House Hacking Minimum Deal Requirements

[Maria Osokina]

Hello Bigger Pockets!

My wife and I are budding real estate investors, and for our first deal we're working on a house hack. We live in the Midwest where prices are reasonable, so a multifamily makes sense. We're early 30s with no kids (yet), and currently rent a 2 bedroom in a nice part of town.

We're trying to find a property that is both somewhere we would enjoy living (a comfortable size, attractive location, upscale enough to attract good tenants, etc.), and makes sense financially. These goals often seem contradictory - we either find deals that are attractive as investment properties but not to us personally, or are places we'd like to live but a pure investor wouldn't look twice at.

As we attempt to balance these goals, I'm curious what you consider the minimum necessary criteria for a house hack property to be a passable financial investment. I've identified three:

1) That the free cash flow be positive (if small) even with us occupying 1 unit

2) That the purchase price (+ rehab costs if any) be reasonable enough we could sell a few years down the road without taking a loss

3) That the free cash flow from all units (if we were to move out at some point) be worth the trouble of ownership, which we've set at $200 per month per door.

What are we forgetting? At this point we've more or less accepted that we won't find a place we really like that also meets the 2% rule and other typical pure-investment property criteria, but given it will save us the $20K+ we currently spend on rent each year we're OK with that, as long as we don't end up losing our shirt. Thoughts?

Thanks for your advice!

Aaron & Maria

[Jaysen Medhurst]

@Maria Osokina, you're definitely on the right track with trying to house hack a MFR. That said, I think you're going to have to compromise somewhere. First, the "places you don't want to live." What does that mean? It isn't convenient to work/your favorite restaurants or you actually feel unsafe? This isn't your forever home. Don't try to force it into that box. Of course, if you don't feel safe in the neighborhood, that's an obvious deal breaker.

I don't know your specific market, but as far as your criteria:

1. This is probably unrealistic. It's great to squeak out some cash flow while you live there, but if you can significantly reduce your living expenses, build equity, and get experience as a land lord, that's a good house hack.
2. Absolutely! It makes no sense to spend more buying and fixing up a place when you could buy something turnkey for less money. Now, if you could combine a house hack with a BRRRR, that would be incredibly powerful. Not easy to find/pull off, though.
3. This is at the top end of what most investors shoot for. Lower your expectations. Especially if you're planning to purchase with a low-down payment mortgage (you didn't talk about financing), the additional debt service will make this much cash flow per unit very unlikely. Better to also consider Cash-on-Cash ROI. If you were only making $100/unit/month on a quadplex after moving out, but only had $20k invested would you take that? At nearly 25% CoC ROI, most investors would do that deal every day of the week.

Again, I don't know your market, but 2% rules are VERY hard to find and only tend to be in very difficult (think D-class...or worse) areas. Not worth the trouble and certainly not a place you're going to want to live. 

Can you share details of any of the properties you've considered?

This, this, and this all look interesting.