Owner occ. sfh+garage apt. $350 NEG CASH FLOW.1st try FLOP or ok?

[Laura Posluszny]

I jumped into real estate investing and purchased a single-family house with converted back garage apt. My cash flow is not in the positives, but since I live here too...am I doing okay? I would like to raise rents to improve cash flow once current leases are up. Suggestions?

my house is 2 bed/1bath, I live in master bedroom. Main house 1100 sq feet. I charge $550 rent for smaller second bedroom and calculate the utilities and divide by 2 for gas (no gas in garage) and 3 for internet, water, electricity since 3 of us use those (me, roommate, garage tenant). She pays $145-190/month in utilities. Aprox income $700/month. roommate is a friend and she signed month to month lease.

garage apt is big, 675 sq feet. But it has small kitchen (no dishwasher) and shares laundry machine with main house. Has window ac units. no central heat. I charge $795 rent and $100 flat per month utilites. Total income $895/month. 12 month lease.

I purchased home 3% down, conventional loan at 4.25%. My mortgage (includes tax, insurance etc) is $1625/month.

Repairs = $2,000 total thus far, close to 240/month. most of which was heavy when I first purchased place and painted, changed light fixtures, window ac units etc. not that much anymore.

Expenses: 1625 (mortgage)+325 (utilities)= 1950 + repairs = 2190

Income: 895 (garage rent & utilities)+700 (roommate rent & utilities)=1595

cash flow= -355 to -595

Pros of the situation:

• I Took action. I bought the house. I'm not just sitting and reading and learning, I have skin in the game and went for it. I was 23 when I bought it last June. goal is to continue to grow in knowledge in real estate
• Great location. fort worth market has houses going up 7-9% in my area. this can change though.
• house appraised 214,000, bought for 213,000
• one day my PMI will disappear hah
• I've considered moving to back garage apt to see if I can get rent for main house higher
• My last 2 b/b apt I was paying $760/month in rent and an additional $150 in utilities, neg $910 cash flow (if you will)
• since owner occupied, I was able to get the conventional first time loan and afford down payment etc. I only brought $7,900 cash to closing. I had savings leftover for emergency but was able to afford this on my own after only 1 year of being a RN.
• I get to live with my friend! in a great cute house that makes me happy. I don't want to over charge her. But I don't want to undercharge either.
• minimal rehab. had a handyman do some electric, I painted, but otherwise but no contractor etc.
• expect a nice tax return?
• Strong tenant screening led to a GREAT first tenant in garage apt. couldn't ask for someone better.
• no rent to a an apt anymore

Cons

• I want better cash flow. still feel like neg 355-600/month isn't great

My aim is to house-hack, but I feel like I'm not quite there yet with this property. Can anyone offer suggestions, encouragement or help? Thanks in advance.

[James C.]

Laura,

First thing, Congratulations! Second thing: relax you are doing ok...

DFW 2 units at $213,000 are tough to cash flow... rule of thumb you need minimum 1% of the value... so you need 2130 per month (minimum target).

When you are doing your numbers, make sure that you are separating out PITI and utilities, mixing the two makes it tough to see where your money is going.

Right now your cashflow looks like this:

Mortgage =1625

Back unit = 795

Main House = -1625 + 795 (Back unit) + 550 (roommate) = - 280 

Utilities bill = -325 + 100 (Back unit) + 168 (Roommate average) = 57

Analysis for you (personally)

Your contribution to mortgage = 280

Your contribution to the utilities = 57

Total out of pocket for you = 337 (280+57) NOT INCLUDING CAPEX.

The #1 thing I would do is (sub) meter the back unit, and quickly. This will allow you to rent out the front unit independently of the back, which will make your life easier. The #2 thing (do 1 & 2 together, NOW!) is to find out how much you can get for the main house. As long as you get more than 830 for the main house, you are above break even, and to meet the minimum of the 1% rule you need to rent it for (2130 - 795) = 1335. 

Assuming you can get 830 to1335 for the main house, an idea might be to create a business partnership (don't include this house) with your roommate. Pool your resources to find a good cash flowing 4 unit in DFW. See if you can find one with a breakeven of 75% of the cashflow, i.e. the whole thing is paid for by the other three units. If you can accomplish that (TOUGH IN A HOT MARKET LIKE DFW), you and your roommate can live in a 2/1 or 2/2 apartment in the building for "free". If you pay yourselves "rent" then you can use those funds to build a down payment to the next building faster. 

In general, the more apartments you have in the building, the easier it is to hack for no money out of your pocket, and positive cash flow. If you are worried about big buildings, don't be, just educate yourself, and pay a GOOD property manager to teach you until you learn the ropes. Make sure the building cash flows to include the management fee. You might want to wander over to "Afford Anything", Paula Pant's blog (I get nothing for the plug), for more on designing your life.

Good Luck!

Jim