Please Help with Evaluation! What the heck am I missing??

Question

Alright ladies and gents, I'm looking for some help! Total newbie alert!

I can't seem to make any house hack make sense!

Example 1:
Triplex (3 bedroom unit, 2 bedroom unit, and a 1 bedroom unit)
Purchase price = $240,000
Loan Amount = $228,000
Rent the 3 bedroom for $800, rent the 2 bedroom for $700 = $1500 in rent
Monthly Payment = $1463
Less than $100 cash flow so far and that's not including vacancy, repairs, etc! Then deduct 10% ($150) for vacancy, and 10% ($150) for maintenance and I'm in the hole.

Example 2:
Duplex (2 bed, 2 bath each unit)
Purchase price = $200,000
Loan Amount = $180,000
Rent = $800
Monthly Payment = $1200
This would mean I still have 400 out of pocket expenses. And that's not including vacancy, repairs, etc.
Once I moved out, I would receive $1600 in rent so I'm cash flow positive. Then deduct 10% ($160) for vacancy, and 10% ($160) for maintenance and I'm basically breaking even.

Are my calculations just totally off? Is my area a terrible place to house hack in? I see these great stories of people basically living for free and can't figure out what the heck the deal is with what I've found.

Any insight greatly appreciated for this rookie investor!!

JD Martin · Answer

You're not really missing anything. In Example 1 you are bringing in let's say 2100 in cash flow - 800 for the 3, 700 for the 2, let's say 600 for the 1. You are eating the 600 by staying there yourself but it's still cash flow - what would you be spending on rent somewhere else? Example 2 is more or less the same thing but without an additional unit to absorb part of your costs. In both examples, tenants are paying off your principal, which you also haven't accounted for, and you are getting tax credit for the interest.

Jane S. · Answer

Ya know, I dont think "house hacking" has enough of a history. It's not like "flipping" or "buy and hold". Out of 100 investors, how many actually "house hack"? It's a cute way to express "buy a duplex and live there rent free ha ha". Which in my younger days was the common way to start up in RE if you had no cash and no rich uncle. Like the term "side hustle" which has a whiff of the forbidden about it (what's that, he has a "side piece"???). Anyhoo, what you're looking for is a quicker fix than you can get with your numbers. How much can a grocer make on boxes of apples or cartons of crackers? Not a whole lot since the markup is so tiny. Wouldnt it be more fun to stay in your nice apt & collect 2 rents? And keep raising them? Blimey ... also, dont escrow anything you dont have to, the banks squirrel cash away out of your pocket to protect them from you not paying ... this happens at closing and no one mentions it. Just try to understand the bank's [piece of paper detailing your escrow activity ...

Michael Noto · Answer

@Corey Stevens Without knowing your market at all, if it is an area that people actually want to live (as opposed to being forced to live in) if the rent payments are covering your mortgage payment when purchasing a triplex then I think you are ahead of the game. The numbers work on this deal when you move out and in the meantime you are basically living for free and that is not even with maybe being able to raise rents over time. House hacking is all about perspective. If you want a deal that cash flows while you live there you are either going to have to buy something that needs rehab in a good area (this may impact your financing options) and/or buy something in a less than desirable area which I do not recommend. Keep in mind if you buy something that needs rehab your vacancy on the front end (or the rent from not updated units) will lead to a dip in performance on the front end until you get the units in good shape and get top of market rents.

JD Martin · Answer

No, property taxes should be in your calculations. I assumed that was in your mortgage number (PITI - principal, interest, taxes, insurance) but if not that certainly changes things to some extent. Still may not be a bad setup - 3000/12000 = 25% annual cash-on-cash not including tax benefits - but not as good as what I posted before.

Corey Stevens · Answer

@JD Martin when you put it like that, it sounds pretty good. One thing I forgot to account for in my original post was property taxes. Those come out to about $375 a month on that triplex. The numbers really don’t look good after that is taken into account. Or am I looking at it the wrong way??

JD Martin · Answer

I think your expectations are out of line with reality. You're putting $12k down on a house and you'll be making $600 per month (what you were spending in rent plus the extra cash flow minus your vacancy/maintenance). That comes out to $7200 return annual, not including any tax benefits.7200/12000 = 60% annual cash-on-cash return. I'd like to know where else you can get that kind of return, because I have equity just looking for that kind of home 🙄

Bjorn Ahlblad · Answer

@Corey StevensYou need to find a neglected property that you can rehab and raise rents. I would look for a 4 plex that needs a shot in the arm where you can raise rents from say 550 to 750 by improving the property. It needs to be in an area that is going through a revival for this to work well and it helps if you have some home improvement skills. All the best!

Corey Stevens · Answer

Thanks for the reply! In regards to your question about spending to rent somewhere else - my wife and I rent a 2 bedroom apartment for $680 in a nice area.Once I account for vacancy and maintenance (call it $300 per month) on the triplex it still doesn't look super attractive. I just feel defeated as I hoped house hacking was going to a bigger game changer for us