Duplex House Hacking - Good Investment Or Not?

Question

I’m thinking about house hacking for the first time with an FHA loan 3.5% down.

There’s a duplex that someone is selling me off market at $220k in a very good area in Tampa, FL (West Tampa is the area). 2/1 each unit and the rents are usually $950-$1,000, separate electric meters, one water meter. Taxes are $2,200 and insurance is $800/yr

As a cash flow deal it makes sense, it shows $224/mo cash flow and 11.98% cash on cash. My question is: Is this still a good deal if I decide to house hack it for a year?

Evan Polaski · Answer

@Nicolas Botia Here are some thoughts:

If you house house, you get FHA loan with little down and 30 yr am.  That is great from a return perspective, but the more you leverage, the higher your monthly costs.

I would look at this as an investment first, so calculate what the true NOI is if you rented out both units, have management fee, reserves, etc all calculated in.  Then calculate in commercial financing terms, and subtract your rent payment if you were to live somewhere else and just hold as an investment. This will likely be a loss, but you need to live somewhere.

Now, go back to your NOI, take out your rent from the duplex (are you taking a whole unit for yourself for $1,000 loss rent or have a roommate and are only out $500).  From that number, calculate your FHA loan payment and see where you end up.

Again, I am going to assume both scenarios end with a negative number.  But living somewhere costs money, so if the FHA loan with you living there is lower than just buying as an investment and renting elsewhere, then you have your answer.  The upside is that once you have an FHA loan, as long as you stay 12 months as owner occupied, you keep that loan and move somewhere else, so you will continue to cash flow better than commercial loan long term.

Evan Polaski · Answer

@Nicolas Botia

I would be careful about just chasing returns.  The "not so nice areas" will always bring a higher return, but remember from econ 101: there's no such thing as a free lunch.  You get a better return, because you are taking more risk.

Your tenant quality goes down the neighborhood quality.  Other investors will view that as "not so nice" and will not pay as much when you want to sell.

Real world color: we have a duplex in a great neighborhood and generally have no downtime when a tenant moves out.  Great landlord references, professional employment and wages, great credit scores for potential tenants.

I also have a SFR in a "not so nice area".  It typically takes me several weeks to find a tenant when it turns.  The "wear and tear" is much more extreme, so I typically have some repairs on every turnover.  Credit scores are not bad, per se, but are definitely lower than the duplex.  Rent is a little lower, but the cost was MUCH lower.

So, moral of the story is, I get a better return on my SFR in "not so nice" neighborhood, but I have to work a lot more for it.  The return is lower on the duplex, but I get to pick my tenant and never have a text about "rent will be a couple days late this month".

