First House Hack - Duplex Deal

[Mike Albrecht]

TLDR: is that it does not meet the 1% Rule nor 50% Rule & likely to Cashflow Negative for a while with current rents, but looking for advice as I need W2-income Tax Benefits and my first investment.

Duplex Status : Built 2006 -3Bed/2Bath Each Side w/ A) 6-month Lease $1,250/mo one side & B) 12-month Section-8 Renter $1,250/mo 

Here is my Current Analysis using CURRENT rents w/ FHA 3.5% Down Payment estimating 6.5% interest rate but I will likely buy points up to a 1% if possible) https://www.biggerpockets.com/analysis/rentals/682608db-8ce9... (Note: I did not factor Vacancy/Maintenance/etc yet)

*Both tenants pay utilities currently but I still factored in water/sewer monthly @ $150 ( See Linked Report)

Realtor states current rents should be closer to $1,500 each side to match the market. 

Issues/Concerns/Random Facts

1)My First live-in House hack and have no idea about Section-8

2) May need to relocate for promotion could happen at ANY time in the next weeks/months, and if FHA allows, I would like to let the 6-month lease stay to term before moving in to that unit.

3) I did not factor in 10% property management but would like to entertain the idea of doing it myself.

4) Duplex is on a small street with many duplexes with exact same style/design cookie cut( at least 10 of them) but THIS duplex has the best curb appeal and landscaping out of all them and every duplex on the street appears to be fully-rented. 

Please let me know your thoughts & I will update info I may have forgot as-needed as it has been a long week!

Thank You for ANY guidance. 

[Ben Fernandez]

Don't use the 50% rule. Use the real numbers.

It appears your taxes and insurance is not apart of your stated mortgage note.

You likely could self manage. My motto is, if you know nothing is mechanically wrong and condition of the property is really good, why have someone else collecting your rent only to charge you 7-10% and nothing is being managed...This sounds like a nice property. You may just need a local agent you can pay a flat fee to for showings while you screen tenants yourself by way of a Zillow/Facebook Marketplace listings. Otherwise, plan the 10% PM fee. But I don't think you can afford it unless you're prepared to come out of pocket each month for holding the asset.

In regard to operating expenses, consider PM, maintenance, true capex based upon the actual life-left of the components and upgrade timelines, vacancy, common electric and accounting. DM me if you need a tool for the CapEx calculations.

Overall, at (roughly) anything over 6% in expenses, your cash flow goes negative at the current gross income stated. If you can get to $3,000 GI, your expense ratio can rise to about 22% before you go negative in cash flow.

Provided your taxes and insurance are at or below 1.4% ($5,200), you self-manage, and you achieve the $3,000 GI, you can break even each month or better if your CapEx is below $130/month.

I always advise my clients to pencil the exit strategy of any investment even if its their personal residence. 

I don't want you to become discouraged. You did a great job house hacking and you're on the right path. Good job. You just need to clear as much air over this hurdle as possible in your next steps. Being that this duplex was almost $400k, I'd bet you're in an area that appreciates well. So, this is another positive. What you don't achieve in cash flow, could be made up in the appreciation. Although, an unrealized gain, you can determine your next action plan based upon this metric. So, think of the equity you'll gain even if you're only breaking even (or close).

The only way this one would have penciled, at its entrance price-to-rent ratio of 0.68%, is if a down payment of 25% was put down and it would then cash flow $25/month at the stated figures.

The balance is always little-to-no cash flow and high appreciation, high cash flow and little-to-no appreciation or a combination of the two. This is based upon asset class. Sounds like you have a B class asset here.