Investment Variables for House Hacking Oakland, CA

[Hassan Karaouni]

Hello everyone, my name is Hassan and I'm defining investment strategies to House Hack in Oakland. I'd appreciate if anyone can provide input on variables I'm using below. What adjustments, if any, should I make? If it helps to have more concrete details, we could consider a 700K-1M purchase that I occupy with 4-5 rooms that I rent. All feedback is welcome and hopefully this helps others too!

Variables

- Interest Rates: 7%. If I'm calculating correctly, this really hurts for investment potential but I'm hopeful that sometime in the next 3-5 years I can get to 5%.

- Vacancy Rates: 8%. I started with 5% but bumped up to account for having 4-5 rooms.

- Annual Rent Increase: 3%. I'm really not confident on this estimate since I've seen some recent updates that CPI also factors in (might reduce rent increases) but there also might be ways to increase rent by up to 10% with 60-days notice.

- Annual Expenses Increase: 3%. I considered that 4% or 5% might be better due to high inflation, but I'm not sure how you all think about this.

- Annual Appreciation: 4%. I'm not sure what to input here.

- Property Taxes: 1.4%. I believe there is also a 2% cap on increased cost per year because of Prop 13. My understanding is that Property Tax is reassessed each year to be 1.4% of the home's newly assessed value that year but also the net annual cost increase is capped at 2%.

- Property Management Fees: 10% of Rent Revenue. Is there any way to get a better rate here? I think I've heard of 8% in the past.

- Expenditures: 10% of Rent Revenue

- Insurance: $1,500 Annual. I'm not sure here and saw a lot of different estimates online from 1-2.5K.

- Utilities: $600 Monthly. I thought $300-400 might be more standard, but $600 could help to account for multiple renters.

- Closing Costs: 3.5%. I was not sure how to best calculate this. I've also read that Transfer Tax is covered by sellers, so I'm not including that in my costs.

[Ryan Thomson]

When looking for a good house hack I consider a couple things.

1. Will it reduce my cost of living when compared to renting?
2. What is my net worth ROI on my downpayment and is this better than another investment opportunity.

Your Net Worth ROI calculation takes into account the appreciation, loan paydown, tax benefits, and the rent avoidance (the difference in what you pay towards your mortgage compared to your rental situation). The total of that number over the year divided by your 5% down payment is your net worth ROI. Because you are getting the home for 5% down and hopefully holding for the long term, you will almost certainly be get a better ROI than the ROIs you can get elsewhere in the investing world.

That is what I look for. Now, how do I calculate that? I have a great calculator to help figure this out.

The inputs for the image in this screenshot are as follows:

500k purchase price duplex.

Rent each side for 2k/month (this is after you move out)

5% down payment

Closing costs: 7k

6.4% interest rate

Insurance: $250/month

Utilities (paid by owner): $400/month

Vacancy budgeting: 5% of monthly rent

Maintenance budgeting: 8% of monthly rent

CapEx budgeting: 7% of monthly rent

Even though you are negative $312/month after budgeting for future expenses your net worth ROI is massively positive. Real estate is one of the best ways to build long term wealth. And house hacking is an incredible hack to get started with only 5% down.

(see screenshot below).

Screenshot saved in “images for investor emails” folder. File name “Spreadsheet duplex net worth roi”