Michael Haynes · Answer

Hello Angel R. What was my biggest lesson from 2008? I am 71 years old. From the time I was 15 the only thing I wanted to do was to learn how to make Money on my own. Money is Mobility. The problem with Real Estate investing is that it is not Liquid. When you want to Sell or have to Sell, you can't. With Stocks and Options on Stocks and ETF's and Futures you have a system set up to get you in and out...NOW. I saved up $100,000 when I was working on Oil Tankers for 11 years with Mutual Funds, to buy a small portfolio of Rental Duplexes and houses in S. Tampa, 30 years ago for my retirement. This was my Buy and Hold investment instead of Stocks. I have done the "Buy five Rentals and then buy five more to accumulate ten Rentals in ten years. Then, fix up the worst five and sell them to pay off the remaining five and end up with a Million dollars of property and $3000 a month Net Rents." I did that twice and in 2008 I find myself wanting to Sell with the Market collapsing as all my renters lose their JOB's. The President of our Mayor's Development Council just told me that he, as a Broker and Builder, lost everything in 2008. He just finished building out 15 prime acres with 500 Townhomes and Houses that he is now going to start selling. So, the biggest and the brightest and most capable did not pay attention to the Real Estate Cycle and when at the top...Sell, Sell, Sell. When 2008 hit my friend had just bought a $250,000 Penthouse facing the inside of Tampa Bay in S. St. Petersburg. He told me that his mother warned him to get out now and he started lowering his selling price $5,000 a week until he sells. He sold for $150,000 and moved to the Phillipines. I saved three of my Rentals and two with my girlfriend including her home that I fixed up. We sold one of our Rentals downtown for a $100,000 Profit three years ago. Then, we lived in our River property and sold that for $150,000 profit, Tax-free as our Residence. Then, I sold one of my ten year rentals for $80,000 profit. All that time I am paying off Debt and now I am waiting to Close on the sale of my Commercial property next month for $380,000. I profit $350,000 and use up the rest of my Carry Forward Deductions. I am fixing up my current Residence to Sell and I should make $50,000 Tax-free Profit in a few months. I want to move outside of the City Limits of Tampa to Brandon. I will have around $400,000 Cash which I have been waiting for eleven years to get back to from 2008. The lesson concerning SFH's etc. in Tampa is that in my 30 plus years I did not find SFH's that paid for themselves. You really had to Buy at the bottom of the R.E. Cycle or like I did, Creatively Finance with Financed by Owner or find a Motivated to the Max Seller who would sell for Cheap. We did not build a lot of Multi-family. Tampa was built up after WWII for the Military from MacDill AFB. 2 and 3/1 wooden houses full of termites after 50 years. I made out by sticking to the ten year Plan and the Rents have to produce more than $100 a month Free Cash Flow for each or apartment. That is impossible if you pay someone to Manage for you, so, I ended up as a Burned Out Landlord. In my time you could use just an all around Handyman. Now, even those have to be Licensed and you have to pull Permits and do Inspections. I just saw an ad for an AC outfit who charges for the estimate! Not!! I am doing all the work myself on my home to sell next. Do you know how to fix everything in your home? Sweat Equity goes a long ways towards your Goal. I signed up with a Broker in Brandon and now get email notice of every new property that goes on the Market in my Target Area. Your looking for a Deal? How do you find a property to fix up that will be worth a lot more when you are done? Well, I found more than one last month and I am kicking myself because they are Foreclosures and I can only make an offer if I have Proof of Funds. The best one is selling for $150,000. It is a 4/3 with a fully enclosed huge pool in the back and all I can see are cosmetic repairs. It is worth $250,000. My neighbor has two houses on the same lot next door. He already Financed by the Owner, two of my first Duplexes and I plan to make him a Cash offer when I Close on the Commercial property. If he accepts my offer after the Virus and not renting for a year etc. I can fix the rest of the problems with $30,000 and Sell for a $50,000 Profit. Then, I plan to go Townhome if I don't get one of my Target houses after that, for my Residence. Because there are soooooo many Foreclosures and I have Cash to offer, I should be able to get at least 10% off the selling price. Goldman Sachs just predicted that we will see a 4% downturn in property values and then Flat in 2021. So, I would still have an upfront, Profit Margin. After I establish the new home as my Residence, the manager at Republic Bank says he can give me a HELOC at the low rate and at least 70% Loan to Value. I am retired, but, I trade Futures online and I will have a lot of Cash to deposit in the Banks. Remember, the FDIC Limit is $250,000 per Bank. If, I bought a fixer upper and it was worth more when I move in and I get at least 80% LTV, I can get most of my Cash back and continue on...one property at a time. In Tampa at this time if you have $200,000 Cash, you can be make things work for you and not have to deal with the Banks. You can slowly, make a living without a BOSS and do it Tax-free and Tax-Deferred. God help everyone to make it through this Epic Stress Test.

Bryan Mitchell · Answer

@Nicolas Botia, while the concept of a Duplex house hack is a great, the numbers have to work. You didn’t mention how much of a down payment you were making and I didn’t see Cost allocation for vacancies, CAPEX, or maintenance. So it’s difficult to tell if it’s a good deal or not. I prefer to get $200 per door with those items factored in. Tampa will likely have appreciation so that nice. The asking price while probably reasonable seems a little high unless your rents are higher than you mentioned. I’d much prefer 2% on this but given a house hack, I’d accept a little less but not less than 1.5%.

Thomas Franklin · Answer

@Nicolas Botia I am not a fan of purchasing a Residential Multifamily Property known as "House Hacking." Many Realtors will suggest purchasing a property using a FHA Loan, to reduce your out of pocket money. If the property requires rehab, the Realtor and/ or Mortgage Broker will suggest applying, for a FHA 203k Loan. A FHA 203k Loan is where the purchase price and rehab costs are rolled into a single loan.

