it might be better to allocate 5-10% for each.

Check your vacancy for the area to see if 10% is accurate, if it is closer to 5% that helps you build a more accurate picture.  For reference, 1 month vacant is 8.3%.

Finally, your monthly  mortgage payment estimate, does that include PMI?