Househacking - Portland, Oregon

[Rob Tyse]

Hi all! I have Portland, Oregon as a finalist city for moving to this summer (from Chicago) and wanted to get an understanding of cash flow expectations, and best neighborhoods w/in 15 miles of downtown that would make the best sense to start looking in for owner-occupied FHA house-hacking (2-4 Unit) opportunities. Budget would be around $450-$650K. What should I be expecting in terms of cap rate? Does Duplex typically make more sense rather than 3-4 Unit? What neighborhoods give me the best shot at being cash flow positive after moving out years down the line, and what neighborhoods would you steer away from? Any advice would be very helpful!

[Chace Fraser]

Hey @Rob Tyse, welcome to BP! Portland is a beautiful city and one that has very high inflow of people. Like @Steven Tran said, we are much more of an appreciation market than a cash flow market. There are a lot of things you're going to want to keep in mind about house hacking in the area.

First, use the 1% rule to quickly analyze properties. The average output of the equation is around 0.58. Anything over that will cash flow better, anything under may likely appreciate better. 

Second. It's very unlikely that you'll be able to live for free while you're in the property; the price to rent ratio just doesn't support it (again, because we're in an appreciation market). However, you need to make sure the property will at least "float" (rents cover the mortgage) when you buy. 

Keep in mind, if you are using a low down payment, it's not really realistic to expect to be cash flow positive while you’re house hacking / in the house hack. When an investor is looking at being cash flow positive, they are typically putting down 20-25 percent or more. If you are in a high demand metro area, it's simply not realistic to expect to be cash flow positive while in the house if you are putting down 0-10%. However, the property must cashflow after you move out for the deal to make sense (in most scenarios).

You just can't expect to cash flow on an initial purchase with a low down payment. Now with time and rent growth, what could be a negative cash flow property might very well become a cash flow king, but that takes patience. Also, keep in mind that in my opinion, you would still be winning if your monthly housing costs went from $1,400 to $900… that would be the equivalent of producing an extra $500 a month in cash flow that you could save up for your next investment.

Another way to increase cash flow would be renting out rooms in the unit you live in, either Airbnb or longer term.

I’m not a lender, but there are some important things you need to know about when looking to purchase a 3-4 unit property. Borrowing on these types of property is a little tricky and you need to make sure you’re working with a lender who has done so before.

In order for a bank to lend on a 3-4 unit property, the property must pass what is called the “self sufficiency test.” This is so the bank can mitigate their risk. Here’s the equation:

Gross rents for all units LESS a 25 percent vacancy factor MUST be greater than or equal to the mortgage payment. >

or

(Gross Rents * 0.75) ≥ PITI

When calculating the gross rents, the bank takes the LOWER of the current/appraised rents. If a unit is vacant, the bank will use the appraised rental value for that unit. Passing the self sufficiency test is not always easy (especially here)  and can kill a deal.

They will also require that you have 3 months of reserves available (PITI x 3). There is no reserve requirement nor self sufficiency test for duplexes.

I'm more than happy to discuss any of this if you'd like to.