House Hack with initial negative cashflow - any thoughts?

Question

I am currently preparing to put in an offer for a 3-family property in a highly desirable neighborhood in Brooklyn, NY. Based on my numbers, the property will have a slight negative cashflow for the first 3-4 years, after it is projected to cashflow. Since I am doing a house hack, I am fine with that, due to that I can easily carry the negative balance myself. Would love to hear any thoughts on this. I've included a link to my analysis.

https://www.biggerpockets.com/...

Thanks in advance for any feedback!

https://www.biggerpockets.com/...

Thanks in advance for any feedback!

Joe Villeneuve · Answer

Here's what I see. You will never recover your cash until you sell the property. That means you are always losing money every year until you sell. It will take you 15 years to break even if you sell. If you don't sell, you are counting on what to make a profit? Appreciation? You can't count on any forecasted appreciation for the next 5 years let alone 15. You're banking on future events you have no control over...that's not investing, that's speculating.

Besides, you own the property, but the property owns the equity...not you.

I would hope you could find a much better financial situation than this one.

Besides, you own the property, but the property owns the equity...not you.

I would hope you could find a much better financial situation than this one.

JD Martin · Answer

I looked at it but couldn't tell - does your gross rental income include the fair market rent value of the unit that you are living in, or only the rent on the units that you will be renting? If you did not include a fair rent for the unit you are living in, then your numbers are off.

Bradley Dosch · Answer

I think the numbers look pretty good for a house hack!

Anders R. · Answer

That negative cash flow value is based on the expected income for all three units.  However, yes, I would be living in one of them, so so I would be "paying" a portion of the rent myself.

Alexander Ball · Answer

is it -735 with you living in one of the units? or -735 with all of them rented?

Joe Villeneuve · Answer

Rationalization is the most expensive word in the REI vocabulary

Anders R. · Answer

@Joe Villeneuve - thanks for your insights.  I totally get that I can't predict the future, but it seems like a limited amount of educated speculation may not be a bad thing.  In my case, I am expecting the property to have a positive cashflow within three years.  During that time, while house hacking, I am basically paying an effectively higher rent for my own unit, which I am happy to do in return for the personal value I will get from being able to house hack in a neighborhood I enjoy living in.  To me, a worst case scenario is if I realize in three years that my analysis was incorrect and I will not get positive cash flow. I guess considering that I am bullish on the market longer term, that is a risk I am willing to take.  Thanks again for your input!

Anders R. · Answer

@Eric Hajdu - thanks so much for this insight.  So my current goal with the property is wealth storage, building equity, and long-term appreciation and less about generating income. Good to be aware that the units might take longer to fill.  Thanks again!

Eric Hajdu · Answer

Hey Anders, I'm not sure how active you are in the Brooklyn market, but from personal experience and through talking to other local investors, I would be very conservative/cautious in your RR projections.  I have two one beds in Class A Bk neighborhoods, and they have not been easy to rent out lately, yes the market is rapidly improving, but it could still take some time to get the units filled, so I would be hesitant to pursue a deal where the margins are so tight.  One final thought, the property taxes on my 3 BK properties have increasing exponentially every year, and I imagine will only get worse with the impending budget crisis.

Ps- I know it doesn't sound like it, but I am very bullish on the local market and wouldn't invest anywhere else.  As I've mentioned in a few of my previous post, you really buy here for the capital appreciation, not the cap rate, best of luck in your search.

Anders R. · Answer

@JD Martin

Yes the gross rent includes fair market rent for my unit as well.

House Hack with initial negative cashflow - any thoughts?

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