2% rule when house hacking?

[Larry Smith]

Hello BP, 

I am currently looking to house hack a duplex here in Toledo Ohio.

I am able to get a Fha Loan on the property because I will be living in it. The bank also has free 3% funding for houses in lower income areas( Not a war Zone). 

The purchase price is 24k. 

The bottom is already rented out for 465/ month

I will be living on the top floor. 

After I ran the numbers I the rent was at 1.76% of the purchase price.

The house in in good shape. The only repairs it needs are flooring in the kitchen and then paneling in the bathroom.

I will be making 38$ in cash flow a month. 

My question is, would it be worth it to go in for the deal even though it is only 1.76% of the purchase price?

 Thanks BP

[Daniel O.]

@Larry Smith The general view here is that this is a good deal and you should do it. While I agree, I would caution you to do a little more number crunching and due diligence before you jump in.  Here are some other things you should be considering. If you have already considered and accounted for them, great.

1) What likely cap ex will you have over the next couple of years? Think furnace, hot water heater, roof, things like that. Does the deal still work if you have to buy a roof this year or next?

2) Lead Paint. Does the house have it (probably), and does it need to be abated (maybe)? If so, what is involved and how much will it cost?

3) The tenants you will inherit. Sounds like they are getting a pretty sweet deal at way below market rent. Are they tenants you would have leased to if they were not already in the place? Credit history, payment history, income, etc. Be sure you are not inheriting a problem. Also, look at the landlord/tenant laws to confirm your ability to raise the rent to market level. If they are on a lease vs. month to month will make a difference.

4) Who pays utilities?  If the units are not separately metered and the owner pays utilities, this could almost completely kill your cash flow, especially if the house is poorly insulated. At a minimum, you need to talk to the utility companies and look at useage / bills over the last year+. If you can look at a period when both units were occupied, all the better. Unless the units are metered separately, build these costs into your model as well.

5) Taxes. Make sure you have factored them into your cash flow calculation.

6) Is there any kind of HOA (unlikely but worth checking) and if so, what are the dues?

7) Flood Zone. Make sure this place is not in a flood zone. If it is, you will end up having to pay through the nose for flood insurance if you have a mortgage. This too could kill your cash flow. 

8) Unless there is some new catalyst such as a new major employer or transportation infrastructure going in, it seems unlikely that this house will appreciate greatly unless you are adding value. But even if you are adding value, appreciation will be limited to a large degree by the houses around you and what they go for. As part of your plan, you should also be thinking about your exit strategy. If this place cash flows as well as you think, then maybe that strategy is to just buy and hold it for a good long time. Nothing wrong with that. But it is always good to have some sort of plan in case you do need or want to sell.

Good Luck. Let us know what you decide to do.