house hacking numbers?

Question

Hello bigger pockets!

I am looking into buying a duplex in the near future. From what i have been reading and listening to, typically its a good idea to look for 12% ROI. I plan on house hacking so obviously this will take away half of the income from rent. What kind of numbers should i look for? Should i look for the tenant to pay for the mortgage and the costs? or them pay the mortgage and myself pay the expenses including cap ex etc? Im just not sure how i should do the math to ensure a good deal.  Thanks in advance

John Leavelle · Answer

Howdy @Jeffrey Gagnon

From one Vet to another ... thanks for your service.

As others have already stated, analyze properties as normal Buy and Hold rentals.  If they meet your Cash Flow criteria, then, investigate further.  To help speed your search up try using the 1% and 50% Rules to screen potential properties.  Look for Rental income to be 1% of the purchase price or better .  Use 50% of income as your expenses, then subtract mortgage payment to determine the Cash Flow. If the property passes both these rules, then, the property warrants further inspection.

For the eventual Refinancing out of the VA loan it will take quite a while.  To do a refinance loan you must have a minimum of 25% equity in the property.  This is because the bank will only allow you a loan that is 70 - 80% LTV based on a current appraisal.  Typically it will be 75% LTV.  Since you are putting $0 down payment you will be starting out with 0 equity.  I would not count on the Refinance.

John Leavelle · Answer

@Jeffrey Gagnon

I assume you have a maximum amount you qualify for on your VA loan.  You must establish a specific set of search criteria.  Example:  2 - 4 units,  list price $30,000 - $50,000 per unit, moderate repairs needed, current rents minimum of 1% of list price.  Once you and/or your Realtor identify a property have your Realtor run comps for that area/neighborhood to establish a good ARV.  Compare the list price to your ARV.   If they are close then move to evaluating Rehab costs.  Also, have your Realtor determine the Rental Market rates for that type property in that area.

I use these three things to help develop my offer.   If ARV and List are close and property is basically turn-key rent ready then not much negotiation on price is required.

If repairs are needed to get it rent ready (up to Market standards) then the offer price should be adjusted to reflect the costs required.

If List price is higher than ARV, then, I want to know why.  Does the property earn higher than average rents?  Is it a high demand area?

The properties I look for are distressed and/or poorly managed.  Therefore, it is easier to justify the lower offer price.  Plus it gives me a greater opportunity to force equity appreciation.

Just remember when you make your offer that you must consider what your all-in costs will be.  Purchase price, Rehab, Closing and Holding costs.  You don't want to over pay for a Buy and Hold rental.  You may never get that money back.

Chris Albanese · Answer

I'm in the same boat right now, and I'm analyzing properties as if they were an investment and I didn't plan on living in them.  Then, if the numbers look good I can see how much "rent I would pay" and see how that impacts my NOI.  Usually if it's a good investment then taking one unit's rent away won't make it a bad investment.  But it's hard to analyze it the other way around, as if you were going to live there.

Jeffrey Gagnon · Answer

@Zach Quick im using a Va loan so i can only "rehab so much"  and since its a va loan there is no down payment, just closing costs.  i have yet to find out monthly expenses on most of the properties, today i plan on trying to find out the average prices of the owner expenses. and i have been researching rent prices in the city. i'm still living in japan and will be moving to Nebraska in June.

Jeffrey Gagnon · Answer

@John Leavelle that's good advice, if its close to 1% i will dig deeper, i think that's a good starting point, if its no where close i will just move on.

Jeffrey Gagnon · Answer

@John Leavelle when i am screening how do i know i cant just make a lower offer? i could run analysis on every property and just make an offer that suits me on every property. my real estate agent tells me that the numbers on sites like trulia etc are not very accurate so im not sure how to shrink my pool of properties

Jeffrey Gagnon · Answer

Thank you everyone

Logan Allec · Answer

@Jeffrey Gagnon "so do you think its best to analyze the properties as though i wont be living in them?"I would.

Joseph Gozlan · Answer

@Jeffrey Gagnon Do you plan to live there for the rest of your life?

My .02 is that if the answer is no then you should analyze it as a pure investment property and don't forget to include PM, Capex and reserves.

If the numbers still makes sense as an investment, then I'd go ahead and move in, otherwise you could end up in a place of "I really want to move out of here but I can't because the property will start losing money" and that's just not a good position to be in.

house hacking numbers?

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