Would you buy a house hack that cash flows, but has no equity?

Question

After I get my first rental property closed I'm going to look into refinancing out of the FHA mortgage on my personal residence into conventional, and possibly pulling a little cash out (and keep it as a rental).  There are not a ton of small multi-family properties in my area, but I one popped up on the MLS yesterday that got my attention.

The property has 2 duplexes on one lot.  Each is 2/1 and about 900sf.  I have a good gauge of what SFH's are worth in my area, but no idea about multi's since there aren't that many around here.  So, assuming that this thing is listed for what it's worth, and each unit will rent for $800-$900 (I'll say 800 for this exercise), is it worth buying and living in one of the units?  The calculator tells me that with an FHA mortgage and 3.5% down my monthly payment would be around $1400 per month.  Rents would be $2400 plus I'd get to live in it for free until we were ready to move.

I realize this is probably not the blockbuster deal that a lot of you may be looking for.  But it is worth buying for someone who is just getting started as a house hack?

Joe Villeneuve · Answer

Never, at any time, by any property, for the sake of buying a property.

This is a numbers game.  The only numbers that matter are the one's with dollar signs in front, not street names behind.

If the numbers ($$$$$) don't work, don't buy it.

Also, if the numbers ($$$) are not working in the area you are looking ("...There are not a ton of small multi-family properties in my area..."), then you are looking in the wrong area.

Investing locally, just because it is local, isn't a good reason to invest in that market.  Many are told to invest locally because they "know that area".   Their reasoning behind that advice was "you knew that area".  If that was their reasoning for you to invest there, it would  have been very bad advice.

Although it is important to know the markets you invest in, it should not be the reason to invest there.  You invest where the numbers ($$$) work...only.  Then, you learn about that market as if it was where you lived...not the other way around.  In fact, that knowledge of the market where you live could be telling you (even screaming at you), "don't invest here...you can't make money here"

Shiloh Lundahl · Answer

@Shaun R. I think I disagree with some of the things that have been said above.  If you look at it in terms of the fact that you need to live somewhere, then any way you can make where you live some sort of investment is a good idea in my opinion.

Of course you need to look at opportunity costs.  For instance, could the money that is going into the house hack investment work better for you in a different investment and make more money for you  when you factor in spending money for rent or a non-house hacking mortgage?

It really is a numbers game, but when it comes to house hacking, the goal is to figure out a way where you can live for free and have others pay down your mortgage.

I just purchased a house in Burbank, California, where house prices, mortgages, and rents are very high.  The reason that we bought it, and we bought it at market value, is because of the added value opportunity and the house hacking opportunity.

Purchase price 800k

Down 160k

building out the attic and adding 700 square feet 130k

ARV 1.1 million

Guest house in the back could bring in 1500 a month

Mortgage, taxes, and insurance, before I add square feet around 3900 a month

Rent for the last year 3900 a month.

Will I cash flow on this house?  Absolutely not.  However, my monthly savings will be around 2500 including the income from the guest house as a short term rental and the principal pay down on my mortgage.  This doesn't include the 170k increase from the increased ARV from the rehab minus the expenses.

The question here is, could I do better than 2500 a month every month by investing 290k elsewhere plus a bonus of 170k minus commissions with the sale of the property in the next 2-3 years?  Maybe.  Lets say I live there for 3 years.

Loan pay down 33,500

Increase in ARV 170,000

Income from short term rental 54,000

Closing costs to sell the house 55,000

Total profit in 3 years 202,500

Monthly profit on an investment of 290k would be 5625 which would be a 23% return on investment.  So even though it doesn't cashflow, since I will be living there anyway, this is a way of turning a primary residence into an investment doing a live-in-flip/house hack on my primary residence.  By the way, these numbers don't account for appreciation.

So I say, if the numbers make sense, then do it.

Shaun R. · Answer

That number does for PITI including PMI.  That is just from the calculator on realtor.com.  If this is still available after I get the property closed that I have under contract, I'm definitely going to dig deeper and get some real numbers.

Mark Jones · Answer

If your $1400 includes tax and insurance, I'd do that deal. Even if you set aside $500 a month for maintenance and capex you should be able to save enough (putting in some of your own cash) for another house hack down payment in about a year.

Thomas S. · Answer

When investing in real estate it is never the seller that sets the value of a property. You determine the numbers that work in order to produce the cash flow that you require and that is exactly what the property is worth to YOU.

It is irrelevant what the seller has the property listed at. Do your calculations based on market rent, expenses, financing costs etc. and determine the amount you can pay and either make an offer that works or walk away.

You are not a home buyer you are investing in a business.

Would you buy a house hack that cash flows, but has no equity?

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