How to make a house hack cash flow positive after moving out

Question

Bill S. · Answer

@Mitch Ottoson I'm a little confused about your statement that it's a great deal while you are living there but not so when you move out. Would you mind sharing some numbers?

That statement seems backwards unless while living there you are planning on "paying" more than market rent.

Ideally your analysis would have you paying rent to yourself and so when you move out and someone really pays rent then nothing changes.

Bill S. · Answer

@George Wines IMO it needs to at least be close to the 1% rule (sum of the monthly rents is around 1% of the purchase price. For this example the rents either needs to be $4,500 per month or the purchase price $240,000 or some combination there of. I know it's a tall order but it can happen. For the right property (low operating costs-separate utilities private yards and washers and dryers for each unit) in the right area (near the urban core) I might go purchase price of $400,000 for $3,500 rents. I'm a bit spoiled as I don't shop with the rest of the folks on the MLS.

Jean Bolger · Answer

450k for a place that will gross $2400 is really unlikely to work out for you as a future cash flow proposition, IMO.

This is the problem that comes up so often with house hacking in Denver. You may have to weigh the desire for future financial security against your more immediate interest in living somewhere fun and/or trendy. If you really want the financial advantage, look towards areas that are more transitional and put on your patience cap.

A lot can happen in  5-10 years. When I bought my first owner occupied duplex I had to make a lot of compromises. First, I was told "No one lives on the west side unless they have to", and also: "Highlands is OK, but just don't buy on the east side of Federal" but that was where I could afford.

Nobody has a crystal ball, but try to look ahead if possible

Bill S. · Answer

@Mitch Ottoson it is very unlikely you will get a property listed at $450K for $350K especially when you have to get a loan on the property. Perhaps the fact that it's a duplex and has income will allow you to push your price point. It's not clear to me from what you have said.

Now to your financial analysis. If the property negative cash flows after moving out, it does the same when you are living there. In your example you are really paying rent of $1,200 per month plus the negative cashflow since you will have to dig into your pockets for the needed funds whether you are living there or not. So really your "rent" is $1,600 per month which is about the same as what your payment would be if you purchased a regular SFH in the price point you mentioned. The advantage of the duplex is the higher leverage amount and greater potential for increased value. Of course that knife cuts both ways. If prices go down, you are further in the hole and duplexes sell harder.

BTW it blows my mind that people are paying $450,000 for $2,400 per month in rent. I know the market but it is really really hard to even break even with those numbers. You are completely gambling on appreciation and rent growth. I'm a big fan of Denver RE but those numbers really make me cringe. In your shoes I would take a hard look at a house hack or a different neighborhood.

Joshua D. · Answer

@Mitch Ottoson

Keep looking! As @Brandon Turner  says,

"look at a hundred deals, offer on 10, buy 1".

I realize Denver is a mad house right now but there are deals out there... The belief that the market is to hot to find any good deals is a limiting one.  Keep looking and you will find one that will be cash flow positive after you move out.

George Wines · Answer

@Jean Bolger Thank you for the response. I am looking at a 3plex in that area and saw Trulia's reported crime map that there is still a pocket of red on the blocks surrounding Federal from 26th to 27th and that was making me feel wary of the area despite driving around and thinking it looked okay.

Jean Bolger · Answer

George, I was referring to quite a while ago and was just using that to point out that fashionable areas change. If you can predict (guess??) the path of fashion you can do very well on investments. Right now that area is one of the priciest in the city. But it was downright scary at one point

George Wines · Answer

@Bill S. thanks for your thoughts. I see you post on the forums a lot and say a lot of things that make sense

George Wines · Answer

@Bill S. with a 450K purchase price, what monthly rent would you expect if you were to feel comfortable paying that much? Just curious about your opinion

@Jean Bolger why is east of federal a bad area in the highlands? Was that in the past or would you still call it true today?

Matt M. · Answer

@Mitch Ottoson You also might consider going the route my wife and I did. We bought a HUD home during the "owner occupant" timeframe. So we had an advantage over other investors. Our idea was to move in, fix it up, and sell it in 2 years to avoid cap gains tax(we were moving from another home where we had $50k+ in gains). I guess you would call it a slow flip.

Although we decided to stay, our home has increased in value over $125k in 2 years. We did just get a heloc up to 90%, which will help us with flips, etc. I will admit that we rode the wave of appreciation in Denver, but I have spent time improving and updating the home as well to increase the value.

Our original goal was to keep doing this every 2 years until we could buy a home outright, but my wife fell in love with this home, so we are here. For my situation, this route was more agreeable to my wife than renting by the room, etc. We went down that road, and it was something we personally prefer not to do.

Although foreclosures, etc have declined dramatically, you can still find stuff from time to time on hudhomestore.com, homepath.com, & homesteps.com. They all offer a buyer only period. If you want help or have questions, feel free to reach out.

How to make a house hack cash flow positive after moving out

Most Popular Reply