House-Hack Search in Austin - still worth it?

Question

Hi all,

Been on the house hunt this year for my first property, a duplex in Austin for a house hack.

Obviously it is very difficult to find a cash flowing rental in Austin proper; but, we're not really interested in moving out too far from the center of town, for lifestyle reasons.

Looking at one potential property, and it looks like, factoring in net rent from one half  of the duplex, property would 'cash flow'  -$2000/mo (FHA loan, 3.5% down).  I.e., my housing payment would be $2000/month.

While living there, this seems fine, since that is about what my housing payment is now (renting), and at least I would be building equity, gaining landlord experience and getting in the game/learning by doing.

Worried about longer -term exit strategy, though. Ideally would not live there more than 3 years. Adding in the rent from the other side, the property would still be pretty negative on cash flow (largely due to the FHA loan w/ minimum down, I know).

MAYBE I could bring the rent up over the next 3 years to where there is positive cashflow; MAYBE appreciation will be such that I could sell at a gain in several years. But these seem like big "Ifs".

Does this situation make sense to move forward on??

Dan Burstain · Answer

Scott,

I really feel this is one of the very few problems with BP.  They have investors who invest all over the nation giving their opinion and that opinion may be spot on where they invest and completely wrong in other places.  If you are looking for a duplex closer in the Austin city limits then cash flow is not going to be ideal.  However, ROI should be.  People on BP will tell you they never invest unless they get 1% or hundreds of dollars in positive cash flow and I will tell you those who invested in Central Austin the past 5 years have made way more money, in negative cash flow, than all those 1%ers.  Then comes the saying, appreciation is icing on the cake and should not be counted on and I will say definitely, in some areas of the country.  In Austin we have consistently seen appreciation for the past 30 years.  So, I would recommend getting in the game sooner than later and just understand that at 3.5% down in a house hacking situation, Austin just might be the best place to invest and the best for an exit strategy.  PM me if you are interested in buying that place and I will work out a commission rebate for you to make the deal sweeter.

Andrew W. · Answer

Hi Scott, I agree with what's been said here. It's hard to buy anything in Austin that would cash flow with 3.5% down.

I own and live in a duplex in NW Austin that has really helped minimize my housing expenses (cheaper than renting). It would be pretty much cash flow neutral if I were to leave (and I did a VA loan with 10% down).

So it may be best to try and save up more cash. Have you considered buying a fourplex? Or buying a duplex and having a roommate on your side?

Jordan Moorhead · Answer

@Nina Hayden there's cashflow in any market!

Jordan Moorhead · Answer

@Scott Fehrenkamp I'm betting you can find somewhere that would be at least break even when you move out.

I plan to pay a little bit when I'm living in a househack if I'm just renting the other side as a long term rental and am the only person occupying my side.

You could also Airbnb the other side and Airbnb your side when you aren't in it. Austin allows owner occupants to get an STR license fairly easy. The cashflow numbers can jump quite a bit with those strategies.

Check Airdna.com and check with the city to see what this would entail.

Nina Hayden · Answer

@Scott Fehrenkamp I don’t follow you at all. You’re wanting to invest in duplex in the 78745 area with an FHA loan and it won’t be positive cash flow. But you’re “banking” on the future and expecting to “make” money because of that solely. So you’re going to pay PMI because again, FHA loan, won’t cash flow, and you barely have reserves for emergencies. Just think about your insurance deductibles for those bigger claims like hail storm. Sorry,  I don’t see that as something good. And I wouldn’t advice anyone on that. It’s like you’re one paycheck or emergency away from chaos and life changing event! Furthermore I know the 78745 area very well, every street, subdivision, school and just about all the information I need to know what type of conditions the homes are in (older homes mostly that need renovations).  Re think it and calculate your worst case scenario because they do happen.  I don’t touch anything that doesn’t positive cash flow, even in Austin!  I don’t take such advice from anyone.

Dan Burstain · Answer

@Nina Hayden - This goes without saying.  The quickest way to lose money in real estate is being forced to sell.  If you have not thought about capex when buying this is a problem.  So hopefully you have some reserves.  There are ways to get cash or protect yourself from potential expenses inside the structure of the deal.  But you should have reserves at all times.  You don't want to buy something and live paycheck to paycheck.  It is too risky.  As for the whole cash flow conversation, I will revert back to initial comment.  Central Austin, with 3.5% down will not cash flow.  That is not even considering house hacking.  I am not sure there is a place in all of Texas that will cash flow while house hacking at 3.5% down.  Does that mean it is a bad investment - not in my opinion.  Like I said, Austin is an appreciation (ROI) play.  Only interested in maximizing cash flow - you should look to invest in Ohio or other states that have minimal appreciation play.

Jordan Moorhead · Answer

@Scott Fehrenkamp I found one in East Austin that more than breaks even. It took 7 months, 4 transactions falling apart and god knows how many offers.

Be ready to hustle, there is no free lunch.

Somebody like @Dan Burstain would be a huge asset to you.

Nicolas Ossa-Laverde · Answer

I Agree with @Nina Hayden and @Lexi Teifke. The 3 things to typically look for is appreciation, equity and cash flow. With prices steadily increasing due to the high demand of homes in Austin proper it is very hard to cash flow. Appreciation and equity however play a way bigger part in the Austin market and what my clients focus on when purchasing duplexes. In my opinion I wouldn't say its a bad idea but to be prepared with more cash for unforeseen circumstances as stated above. Also not buying to much of a property to where its still manageable for yourself and not to much of a headache

Nina Hayden · Answer

My problem with that scenario is your lack of funds. What happens when water heater breaks down?  New roof? So while a lot of people made money by holding to rental properties in the prime areas of Austin by values going up, it can wipe you out if you’re not financially prepared to handle emergencies. And given you’re doing FHA it sounds like you’re not in position to go through this.

Scott Fehrenkamp · Answer

Hi and thanks for the replies, all.

@Nina Hayden et. al.- I swill still have some reserves for repairs; going FHA because they still allow minimum down on a duplex, where Conventional guides require 15% down. So, I do have more than the 3.5% available, just not quite all of 15%.   At this $2k payment  will still have a positive savings rate as well, so not too worried about repairs.

@Dan Burstain @Nicolas Ossa-Laverde that makes sense that it is an appreciation play.  Im just thinking about, in the event I want to move out / purchase the next property, how much I may be paying out each month to hold on for potential/eventual payoff when I sell.

And how long would it take for sufficient appreciation for a decent return?

@Jordan Moorhead - the AirBnB angle is a good idea- could increase the monthly income above what I had in my calculations.

And I'd just add that - yes I'm sure a better property in terms of the numbers is out there "somewhere", but the rub with the 'house-hack', is that you also have to want to live there.  Just wondering how far out is that somewhere? (Currently looking mostly in the 78745 area).

House-Hack Search in Austin - still worth it?

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