What percentage of monthly expenses should be covered?

Question

Hi, I'm looking to purchase my first house hack in the next few months and am working on my system to analyze cash flow for properties. I'm looking to do a duplex traditional house hack, living in one unit and renting the other. When analyzing properties, I'm finding that the monthly cash flow is often negative, which obviously sounds bad but doesn't account for my living for free in the other unit. Is there any rule of thumb or guideline to figure out how much of the remaining monthly expenses I should be covering? Would it make sense to perform the analysis as if I was another tenant and paying market-value rent for the unit I live in? Or maybe analyze each unit separately somehow? Any advice or directions to look into would be appreciated.

Tyler Gibson · Answer

Very rarely are you ever going to find a house hack where you can live completely for free. It's not impossible but it is rare. I tell people that really want to house hack to focus on a deal where their cost of living is going to be less than renting because of the house hack. If you're paying $1,500 a month in rent and you can buy a house hack where your total out of pocket expenses are $900 a month that could be a great deal. You've reduced your cost of living you're also putting your money towards paying down the principal which is increasing your net worth. The trick is to save the difference between what you were paying in rent and what you're now paying in the mortgage to save up more capital for your next investment.

Shawn McCormick · Answer

@Jack Sullivan you've got spot on advice here already and would add that if you don't know Orlando from a price point, neighborhood, appreciation, or demographics point of view..start with those points. Duplexes (decent ones, where you'll want to live, do you have kids or wife/girlfriend/partner that you need to consider location?) have become expensive and will eat into your pro forma if you don't do some homework.

Househacking and BRRR are becoming far more mainstream than just a few years ago so deals are competitive and harder to find. Right now, there are 29 duplexes on the market within 30  miles of downtown. Only 5 are under $300k and high is $1.5MM. There are many hurdles to find one that is in good enough condition to qualify for financing and also has an empty unit for you to live in too.

Best of luck!

Eliott Elias · Answer

Negative cash flow when house hacking is acceptable, as long and it's less than what your rent would have been.

Nicholas Coulter · Answer

@Jack Sullivan As long as when you move out it cash flows that's what matters. I would shoot to save more than you would be paying for rent. IE rent is 1500 and you are paying 1000 out of pocket

Nathan A. · Answer

If you analyze it that way and it's cash flow positive, that gives you peace of mind that you can easily move out later and keep the property.

Sarita Scherpereel · Answer

Hello. What market are you in? Or where are you looking to purchase? In some areas negative cash flow is very common. As a house hack you'll occupy what would be part of the income when you leave. So when you're living there you're not making those returns. Most house hackers run proformas on what the property yields when they move in and when they move out. Expenses for that again depend on the market. Like in my market, taxes are high so we have to estimate increases. Posting locations will help people in the forums be more specific.

What percentage of monthly expenses should be covered?

Most Popular Reply