What would you do? Oakland County Michigan Duplex House Hack

Question

Hello all,

My wife and I are from the Boston area and recently moved to Michigan to be closer to my wife's family after the birth of our first child. We are living with my wife's Aunt for the time being to save money. We are ready to be out on our own and want to buy a multifamily to house hack for a year or two and then buy a single family house to live in and rent both units of the multifamily. There are currently not many multifamilies on the market in our area and so we are deciding weather to just rent an apartment for a year and hope something comes up next summer, buy a single family house, or finally buy this not so great cash flowing two family. I am trying to get the numbers to work but I don't see any way to get them around the 200/door that I would ideally want. Here are the numbers if you could take a look and give us some advice on what to do.

We would be using an FHA loan and put down 3.5%. House is in very good condition and does not need anything to make it rentable. Both sides are identical 2 large beds, 1 bath, 1050 sq ft with a shared 2 car garage.

Taxes are very high due it being in a downtown historical village.

If anyone can provide any input, it would be very much appreciated. Thank you!!

Purchase Price: $200,000

Down Payment 3.5%	7000Closing Costs @2%	4000FHA 1.75% Fee	3500Escrow Taxes	4175Total Cash Down	18675	Income Currently at 860 left side and 800 right side. Rents should be 1100 per side.	Expenses:	Mortgage Principle and Interest	805Taxes	561Insurance	110Mortgage Insurance @1% 200		Vacancy @ 5% 81Repairs and CapEx @ 12%	201Lawn and Snow	40	Total Expenses 1998Net Income at current rents:-318

Net income if rents were 2200: +202/month

Connor Anderson · Answer

@David Heidkamp Hi David - if you can qualify for a 5% conventional loan that might make the numbers work better. Also with conventional loans you can get rid of PMI at 80% LTV, which will help your cash flow. FHA loans have PMI for the life of the loan. Let me know how else I can help or if you need a strong agent.

Steve Majors · Answer

If it's in great shape and needs nothing, and the furnace and roof are in good shape, you could cut your CapEx by about half saving $100. Especially if you are somewhat handy and can do small things yourself. If you're house hacking, you could also do the lawn and snow yourself saving another $40. Also keep in mind you're building equity as you and your tenant pay down the principal. Compare your out of pocket expenses to what you would spend if you bought a SFH. I Think the duplex house hack will win. Try to save enough over the next 2 years to refi it to a conventional with 20% down to get rid of the PMI and lower the monthly payments. Then rent both sides and go buy your SFH. You should easily hit the $200 a door cash flow by then. Good luck!

Drew Sygit · Answer

@David Heidkamp you may need to adjust your expectations:)

You won't find many turnkey properties in the suburbs that will have great immediate cash flow. Basic economics will adjust prices to address any market inefficiencies.

Improving your numbers means finding properties where you can make improvements in the property or rents. The smaller your improvements the longer it will usually take to increase your cash flow.

If you're handy, you may want to focus on properties that need work and investigate the FHA (203k) loan that allows repairs to be financed into the purchase mortgage.

Aaron Montague · Answer

I recommend you pass on this deal.  From what I'm reading, you are not going to get anywhere near your $200 per door mark any time soon. A major skill in the RE world is knowing when to walk away.  In my opinion, this deal is also missing a major monthly expense.

I don't see Property Management anywhere in your equation.  Which will probably come out to at least 10%.  If you do not put this monthly expense in you are bound to be physically near the house, self managing, until you sell it.

Are the sewer and water bills already separated? I didn't see that number in your list.

How about trash?

This looks like an okay house hank only because you don't have to pay the management fee.  If you foresee an increase in value over the next few years, buy this place knowing your only good exit strategy is selling the place.  Here are the numbers as I see this place as a rental at the max rents you mentioned:

Total   Due at Signing

$           55,500

Mortgage Rate

4.50%

Length of Mortgage in years

30

Monthly Mortgage payment

$760.03

Taxes

$           425.58

Sewer and Water

$         100.00

Trash

$                -

Heat/Utilities

$                -

HOA/Legal

$                -

Cap Ex and Ops

$         200.00

Insurance

$         110.00

Mgmt Fee

$         220.00

Vacancy

$         110.00

Total Expenses

$1,925.61

Unit 1

$       1,100.00

Unit 2

$       1,100.00

Unit 3

$                -

Unit 4

$                -

Unit 5

$                -

Unit 6

$                -

Total Revenue

$       2,200.00

Cashflow/month

$        274.39

Cashflow/year

$         3,292.66

Cash on Cash Return

5.93%