Assuming you have a respectable FICO you can buy, with a FHA Loan (3-5% down, a 30 year amortization schedule, and a residential loan rate). You live in one unit and let your tenants pay the mortgage and other property expenses. This will give you experience as both a Landlord and Property Manager. The downside is you will need to live there, for a minimum of one year (to satisfy FHA Requirements); AND because you closed personally, you will not have Asset Protection, in the form of closing in the name of a LLC. What happens if one of your tenants has a slip and fall, on your property, or something else happens to them? You are on the hook and can be personally sued, for everything you own. Some people will say, "Take out a quality Insurance Policy and you will be protected." Ambulance chasing attorneys know their way around and can legally navigate around Insurance Policies. Another downside is you loose on the advantages, of the Federal Tax Code, by not closing in the name of a LLC.

If you want to close in the name of a LLC, Mortgage Lenders will offer you Commercial Loan Terms (25-30% down, a 15-25 year amortization, and a ballon due in 5-7 years). This is what I am encountering, in the current Mortgage Industry.

If you think you will go FHA, Conventional, FHA 203k, etc. and then Quit Claim the property, to a LLC, or a Land Trust you run the risk of the lender discovering a Title Transfer occurred and activating the "Acceleration Clause" or "Due on Sale Clause" that requires the loan to be paid in full, within 'x' number of days. These clauses are contained, in all Promissory Notes nowadays.

Many Realtors and/ or Mortgage Brokers will not tell you this information. Many, but not ALL are only focused on the commissions he/ she will earn and not focused, on your best interests. You may be asking yourself what can I do? Locate a Motivated Seller that will consider Seller Financing. You may have to put more money down (10-15%), but you can close, in a LLC, with no worries about banks. I have a lengthy Legal Opinion, from my seasoned Legal Team regarding this matter.

Nicolas Botia · Answer

@Evan Polaski @Bryan Mitchell

Thank you both for the answers! It does 100% make sense as a rental after I move out but not with a lot of equity.

I can find duplexes for $150k turn key and ready to live in (still not much equity) but they are in less desired areas, should I look into that possibility? Rents in that are will be at around $800-$900.

Nicolas Botia · Answer

@Bryan Mitchell

Down payment will be $7,700 (3.5%). And I did include all expenses. 5% vacancies, 5% repairs, 7% Capex. I also included $150 for utilities and $25 for garbage.

But what about all the money that I’ll be saving? Right now I’m paying $1,460 in rent and if I buy that duplex, I’ll be paying probably $200-$300 out of pocket.

Is that something that I should consider or it should always cash flow as a house hack?

Angel R. · Answer

What was your biggest lesson from 08? Do you think is wiser to buy MultiFamily in Tampa than SFH?

Thank you,

Michael Haynes · Answer

Hello Nicolas Botia. The one thing that Newbie's don't understand when they see Duplexes as a way to go for a First Time Buyer/Investor is... "the worst thing an Owner can do." =  to Live in the same building as your Tenants. That also means to take in a Roomate in your 2/1 Apartment to lower the costs. As a burned out Landlord with 30 years of renting in S. Tampa, I look forward to just buying a Fixer Upper House to live in for 2 years and be able to sell Tax-free as my Residence. I finally got a a good offer on my 4 Commercial lots off Dale Mabry Hwy and Interbay. I will get back to where I was 11 years ago, before the Crash, with a Profit of $350,000. That will allow me to buy Foreclosure houses under $200,000, Cash, fix them up and do 1031 Exchanges as I find real Deals to buy. You can 1031 those houses until your Profits go over $200,000 and then move into the last one for two years and sell as your Residence. Your an Agent? You need a place to live and you have a JOB. Why complicate your life with "biting off more than you can chew" and putting up with the Tenants? Single Investors don't need to do more than one Deal at a time and make it Tax-free and Tax-deferred. "The Bigger they are, the Harder they fall." We are at a top in the Market. Where do you think it will go from here?

Lucia Rushton · Answer

Without diving deep into the numbers, yes I personally think a Duplex is a nice way to house hack.

Duplex House Hacking - Good Investment Or Not?

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