Critique my Duplex House Hack

[Michael Henry]

Hi Guys - looking for feedback on things I could've done better, where I could've saved money and or tips / advice on this deal so I can better prepare myself for my next house hack when I move out of this Duplex.

The Deal:

Live In Duplex

- 3bd/2bt 1250 sq ft + 1 car garage per side built in 2008

- Rents $1050 Side A / $1100 Side B

- Purchase Price $280,000

-5% Down Payment ($14,000)

-Purchased already rented, one side to be vacated at closing for me to move in

Mistake I made looking back is the comps I was looking at a brand new duplex listed for $350,000 and a duplex more updated but built in the same year also listed for $350,000 were not truly comps as these duplex are still for sale to this day. Appraisal came in at $280,000 much lower than I thought. But the GRM (Gross Rent Multiplier is 130.5) $2150 x 130.5 = value $280,575

Similar Updated properties are rented for $1300-1400. The unit I was moving into was not livable (to my standards) so I did a light renovation which is detailed below. After renovation I'm estimating I can rent my side for a conservative $1350, side B ill increase rent to $1250 in 2020. It is in much better shape and already rent ready. This should give me a value of $339,300 (130.5 x 2600)

Mortgage including PITI = $1800

Estimated rent = $2600

Property management = $260

Vacancy / maintenance = $260

Net profits = $280

Down payment = $14,000

Rehab = $16,000

Cash on cash return = approx 11%

Equity = $59,000

[Richie Thomas]

> were not truly comps as these duplex are still for sale to this day

@Michael Henry, it sounds like you've already learned to get your comps from "Sold" properties (as opposed to "For Sale" properties).  Nothing will take the place of a licensed agent's comparative market analysis, but as a first step I like to use Realtor.com's "Sold" page.

I also highly recommend frequenting this very forum and using the BP calculators to analyze the deals that other investors post here.  If you do one per day, within a few weeks you'll start to develop a sixth sense for whether the numbers will work before you even plug them into a spreadsheet.  For instance, I don't even need to plug the provided numbers into a calculator to know that a $280,000 purchase price with a $1000 rental income won't pencil out, even if the other unit is for you to live rent-free.  That's especially true with a 5% down-payment.

Ideally, the house hack should be cash-flow positive even with you living in it.  That way, you're protected in the event of a market downturn.  In this particular example, even if you were renting out both units, I still can't make the math work out in your favor.  Here's a report I did showing both units rented at the higher rate you mentioned ($1,300 per unit).  It's still a negative carry of $315 per month, or -8% cash-on-cash return.

The post-rehab photos look nice.  Do you have a sense of how the property now looks and feels in comparison to the other neighborhood properties?  If it's nicer, is it significantly nicer?  The danger in using your own personal standards when rehabbing is that you may have higher standards than others in the neighborhood, and you'll end up spending money on the rehab that doesn't pay for itself.

One thing I've heard around the campfire is that appraisers have different methodologies in different farm areas.  Some use quantitative measures like the property's square footage as the main factor in their decision, while others use more qualitative measures such as age of the roof, condition of the foundation, etc.  If you're committed to this farm area, talk to local appraisers and see which method predominates, and base your rehab strategy on what you learn from those conversations.  It may turn out that you're better off buying an oversized 2-bedroom and converting it to a 3-bedroom, converting a Florida room into a 3rd-bedroom, or some similar strategy.