House Hacking w/ Negative Cash Flow?

[Joey Gorombey]

Hi All,

TL;DR -- How do I evaluate properties that I will house hack? Should I look at the property holistically, or with only one unit of income? 

I'm interested in house hacking, and subsequently purchasing multifamily rental properties. When evaluating multifamily properties for house hacking, how does one go about underwriting the property? 

Estimating the property with two rental units versus one rental unit gives very different numbers on the property. Should I be underwriting the property with one rental unit or two? As a newbie investor, I see arguments for doing both. 

Evaluating with one unit of income (since I'd be living in the other) gives me a realistic idea of expenses, but the property doesn't seem ideal. Assuming FHA financing at 3.5% with zero points, 10% repairs and maintenance, 6% vacancy, 10% capex, 10% management fees, taxes, HOA fees, and not including PMI:

• $6000 NOI, Cap rate of 4.0%, -25% CoC return, and the 50% rule generates a measly $2 in cash flow. The property underwritten at 1 unit also fails the 1% test miserably

Evaluating at two units of income seems to tell a whole different story. Assuming everything above is constant, except rent is calculated for both units, i.e. not living there:

1. $18,000 NOI, Cap rate of 11.9%, 100% CoC return, and the 50% rule generates $756 cash flow. The property underwritten at 2 units also gives 1.6%, passing the 1% test.

It seems like this data is objectively telling me house hacking makes this property miserable, and that it's a grand slam rental property, but I feel like I'm missing something here. After all, one side of me is saying that a $400 or $500 mortgage with equity still seems better than renting. And the other side of me is sticking to the numbers, saying that I'm essentially renting cheap, but carrying the burden of being a landlord, and assuming costs that will sink my investment. 

Thoughts?