Duplex that does not cashflows still good for first home?

[Jaekwan Lee]

Hi,

As a first time home buyer, I want to learn and experience real estate so I would like to buy a duplex to gain experience as a landlord and get familiar with the processes. I found that most of recommendations to buy a duplex emphasis on positive cashflow or match with simple 1% rule to start with. However, the place I am looking for to stay with my family is north Austin suburb and none of the duplex has a cashflow even if I put 20% down. For example, there are 500k-600k 2000sqt+ duplex that has monthly cost around $4000 ~ 4500 without management but the typical rent in that area for those units is under $2000. So it does not cover even $4000. 

In this type of scenario, is it still worth buying the duplex with one unit owner occupied? Or it is just a bad decision to start investment this way. Let's assume this location has more than average appreciation but not very promising of big jump.

[Russell Brazil]

Quote from @Jaekwan Lee:

Quote from @Russell Brazil:

Is your other option to live in a house and not househack that will cost you $4,000 a month?

I could go a single home that could cost me $2500-$3000 a month. 

 So let's look at the options.

Option A: Pay Rent $3,000 a month. You help your landlord grow rich. 

Option B: Buy Duplex. Cost $4,000 a month. Tenant pays $2,000 of that, and you pay $2,000. 

Option B allows you to save an extra $12,000 s month (minus maintenance costs) and build equity. Rents will continue to rise over time as well. Your tenant helps you grow rich instead of you helping your landlord grow rich.

Option B seems like a no brainer to me.

[Charles Carillo]

@Jaekwan Lee

When I have house hacked, the properties have never cashflowed (with me living there). I know people say that, and it is ideal, but it is difficult, especially in growing markets. My goal when I house hacked was to lower my monthly payments. I would want the property to cashflow if it were 100% rented, which sounds like it is still a stretch. If you are going to live there for several years, you might see some rent growth that can assist your bottom line, but I might keep looking.

[Dale Line]

It absolutely can be. House Hacking is generally the one situation when purchasing an investment property can be done without positive cash flow. The rationale being you are reducing your personal housing costs as the rented unit will be covering some of the costs. 

I did it with my first home purchase on a 2-family. Ended up living in my unit for about 25% of the price I was getting in market rent for the other unit, even though it didn't have positive cash flow.

Couple things to consider:

1. Make sure you are, in fact, spending less on a monthly basis than if you were buying/renting an equivalent personal property. It may not make sense for your personal finances if over invest and end up with a house hack option that costs more money than somewhere you could live on your own.

2. Run some estimates now on potential future earnings if, at some point, you didn't live in the house and instead it was used as 100% rental. It should have positive cash flow in that future scenario. 
 

[Russell Brazil]

Is your other option to live in a house and not househack that will cost you $4,000 a month?

[Sarita Scherpereel]

Hi @Jaekwan it can. Especially, in some areas of the country were appreciation is high. The 1% rule isn't law and came into existence after the housing crisis but now is harder to find- https://www.biggerpockets.com/blog/1-percent-rule-dead

Attend local meetups to find out what the market is doing on a local level. That will help break down that market and give direct insight on deals there. Best of luck! 

[Jaekwan Lee]

Quote from @Sarita Scherpereel:

Hi @Jaekwan it can. Especially, in some areas of the country were appreciation is high. The 1% rule isn't law and came into existence after the housing crisis but now is harder to find- https://www.biggerpockets.com/blog/1-percent-rule-dead

Attend local meetups to find out what the market is doing on a local level. That will help break down that market and give direct insight on deals there. Best of luck! 

Thanks. This would explain why it is hard to find a property under 1% rule.

[Jaekwan Lee]

Quote from @Russell Brazil:

Is your other option to live in a house and not househack that will cost you $4,000 a month?

I could go a single home that could cost me $2500-$3000 a month. 

[Jaekwan Lee]

Quote from @Dale Line:

It absolutely can be. House Hacking is generally the one situation when purchasing an investment property can be done without positive cash flow. The rationale being you are reducing your personal housing costs as the rented unit will be covering some of the costs. 

I did it with my first home purchase on a 2-family. Ended up living in my unit for about 25% of the price I was getting in market rent for the other unit, even though it didn't have positive cash flow.

Couple things to consider:

1. Make sure you are, in fact, spending less on a monthly basis than if you were buying/renting an equivalent personal property. It may not make sense for your personal finances if over invest and end up with a house hack option that costs more money than somewhere you could live on your own.

2. Run some estimates now on potential future earnings if, at some point, you didn't live in the house and instead it was used as 100% rental. It should have positive cash flow in that future scenario. 
 

Your case made sense because it is just 25% of the price for your unit. The properties I see the price near my area is around or above 100% of unit price (half the mortgage + @) so I don't see a reason to start with duplex. 

[Russell Brazil]

Quote from @Jaekwan Lee:

Quote from @Russell Brazil:

Is your other option to live in a house and not househack that will cost you $4,000 a month?

I could go a single home that could cost me $2500-$3000 a month. 

 So let's look at the options.

Option A: Pay Rent $3,000 a month. You help your landlord grow rich. 

Option B: Buy Duplex. Cost $4,000 a month. Tenant pays $2,000 of that, and you pay $2,000. 

Option B allows you to save an extra $12,000 s month (minus maintenance costs) and build equity. Rents will continue to rise over time as well. Your tenant helps you grow rich instead of you helping your landlord grow rich.

Option B seems like a no brainer to me.

[Jaekwan Lee]

Quote from @Russell Brazil:

Quote from @Jaekwan Lee:

Quote from @Russell Brazil:

Is your other option to live in a house and not househack that will cost you $4,000 a month?

I could go a single home that could cost me $2500-$3000 a month. 

 So let's look at the options.

