First Deal - House Hack: Need Advice

[Trent Strang]

I finally pulled the trigger on my first duplex which is super exciting!!! (It’s been a long time coming). The duplex is in the surrounding Lansing area. I’m doing conventional owner occupied financing 5% down at 4.75%. I am housing hacking, which is what allowed me to put such little money down.

I am a newbie so I would love to hear your thoughts, comments, concerns (numbers posted below). One of the biggest battles I am going back and fourth with is to raise rents or not to raise rents on current tenant, if so, what is fair?

The current tenant is very clean, takes great care of her unit and has lived there 7 years. I bought it (and it was being rented) as a 2 bed 1 bath, which for this area can rent anywhere from $750-$850 depending on sq ft and condition. She is paying $700. Each side of the duplex technically is 3 bd 1 bath as their is a legal basement bedroom with egress window and meets other requirements to be a bedroom. As a 3bd 1 bath this should be renting for $850-$1,000 depending on condition. So again I would love to hear thoughts, comments, concerns on what you would do/have done with your units when taking over. Good tenants but low rent, how do you handle? Thank!

(Numbers are run as if both units are rented: one at current rent $700 one at market rent rates $850. Both units will be rented in the future)

Purchase Price: $117,500

Cash to Close (5% down): $5,875

Rent (current): $1,550

Tax: $378/mo (will go down w/owner occupied)

Ins: $100/mo

Mort: $582/mo

Pm (10%): $155/mo (self managed I will pocket)

Vac (7%): $110/mo

Repairs (5%): $75/mo

Cap X (7%): $110/mo

Total Expenses: $1,510/mo

Cash Flow/mo: (I added back in the PM expense to cash flow because I will self manage $1,705)

$1,705-$1,510=$195/mo

Cash on Cash ROI:

$2,340/$5,875= 40%

[Noah Krietsch]

Hi Trent. Congrats on the purchase. I have looked at a few multifamily deals in Lansing but did not end up pursuing.

Househacking is a wise move, and will pay big dividends in the long run as you are able to keep socking away cash to dump into future multifamily deals since your living expenses are paid for while you live there and you've minimized your capital depletion with the 5% downpayment.

One thing to note...don't forget about the closing costs in your ROI calculation (will range from 3-5% of the purchase price of the house).

The question you posed is a good one: should you raise the rent on the existing very good & clean tenant? My answer is no for a duplex (or anything 4 units and under), and here's why:

• Having a solid, clean, long-term tenant in smaller properties is actually worth more to you than the potential $100/mo extra rent you may or may not be able to get because of the vacancy and unit turning  (in larger buildings 24+ units, vacancy and turning units is just an inevitability that is built into the underwriting, but in quads and smaller, vacancy and unit turning can blow up all your profits)
• In the 7 years that she has lived there, there could have been instead new tenants moving in every year, likely driving ~1mo of vacancy every time new tenants came on board (need to time turn the unit, get the new tenant in order, etc...many people think they can do all this in under a month but it's just not true)...so that's 7yrs*$700 vacancy=$4900
• The less clean tenants who would have taken her place would have driven ~$800 unit turns each time they moved out (unless you do all the painting and cleaning and all that garbage yourself)...so that's 7yrs*$800 per turn=$5600
• So in her time there, there could have been $10,500 in rent lost to vacancy+the cost to turn the unit, as opposed to $8,400 potential additional rent  (and you will have had a lot less headaches too if you keep the good clean tenant instead of chasing higher rents)

Just my 2 cents.