House Hack - What should I shoot for in Reserves after Move Out

[Zac Kucharek]

-first time home buyer, looking to buy in Medium sized Metro area, 2-4unit property to live in one and house hack, then move out after 1-2 years.

(Question)

How much I should aim for in reserves for a house hack after move out. Looking for a 2-4 unit duplex and plan to put 5% down in the coming months here. I am analyzing deals in the area and with interests rates quite high (Approx. 8% at time of writing for 30yr fixed) and asking prices that don't reflect how powerful an effect the higher interest rate has on affordability. My goal with the live in portion to House hack would be to reduce my rent costs as much as possible, but as a long term investor I want this property to at least cover all expenses upon move out. I realize cash flowing properties are difficult to find, but I don't think something that at least breaks even after moving out of owner occupied portion of the house hack should be unattainable? But maybe in this market it isn't with 5% down. 

I have been able to find some small multifamily deals where after moving out and renting out they do cover the PITI + PMI with 0-100$ left over as reserves, but are still are quite often 500-750$ away from covering vacancy and capital expenditure reserves. So, there have been a select few that 'cash flow' after PITI+PMI but does this count as cash flow even, as it doesn't cover important reserves such as vacancy and cap-ex? Most deals currently at prices and interest rates available don't even cover the PITI+PMI in my area for a 2-4 unit, which for me are not even a 'deal' at that point.

Overall, just wondering your thoughts on this and what I should aim for as reserves vs. pure cash flow after vacancy/cap-ex. Or since I am just starting to get into a property that even breaks even after PITI+PMI initially is a good start?

Thank you for all of your thoughts and comments in advance.

[Andrew Postell]

@Zac Kucharek ok, very glad you defined what you are looking for.  Formally, "reserves" means the money you have in "reserve" when you purchase property. This is a formal definition because some loans will require "reserves".  Meaning, you might be required to have 2 months of your mortgage payment in "reserve" to qualify for a loan.  But it sounds like you are speaking specifically about "cash flow".  And to formally define "cash flow" - this is our money left over AFTER expenses. Your expense/cap ex/vacancy factor/whatever you want to call it minus "Gross Income" = cash flow.

So, what should you expect  in cash flow right now?  You should expect ZERO...actually, LESS Than ZERO.  You will have negative cashflow on any property you look at when house hacking.  And yes, even after you move out.  Now, there might be some video or guru or tiktoky that might say otherwise...but this is not the case.  ALL properties right now will have negative cashflow.  Does that mean you shouldn't buy a property?  Of course not!  How else will I offset the high cost of buying a property BESIDES using the house hack method?  This is a tried and true method that has been working for decades.  Only in the past few years have terms like "cash flow" been used when buying a property...and that's because the interest rates were UNUSUALLY low.  The historical average for interest rates is 7%.  So, now that rates are back to "normal"...the same principles from 20 years ago work today.  I got started house hacking over 20 years ago.  And all of us that started then, are millionaires now.  I still firmly believe in real estate and the numbers justify the reason to invest in it.  You think it's hard now?  In 5 years you will be so glad to have purchased any property today. 

Will you eventually cash flow?  Yes, next year you will increase rents.  And the year after that.  And yes, you can cashflow if you put something like 40% down...but that's not what we are talking about.  I wrote a post on this specific topic a few weeks back that you can find HERE.  Hope that will help in some way.

@Trevor Morris taggin you here as well.

Thanks!