Multi-Unit Analysis: How do you analyze owner-occupied?

Question

Hi guys! I'm looking at a duplex deal right now and will post the details below. When I analyze the deal assuming both units are rented out, I come out with a 6.7% Cap Rate, 10% Cash-on-Cash ROI and $168/month/unit cash flow. Cash flow and Cash-on-Cash ROI being my top goals as a new investor, with a $125/month/unit target and a 10% Cash-on-Cash ROI target.

My goal however is to house-hack and live in this unit with my wife for at least a few years. When I analyze the deal as a house hack, I come up with a 3.2% Cap Rate, -4.8% Cash-on-Cash ROI and a whopping $ - 80/month/unit cash flow. We would be losing $161/month in this scenario... however if we looked to rent, we'd probably be paying $800 - 1000 in the area.

My big question is: How do you analyze an owner-occupied deal? Did I go about this correctly? Does this deal flop since it doesn't cash flow while it's owner-occupied?

When I analyzed the house-hack option, there were two changes I made: (1) rent was adjusted so that only one unit was income-producing, (2) capEx, maintenance, property management (which wouldn't be utilized since we'd be living there, but still included it in the analysis), and vacancy were adjusted to be the respected percentage of the new gross annual income.

Here are the Details:

Purchase Price: 169K

Closing Costs: 3.1K

Initial Repairs Needed: 3K

Down Payment (20%): 33.8K (could also consider going FHA on this)

Monthly Rent: 800/Unit

Gross Annual Income: 19,200 (both units)

Taxes: 170/annually (all data points at this, however I really need to investigate this number...)

Insurance: 400/annually, CapEx (10% of Gross Income) = Maintenance = Property Management = 1,920/annually, Vacancy (8% of Gross Income): 1,536

Annual Expenses: 7,866

NOI = 11,334, Cap = 6.7%

P&I: 609/month

Monthly Cash Flow = 336, Cash Flow/Unit/Month = 168, Cash-on-Cash ROI = 10.1%

Roy N. · Answer

@Amr OmarFirstly, CAP rate is a fairly meaningless metric when you are looking to acquire a residential property (whether you plan to reside in a unit or not). This is because residential properties (1 - 4 units) are transacted based upon comparative sales and not based upon the cash flow they throw off (as is the case with a multi-unit property). ie., if you would be giving-up You are on the right tract to analyse the property as if all units were being rented and current rental rates. If the property produces an acceptable positive cash-flow under these conditions, then it may be a viable fit.If you plan to live in one of the units, then you need to determine if the cost of that approach is less than the cost of your present accommodations. If your out-of-pocket cost to live in one of the units of the property is less than, or on-par with, your present monthly rent (and utilities, and tenant's insurance ... costs which would be coming with you), then it is most probably advantageous to pursue the acquisition.

Pete Perez · Answer

@Amr OmarI think a good way to look at owner occupied investments is in terms of life cycle cost. In essense exactly what @Roy N. has said. "Which option will yield the most net cash?"Look at your existing conditions. I am not exactly sure what they are, but if you are renting, or even own your own SFR. Project your net income and expenses over the next X months, and compare that to the house hacking situation in question. For example, I did this recently with my own finances. I projected out 1 and 2 years and compared our net savings betwen purchasing a SFR or owning a MFR. Option 1- Buy a SFR home ($200k-$235k)Potential savings (Assuming we can save 40% of our income):1 Year : $9247.22 Years: $ 18,556.4 Option 2-Buy a MFR Home & Rent out other unitsPotential savings (Assuming we can save 40% of our income):1 Year : $19,356.22 Years: $ 37,057.9This was great for showing my fiance that going the MFR is a much better approach, for us. In terms of measuring the performance of a property, if you continue your analysis you mentioned, and pair it with a life cycle cost it will give you a good measure of comparison. This is what is working for me so far. When I eventually purchase a MFR and want to move on from that, my approach may change. This is strictly speaking from someone who has not yet purchased a property and is weighing their options.

Bryan O. · Answer

I agree with @Roy N. here. Run your numbers as if it were a full investment property and see if you would buy it without the intent to move in. If so, decide if it is somewhere you would be willing to live. You already know that it is cash flowing $750/month (effectively) if you owner-occupy, so you just need to determine if you are happy with the numbers after you move out.

Amr Omar · Answer

Thanks @Roy N.! That really helps out!Yes, I included the Cap Rate here, but I only use it as a comparison between properties, not necessarily part of the decision making of whether to pursue a property or not. Cash Flow & Cash-on-Cash ROI are what I'm really after.In this scenario, I would be paying $161/month to live in one side. Whereas, if I keep my current situation, I'd be paying $850/month to rent (and building 0 equity).