Is there too much cash in my house hack?

Question

My wife and I have a house under contract that we're planning to house hack. The plan is to rent the 1000sqft basement as a short-term rental (1800/mo) then when we move away after a few years, rent the top 2000sqft as another short-term rental ($2300), or rent both together. Having long-term tenants are also an option but the cashflow and cash on cash returns are half.

The numbers seem to work but it needs a lot of cash and I'm wondering if we should just buy a regular house to live that needs zero renovations and then take our cash and start investing in small multi-family out of state, which I'm planning to do eventually anyway. What are your thoughts?

These numbers are as if we were renting both units as short-term rentals today. Once we do rent out both units in 3-5+ years, the income will be higher.

	Income		.			Cash Flow
			.
Rental Income	$4,100.00	.		Total Monthly Income	$4,100.00
Laundry Income		.		Total Monthly Expenses	$2,755.00
Storage Income		.
Misc Income				Total Monthly Cashflow	$1,345.00
			.
			.
Total Monthly Income	$4,100.00	.		Total Annual Cash Flow	$16,140.00
	Expenses		.			Cash on Cash Return
			.
Taxes	$290.00	.		Down Payment & closing	$26,250.00
Insurance	$75.00	.		Other
Water/Sewer	$60.00	.		Rehab Budget	$160,250.00
Garbage	$45.00	.		Misc Other
Electric	$80.00	.
Gas		.		Total Investment	$186,500.00
Supplies	$25.00	.
Lawn/Snow	$50.00	.
Vacancy	$0.00	.		Annual Cash Flow	8.65%
Repairs	$100.00	.		Total Investment
CapEx	$50.00	.
Prop. Management	$0.00	.
Mortgage	$1,980.00	.
			.
			.
Total Monthly Expenses	$2,755.00	.		Cash On Cash Return	8.65%

Renovation costs
HVAC	$30,000	We may finance this.
Quality of life upgrades/ Top floor remodel	$30,000	Converting 4bd/1ba top floor to 3bd/2ba+W/D
Oil Tank removal	$4,000
Electrical	$3,600
Windows	$30,000	All single pane. We plan to upgrade over a few years.
Roof	$15,000	4 layers of shingles! We plan to upgrade in a year or two or finance it.
Basement	$25,000
Basement furniture	$5,000
Upstairs furniture	$10,000	Won't be necessary until we move out and rent the top unit
Holding costs	$7,650	Might not be necessary but if we need to continue renting for 3 mo during renovations.
Total renovation cost	$160,250

I'm happy to provide more details if anyone is interested (I'm a numbers guy). Thanks all!

Dan Guenther · Answer

@Ryan RotzYeah, that's a tough one. You could also keep an eye out for a large heated garage and maybe convert part of that to an office space.

Ryan Rotz · Answer

Thanks @Dan Guenther, I appreciate the feedback. It is a lot to take on for our first deal. One problem we're running into is that we need 3bdrm + office or a 4bdrm. I haven't seen anything that's sold in the last 6mo that meets those requirements. Most houses seem to have 2-3bdrms upstairs and 1-2bdrm in the basement. I've also considered building a 10x12 office/shed in the backyard so that it would be easier to find a house that worked. You can buy them for about $20k. Maybe I should revisit that idea.

Dan Guenther · Answer

@Ryan RotzWelcome to the community! In my opinion that seems like a lot to take on for your first deal. I'd look for deals with quick value add projects that aren't going to completely overwhelm you (paint, floors, minor repairs). Here in Denver, we find a lot of properties that can be split into two units by putting up a wall (split-level houses or houses with walk-out basements). On top of the rehab, you are going to have a lot on your plate as far as learning the property management side of things. Do you and your partner have W2 jobs also? Are you currently working with an investor-friendly agent that can help search for creative properties?

Anthoney Hanks · Answer

@Ryan Rotz, welcome to the BP community - wishing you the best of luck with your investment

Ryan Rotz · Answer

Hi @Kathy Henley, thanks for your response. That's great advice to analyze based on long-term rental rates as well. I put my numbers below. About $660/mo cashflow and 4.6% CoC return. The city planner said there is no ordinance for short-term rentals. It's small town that's growing rapidly so in 5 years things may change. The house is zoned for multifamily so there are options there as well. I also talked with a few Airbnb hosts in the town and they're booked year round. This is a primary home with a rentable basement. This house is significantly cheaper than buying a duplex in the area so we aren't too concerned about paying the monthly bills. We'll be paying for the rehab ourselves. I'm planning on 2-3 months for the top floor remodel (hence the holding costs), then we'll move in. Then we'll start on the basement remodel.Here are the numbers for a long-term rental, if we were to rent the top and bottom units today (after the remodels).Rental Income$3,600Total Monthly Income$3,600Total Monthly Income$3,600Total Monthly Expenses$2,941Taxes$290Total Monthly Cashflow$659Insurance$75Total Annual Cash Flow$7,908Lawn/Snow$50Vacancy$0Down Payment+closing$26,250Repairs$100CapEx$50Rehab Budget$145,250Prop. Management$0Mortgage$1,980Total Investment$171,500Total Monthly Expenses$2,545Cash On Cash Return4.60%

Kathy Henley · Answer

@Ryan Rotz Are you analyzing this purchase as an investment? Buy low, sell high kind of thing? Or is this a primary home with a rentable basement and you are trying to make ends meet? The tax man will want to know. You show a monthly mortgage payment of $1,980. Where does the $160,000 of rehab money come from? How long will the rehab take? Will you live there during construction (maybe the basement?) How long can you pay the bills before you need rental income?Will the area support one more AirBnb apartments? I have had successful furnished rentals. Then the market changed and we signed long term leases. It is best to analyze the investment with long term rent rates and enjoy the flush short term furnished rent rate, as long as it lasts. Use the worse case scenario numbers. Budget a savings plan for the roof. They are real.