House Hacking and Cash Flow

[Jaclyn Spinelli]

Hey!

I'm thinking about house hacking in the north side of Chicago (Avondale and the surrounding areas).  I've used a couple calculators to assess cash flow and stuff, but I'm wondering if there is a rule of thumb or something to determine how good a deal is?  Like, am I expecting cash flow while I'm living there?  Or just when I move out?

Thank you!

Jaclyn

[Andrew Holmes]

@Jaclyn Spinelli Avondale and some of the surrounding areas more life style areas and pricing in todays market is pretty high. Having said that your cash flow is going to be driven by the deal that you find in terms of purchase. Generally if you buy right it will cash flow but you will have to do some digging and then the other factor will depend on condition of the property. I own quite a few properties in Chicago suburbs but a recent purchase just south of Belmont (Just South Of Avondale) meets all the numbers we use. Some of these area in the city are what I call lifestyle or aspiration areas so you end up paying a premium for them and cash flow become tough. 

If you are looking to a house hack personally you use some back numbers that will set you up for the long term. So even after you move out of this property you can keep buying more and more properties and it's not based on your income in the future. 

75% of all rent collected should cover all expenses (Principal + Interest + Taxes + Insurance + Common Area Expense)

For Example you have a 2 unit Each will rent out for $ 1400 * 2 = $ 2800 

2800 * 75 % = 2100

Your Goal should be to hit 2 numbers 

#1 75% of rent collected covers all your expenses. 

# 2 DCR (Debt Coverage Ratio) - Min of 1.33%

If you keep these tow numbers in mind you will never go wrong and you can keep building one after the other regardless of your job situation. You can keep scaling property after property as long as you keep these numbers in mind. 

So assume you pay $150/ Month in common area expense like heating+ Water + Garbage etc. (Notice I did not put Cap X expense) that should not be taken into account when you do house hacking you will have plenty of cash flow if you follow these numbers. 

Insurance - $ 1000 per year  Property Taxes: $ 3000/ Year

Now if you we take the 2100 and all the expenses into account you can buy up to a $ 334,645 property and still hit all your numbers. You should be able to buy a 3 flat for that all day long all your numbers will be better. 

If you buy a 2 flat. When you are living in the your property it will cost you $ 700/ per month out of pocket to own it. When you move out you will have $ 700 in cash flow. 

If you buy a 3 flat. You will break even and make money. You will make even more money once you move out. 

I have attached the pics and calculation. Hope that helps.