Duplex House Hacking - Rental Income

[Mark Douglas]

Morning BP!  

I'm analyzing small multifamily properties (primarily duplexes) for my first owner-occupied investment.  

I have a general question about rental income: should the rent from the vacant side completely cover the mortgage, or is it feasible for the rent to only cover 70-80% of my mortgage?

Am I expecting too much from the rented side?  

Thanks so much !

Mark Douglas

[Jon Holdman]

Realize that the taxes and insurance included in your mortgage payment are only two of the many expense you incur with a rental. To be cash flow positive with a rental, the rent needs to be a lot higher than the PITI payment.

When evaluating a house hacking duplex deal, I would start by looking at the rent from both halves vs. the purchase price. And do the normal evaluation. That is, start with assuming 50% of gross rents go toward all expenses, then subtract the P&I part of the payment from the remaining 50% to estimate cash flow. Divide a year's cash flow by the total cash invested to determine ROI. If that's a good number (whatever you consider good), then it's a deal. If you're willing to self manage, drop that 50% for expenses to 35-40% because you will be doing the PM's job and earning what you would have paid the PM.

Now, consider the effect of you living in one half.  You will get no rent from that half.  OTOH the tenant in your half probably won't make you evict him, nor will he wreck the place.  But he may incur higher expenses than a normal tenant as he fixes the place up.  I'm talking about you, if that's not clear.  I'd also assume that you being right next door would deal with property management.   So, I'd keep the expense estimate at that same 35-40% number.  Total gross rents are just from the one rented unit.  Your cash flow estimate is then:

Cash flow = Rent from one unit - expenses - P&I

The determination about whether or not it's a deal is more complex than just COC = cash flow / cash invested because you're getting "free" rent out of the deal. I would argue you should add the rent you're not paying into the cash flow. Which is the same as I say in the first place - evaluate it as if both sides are rented. The cash flow estimate does matter, though. If that's negative, as is likely even with a good deal, can you handle it? That negative cash flow is really your "rent".