House Hacking Deal Calculation Adjustments?

Question

I am sold on the idea of house hacking. Duplex, Triplex, or 4-plex all sound good to me. It makes sense to me to cut your living expenses even if it lowers the cash-flow from the property. I have looked through many of the house hacking related articles, but I havent seen anybody mention if they make a calculation adjustment for if you are house hacking.

What I was looking for would be something in the rental property calculator that also takes into account the rent you are currently paying before you move into the multi-family you are about to purchase.

For a little background on my situation, I am looking to buy in the Denver area near a light rail station. I work in the tech center, but could change jobs to work downtown in the next year or so fairly easily. A light rail location works for me.

Currently I am paying $650/month all included to rent a room from a guy who owns the apartment. But, I will be moving into the multi-family unit with my significant other who pays a whopping $1360/month because she lives in her own 1br/1ba. Assuming that utilities will cost about the same for her in the new place and since I dont pay utilities, I would count that as a wash. Overall though, this is ~$2K/month.

In the multi-families in the light rail neighborhoods I am looking in (A class in general), rent is between $1-1.5K/month. So if I were to buy a 4plex with 4-1br/1ba units renting at $1200/month each and I lived in one, I would only collect $3600/month but there is also that $2K/month saved in expenses. Can you add that $2K/month in expenses saved to your total return? (If I didnt explain my idea correctly, let me know and I will try to elaborate or rephrase)

Does this sort of calculation make sense to do if you are house hacking? Or should you always look at a deal as if you were not going to live there?

George Wines · Answer

@JT Spangler yes you are right with what I am seeing out there.

@Dan Mackin I was hoping to see it mainly because I am new to REI and not very familiar with the market haha.

George Wines · Answer

@Bill S., you are right that most of the properties I am seeing out there are dogs in regards to cash flow. Without severely underbidding them it isnt even cheaper than the current dual rent total. Thanks for responding and what you said made sense.

JT Spangler · Answer

I don't think he said anywhere that the price wouldn't be exorbitant. Downtown Denver near the light rail in an A class neighborhood, I assumed he'd be looking for an FHA multi and would pay through the nose for it.

Dan Mackin · Answer

As Bill said you are getting into a very popular type of real estate right now. The multi market is quite scarce since lots of folks are looking to offset those expenses. The big thing for me is that the amount you save in rent is only relative as long as you're living in the property. Generally the calculation should be done as a straight investment without you living in it. If it makes sense in that manner then purchase it. If it doesn't then don't get attached and move on. A big principal of house hacking is that you move on from the property while using (usually) smaller down payments.

I'm curious as to where you expect $1200 per 1/1 in a multi where the price would not be exorbitant.

Bill S. · Answer

@George Wines I'm a bit confused by your question. What is the purpose of the calculator? It's to show you how the property will perform on it's own. Since you are house hacking, you are just one of the tenants. If living in the property puts more money in your pocket than renting that's the whole point of house hacking but the property only does what the property does. I'm guessing, by the areas you say your are looking in, that your calculator is showing that the properties are dogs. By dogs I mean, they don't make money and in fact many will cost you money out of pocket to own (they MAY appreciate at a nice rate though). That's the fact of life about your areas of interest. Denver class A. You are competing with every other house hacker and many out of state investors parking their cash in our market.

A bit of perspective, the calculators are designed to evaluate properties. They are not designed to show you whether house hacking will make financial sense for you. So how do you handle the reduced rent that you and your SO will be realizing from your house hack? Use the calculator to evaluate the property. The calculator will tell you how much it will cost you beyond what will be coming in for rent. If the property loss is less than the difference you are currently be paying in rent vs the "rent" on your house hack, then buying the property would be cashflow positive for you and your SO in your current situation. That's not saying the property is a good deal it's just telling you if you are personally better off owning the property than renting. I hope that makes sense.

Post back if you have more questions. Perhaps if you have a specific example (property) we can step through it.

I think the biggest hurdle would be the financing of the property. Personally I would get with a lender that knows the house hacking lending game (knows how much of the rents can be used for income) and see what you can qualify for. That may be more limiting than the "quality" of the deal based on the BP calculator.

Keep us posted on your progress.