First time Househacking- Break down my deal!

[Keith B.]

Hi everyone,

First time homebuyer, first post, and first analysis all at once so please be as critical as you like; it's the only way for me to learn. I have a multifamily property under contract for $600k. The projected rental income would be $6000/monthly, projected cash flow is ~$1000/month, and CapRate at 7.2%. In addition to the mortgage, property taxes, and insurance, the projected calculations are taking the following expenses into consideration (5% rate for vacancy, 5% for repairs/maintenance, 5% for CapEx, and 10% for property management; otherwise the income figures would be higher. The property is a B- area with only mild appreciation historically but it's near a metro hub so finding renters won't be difficult.

However the property is nearly 100 years old so it looks dated from the exterior. The interior looks decent with only cosmetic rehab needed, some appliances changed, new floors, and a re-tiling of a couple of bathrooms. I will know more after an inspector and/or a contractor sees the house. I did pay the asking price for the property as there was another bidder and I wanted this property due to my lack of experience and rising interest rates. Bad move?

I plan to house-hack it so the rental income/cash flow will be significantly less. What do you guys think of the deal? Are there any factors that I'm missing? I can still legally back out of the contract if needed but I would love to hear from your guys first!

[JD Gunter]

You can independently verify the rents on Rentometer if you would like. Try to find as close a comp as possible on one of your units. A local agent can be great for rental rates, but the agent you are buying from is biased to sell you something. For my clients, I always send them the source of my information so they don't have to take my word for it. 

It is interesting, and unusual in my market, that they are all empty. Hopefully there is a good explanation for that and it's not that they couldn't find tenants. 

If you are under contract, you should be able to get the past leases, rent roll, and utility bills now. I would be curious how recently the units were rented and for how much, compared to your target. Theoretical market rent and tenants actively paying rent are two very different things.

Your upfront costs are going to be substantially higher with no tenants. You need to factor for advertising, lease signing, background/credit checks, etc. If you are going to manage it yourself, plan on time for interviewing tenants and doing walkthroughs. 

If you are going to rehab the property before you lease it, you need to plan on carrying costs for the time it takes you to rehab. Normally, I would recommend rehabbing units as the leases expire, but you won't have that luxury. You may want to consider getting at least some tenants as quickly as possible so you don't get buried in rehab costs and carrying costs simultaneously. 

Regarding the calculations, I guess my point was that you should shift from running numbers hypothetically for calculation purposes and start using real numbers so you can see what you are getting into. I have clients that have a hard time making this switch. As investors doing research, we spend so much time running hypothetical numbers that it can be hard to realize we have real numbers that we can use. At this point, you want the cold, hard truth. 

Right now, you don't have any cashflow. 

I think $1,000/month cashflow on a $600k unit could be great, but you have a long way to go to get there. Right now you are walking into a 100% net monthly loss. 

I'm not trying to scare you, it could be a great deal, just know what you are walking into. Your cap rate and cash-on-cash return are currently negative, until you get three tenants and start collecting some rents