Quote from @Matt Szablowski:
Hi BP friends,
What are your thoughts about buying a MFU house hack that initially has negative cash flow once it is occupied by tenants as long as I see possibly for cash flow in the future with refinancing for lower interest rate and completing updates that would lead to higher rent.
Background: I'm currently looking for my first house hack (and first investment) in the Chicago area with a FHA loan and 3.5% down payment. I've been searching in Jefferson Park, Albany Park, Irving Park, Portage Park, Avondale, Pilsen and University Village. Most of the properties I looked at are between my price range of $400k-$500k I believe I have found a few good duplexes that meet FHA guidelines, have strong bones and opportunity for sweat equity that will help me raise rent in the future. However, due to the high interest rates and low market rent costs these properties would either (best case scenario) break even or potentially have negative cash flow of $300-$500 dollars per month when they are fully occupied with year long tenants. When negotiating I plan to negotiate a buy down interest rate or price of home but realistically it will still not cash flow initially.
Strategy: I would hold this property and refinance in the future once I have 20%> equity and interest rates are lower. There's also opportunity for sweat equity to improve the out of date kitchen's, bathrooms and living room but financially I won't be able to complete the updates all at once. With the updated units I would raise the rent. In the meantime I can try renting one unit as a medium term rental to help create cash flow or potentially live in it for longer if needed while the other unit has a year long tenant. Once both units are completely updated, with higher rent and interest rates are 4% or lower each unit could cash flow $300 per month.
Is this a bad strategy for a small return? I understand that it's a risk because interest rates could potentially stay high for a long time and it wouldn't make sense to refi but this would be my first mortgage and investment property so I feel like I can take on the risk in this time when it's hard to find a good investment deal.
I would like stay close to Chicago for now. I also want to buy now rather then wait another 6 months so I can start building equity and avoid competition.
Thank you for any advice or input.
Hey @Matt Szablowski , your questions are valid and many people will approach them in different ways. Just to give my two cents, I have househacked one property per year for the past 5-6 years. I have acquired roughly 10 units across 6 properties through creative financing and househacking.
The first thing I look for in a househack is a 2 unit building that could function like a 3 unit building - so, like a 2 unit with a bonus attic or basement. This way, I can rent out the extra spaces. Also, if there are bonus storage areas like a garage, I’ll try to rent these out separately.
The second thing I think about are ways to increase cash flow. Renting units to long term tenants is one thing. But, could you rent by room? That’s what I did. For my very first duplex, my wife and I fixed up the 2nd unit ourselves, made a lot of mistakes, and eventually got tenants in. Then we fixed up the 1st unit and lived in one room while Airbnb-ing the 2 other two rooms. Currently, in all of my buildings, I have a combination of long term tenants, rent by room tenants, and mid term rentals.
Lastly, I try to be as creative as I can. If I have units with 2 bedrooms, I try to see if I can convert extra spaces or a den or a bonus room into a bedroom. Then I’ll take that 3 bedroom unit and see what will cash flow me the most between short term rentals, mid term rentals, furnished finders, long term tenants, rent by room tenants, etc.
I would never advise someone to buy a property that doesn’t cash flow. With this being said, I’ve had properties where cash flow was slim but I’ve used creative ways to make it cash flow.
Hope this helps!