Option A: Pay Rent $3,000 a month. You help your landlord grow rich. 

Option B: Buy Duplex. Cost $4,000 a month. Tenant pays $2,000 of that, and you pay $2,000. 

Option B allows you to save an extra $12,000 s month (minus maintenance costs) and build equity. Rents will continue to rise over time as well. Your tenant helps you grow rich instead of you helping your landlord grow rich.

Option B seems like a no brainer to me.

 I meant Option A would be buying a single home with $2500-$3000 mortgage payment and possibly use 'live and fix' to increase the house value. 

[Russell Brazil]

Quote from @Jaekwan Lee:

Quote from @Russell Brazil:

Quote from @Jaekwan Lee:

Quote from @Russell Brazil:

Is your other option to live in a house and not househack that will cost you $4,000 a month?

I could go a single home that could cost me $2500-$3000 a month. 

 So let's look at the options.

Option A: Pay Rent $3,000 a month. You help your landlord grow rich. 

Option B: Buy Duplex. Cost $4,000 a month. Tenant pays $2,000 of that, and you pay $2,000. 

Option B allows you to save an extra $12,000 s month (minus maintenance costs) and build equity. Rents will continue to rise over time as well. Your tenant helps you grow rich instead of you helping your landlord grow rich.

Option B seems like a no brainer to me.

 I meant Option A would be buying a single home with $2500-$3000 mortgage payment and possibly use 'live and fix' to increase the house value. 

 Option B still seems like a no brainer to me

[Joehn B.]

Look at fourplexes.

I think we now have Fannie loans (in addition to FHA) that cover owner occupied multi-family!

it still won't cashflow but you might live in one unit for 1,600 and the tenants pay for the rest of the building.  Scale up!

[Dale Line]

Quote from @Jaekwan Lee:

Quote from @Dale Line:

It absolutely can be. House Hacking is generally the one situation when purchasing an investment property can be done without positive cash flow. The rationale being you are reducing your personal housing costs as the rented unit will be covering some of the costs. 

I did it with my first home purchase on a 2-family. Ended up living in my unit for about 25% of the price I was getting in market rent for the other unit, even though it didn't have positive cash flow.

Couple things to consider:

1. Make sure you are, in fact, spending less on a monthly basis than if you were buying/renting an equivalent personal property. It may not make sense for your personal finances if over invest and end up with a house hack option that costs more money than somewhere you could live on your own.

2. Run some estimates now on potential future earnings if, at some point, you didn't live in the house and instead it was used as 100% rental. It should have positive cash flow in that future scenario. 
 

Your case made sense because it is just 25% of the price for your unit. The properties I see the price near my area is around or above 100% of unit price (half the mortgage + @) so I don't see a reason to start with duplex. 

Yes - the economics are different and living in a 2-family isn't for everyone. Something to keep in mind is that if you were living in 1/2 of a rental property 50% of the building maintenance will be tax-deductible (this is because 50% of the building will be investment property). Living in a single family home that you will eventually turn in a rental won't give you that same benefit while you're living there. Sounds like you're doing a great job crunching the numbers. Keep us posted on what you do! 

[Sarita Scherpereel]

Quote from @Jaekwan Lee:

Quote from @Sarita Scherpereel:

Hi @Jaekwan it can. Especially, in some areas of the country were appreciation is high. The 1% rule isn't law and came into existence after the housing crisis but now is harder to find- https://www.biggerpockets.com/blog/1-percent-rule-dead

Attend local meetups to find out what the market is doing on a local level. That will help break down that market and give direct insight on deals there. Best of luck! 

Thanks. This would explain why it is hard to find a property under 1% rule.

 Right! Even experts on BP say it's harder in a lot of markets. So you're not alone. It just means people are leaning on appreciation much more. 

Listen to your LOCAL experts! People on the ground in your market should be able to give you better market advice. 

[V.G Jason]

Quote from @Jaekwan Lee:

Quote from @Russell Brazil:

Quote from @Jaekwan Lee:

Quote from @Russell Brazil:

Is your other option to live in a house and not househack that will cost you $4,000 a month?

I could go a single home that could cost me $2500-$3000 a month. 

 So let's look at the options.

Option A: Pay Rent $3,000 a month. You help your landlord grow rich. 

Option B: Buy Duplex. Cost $4,000 a month. Tenant pays $2,000 of that, and you pay $2,000. 

Option B allows you to save an extra $12,000 s month (minus maintenance costs) and build equity. Rents will continue to rise over time as well. Your tenant helps you grow rich instead of you helping your landlord grow rich.

Option B seems like a no brainer to me.

 I meant Option A would be buying a single home with $2500-$3000 mortgage payment and possibly use 'live and fix' to increase the house value. 

Where in Austin are you going to do that? Far, far east don't think you can even do that. Take into account with Option B that your rents are actually getting hammered this year probably through 2026-2027 given austin's development. Past that, this is the city to be in. So long term, in my opinion, I always take higher quality location SFH over multifamily house hacking but if the latter is the most and easiest access point into REI then definitely roll the dice.

[Basit Siddiqi]

First - You will have other expenses ontop of your mortgage payment. One of which you mentioned, PM Fees, but it will also have other expenses such as repairs, improvements, utilities, etc.

Therefore, your cash-flow will be several percentage points in the negative.

Should you invest?
Real estate provides you a return in one of two ways, cash flow and appreciation.
Cash-flow is negative
Do you project your appreciation to be positive?
Historically, real estate appreciates 3% - 4% annually.
It may be possible, that an area like Austin will appreciate more.
Austin, TX, from my understanding had many years of crazy appreciation and recent years of negative appreciation.

There are also a lot of reports that Austin, TX has a lot of new rental supply that came and is coming into the market.

What is your required return from an investment?