Duplex or 4-plex? An analysis from a noob.

[Zach Bagby]

I currently pay 1350 in rent for a 1br 1ba in the South Denver area. I am looking for something to buy sometime next year, maybe sooner if the right opportunity came up. Mainly looking in the Littleton and Englewood areas of Denver Colorado but open to look a little further out if need be. This post is mainly for practice and feedback. My lease is up in April 2018. If you were me would you buy a Duplex or 4-plex? I want to house-hack. Let's make some assumptions before beginning: rents are at 1500 per unit, no immediate repairs are needed, and seller will pay closing costs. (This just makes things easier for a noob like me)

Let's start with a duplex:

(i'm using trulia calculator)

Cost $350,000

Downpayment = $17,500 (5% down)

Principal & interest=($1,549)

Property taxes=($158)

Home insurance=($75) Mortgage insurance=($211)

Total PITI = $1,993

Vacancy = $200

Repairs = $150

Cap Ex = $ 150

Prop manage = 300

Total monthly expenses = $2,493 w/o PM and $2,793 w/ PM.

Total monthly Income = $3,000

Monthly cash flow = $507 w/o PM and 207 w/ PM

Cash on Cash = 507*12 / 17,500 = 34%

That seems too high like I'm doing something wrong any suggestions? I would most likely be paying more than just a down payment but this makes things easier.

Rough Avg principle paid per month = $500 which makes my ROI almost double 34% or 68%.

I would be living in one side which gives me -1500, but it reduces my monthly rent payments from 1350 to 1000 and I get to practice being a landlord.

Now a 4-plex:

Cost $750,000

Downpayment = $38,750 (5%)

Principal & interest=($3,396)

Property taxes=($423)

Home insurance=($75)

Mortgage insurance=($450) Total PITI = $4,344

Vacancy = $400

Repairs = $300

Cap Ex = $ 300

Prop manage = $600

Total monthly expenses = $5,344 w/o PM and $5,944 w/ PM.

Total monthly Income = $6,000

Monthly cash flow = $656 w/o PM and $56 w/ PM

Cash on Cash = $656*12 / 38,750 = 20%

Rough Avg principle paid first year = $13,000 

ROI = 53%

In this case when I -1500 for myself living in one of the units I'm only having to pay $844 a month which is even better.

Assuming I can actually find deals like this (or maybe better) and have the downpayment... What would you do? Duplex? Triplex? 4-plex? Live in flip? How do you analyze deals? Are my calculations Waaaay off? If these are bad deals, why? At what price do they become good deals? Are you seeing any deals like this now? Thanks in advance! =)

[Jared Bouzek]

@Zach Bagby I think your question is more about thought process than digging into the nitty-gritty of your numbers. Yes, as pointed out above, some of your assumptions are likely not entirely correct on the true costs, but your methodology of analysis looks pretty solid. 

The choice of analysis metrics really comes down to personal preference in my mind. A lot of people like COC or ROI, and I believe those are valid methods of analysis mainly prior to the purchase. After time has passed, I think it is much more difficult to see analysis that makes sense using COC or ROI. My personal preference is to look at investments as best I can over a long period of time, so my preferred metric is Return on Equity (ROE).

House hacking, more than maybe any other style of REI, reveals the power of leverage. There are few other investment opportunities where you can put $17,500 at risk and control a $350,000 asset. As a result, a lot of your return metrics will look inflated in early time because of the minimal up-front investment. If you look at it over time from an ROE perspective, you will see a rapid decline in the ROE in the first few years as your reinvested equity outruns your investment gain.

Using ROE gives you a true sense of the opportunity cost of your investment because you're accounting for the "dead equity" left trapped in the investment. As a result, I think it's wise to set a baseline minimum expectation, and when your ROE dips below that level, it triggers a choice to access that equity and re-invest by selling, cash-out refinance, HELOC, etc. To give you a comparison, if you're a stock investor, you have a daily choice to either buy or sell your stock. There is no hold because making the decision to hold means that you would buy that stock at that price on that day. In a similar sense, we don't look at REI on a daily level but maybe yearly. After you've owned an asset for one year, you ideally have a certain amount of the equity in that property that you could access, and you make one of two choices - remove the available equity to invest in a higher return opportunity or "reinvest" that equity by keeping it locked in the property. This choice continues as time goes by and you reinvest more of the equity back into the property as the value appreciates and you pay down your loan.

Using this methodology allows you to make the most accurate comparison between investment alternatives as you move through time and gives you the information you need to deploy your funds at your optimum risk vs return level.

Hope that makes sense and I'm answering some of the questions you have.