Author Topic: Calculating House Hack  (Read 1065 times)

RePatriot

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Calculating House Hack
« on: May 07, 2018, 05:30:53 AM »
My wife and I are currently renting a small, 1br apartment for 850 with utilities.  Spur of the moment, we started cruising neighborhoods and looking at houses.  We stumbled across a duplex going for 175k in an up and coming neighborhood.  After some very initial number running, we would be paying approx. $300 less month to month to live there than the cheapest apartments available in our city, assuming we have a tenant in place at a highly conservative rate.

A few things to know that makes this situation unique:
-My wife is a nanny.  The family she works for is extremely well off and one of them still has their RE license.  They have offered to act as our agent for free.
-We are planning on staying in Houston for the next 3-4 years.  Then it is all up in the air.
-We are first time home buyers and landlords.
-We believe the neighborhood may experience a significant up swing in the next decade or so.
-The neighborhood is not very nice.  Independence Heights isn't high crime, but it isn't low crime, either.

I don't want to miss anything, so I'm asking for some hole-poking in my assumption.  It is basically this:
Isn't it a no brainer to build equity and pay less for housing, given that I'm significantly reducing purchase costs?

I still need to crunch numbers harder to see if it would be profitable without us living there and being managed by a third party.
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sokoloff

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Re: Calculating House Hack
« Reply #1 on: May 07, 2018, 05:48:08 AM »
A few things to know that makes this situation unique:
-My wife is a nanny.  The family she works for is extremely well off and one of them still has their RE license.  They have offered to act as our agent for free.
That's not unique. The buyer's representation in a typical residential real estate transaction is usually "free". (To put it another way, you're the one bringing all the money into the transaction, so obviously, you're paying for everything. It's just that the agents on both sides of the transaction are being paid by the seller at the same moment the seller is being paid by you.)

Said more shortly, I've bought two houses and in both cases, my agents were "free" to me as well. The seller paid them in each case.

tralfamadorian

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Re: Calculating House Hack
« Reply #2 on: May 07, 2018, 08:21:41 AM »
Isn't it a no brainer to build equity and pay less for housing, given that I'm significantly reducing purchase costs?

To answer your question, yes! It's a no brainer that 2-4 unit properties where you live in one unit are a wonderful way to bring one of your big three expenses (housing, transportation, grocery) to zero. So the question is whether this could be the right property. My gut reaction is no- C neighborhoods have more hassle, higher vacancy and more repairs than their B counterparts. But maybe my gut is wrong so running the numbers is worth it.

Questions that come to my mind-
What would the rent be for the other side of the duplex? And what would PITI be? Does your $300/mo carrying cost include expenses (common area utilities/water/etc), vacancy, maintenance, capex and management in addition to PITI?

You mentioned that the neighborhood isn't great. Does that mean C+, C, C-, D? What kind of tenant would the other side of the duplex attract? What's the vacancy rate for 2-4 unit properties in that neighborhood? If you decide to move in 3-4 years, what are your management options? Do the good management companies work in that neighborhood? (You should be able to get answers to all the questions in this paragraph by talking with property managers.)

RePatriot

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Re: Calculating House Hack
« Reply #3 on: May 07, 2018, 06:31:18 PM »
Some numbers:
-Rent would be $800 conservatively, $900 possible
-P/I would be $709
-In the 100 year flood plain in post-Harvey Houston, I've wrapped in about $2000/year insurance

The current rent on my current apartment is $850/month including utilities.  According to my numbers, this house would save me between $400-$500 a month under that rent.  The other unit would not be covering all costs.  I'm wondering, is it worth it to tie up 30k of our cash in a house to save that much money on a potential 5 year timeline for holding the home?
Questions that come to my mind-
What would the rent be for the other side of the duplex? And what would PITI be? Does your $300/mo carrying cost include expenses (common area utilities/water/etc), vacancy, maintenance, capex and management in addition to PITI? My carrying costs would be $540

You mentioned that the neighborhood isn't great. Does that mean C+, C, C-, D? What kind of tenant would the other side of the duplex attract? What's the vacancy rate for 2-4 unit properties in that neighborhood? If you decide to move in 3-4 years, what are your management options? Do the good management companies work in that neighborhood? (You should be able to get answers to all the questions in this paragraph by talking with property managers.) Thank you for these questions, I'm reaching out to property managers tomorrow!  To clarify, the neighborhood is working class.  Seems like a solid C from what I've read on classes.  Is there an objective measure of crime rates that could help illuminate me on this question?
« Last Edit: May 07, 2018, 06:43:53 PM by RePatriot »
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waltworks

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Re: Calculating House Hack
« Reply #4 on: May 07, 2018, 08:17:24 PM »
If your timeline is that short, forget it. Costs to sell the place will eat any savings.

Slightly OT, but I wouldn't buy anything in ANY floodplain near the ocean these days.

-W

tralfamadorian

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Re: Calculating House Hack
« Reply #5 on: May 07, 2018, 08:28:30 PM »
My carrying costs would be $540

Thank you for these questions, I'm reaching out to property managers tomorrow!  To clarify, the neighborhood is working class.  Seems like a solid C from what I've read on classes.  Is there an objective measure of crime rates that could help illuminate me on this question?

$540 carrying cost before repairs/capex/vacancy reserves is a lot. I think the flood insurance plus high Houston regular property insurance plus some of the highest property taxes in the country are going to keep this property from having a chance to work. And like Walt said, flood zones properties are going to become more expensive to insure and more difficult to sell, not less.

Unfortunately no, there is no hard line between what defines the different asset classes. That's one reason I recommended talking with property managers. A realtor has a reason to sugar coat an area as a C when it's really a C- or a D. But if the property managers tell you it's not a great area or that they do not represent properties in the neighborhood, then you have your answer.

RePatriot

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Re: Calculating House Hack
« Reply #6 on: May 07, 2018, 09:02:50 PM »
To clarify, $540 carrying costs included a ball park inclusion of property tax ($1600), home owners insurance ($1200), Flood Insurance ($2000), my utilities ($2400), and maintenance ($1000).  Would that change your opinions at all?

Sorry that these posts have been scatter brained.  I've never evaluated a real estate deal before and I'm trying to figure all the math out.
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waltworks

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Re: Calculating House Hack
« Reply #7 on: May 08, 2018, 10:32:28 AM »
To clarify, $540 carrying costs included a ball park inclusion of property tax ($1600), home owners insurance ($1200), Flood Insurance ($2000), my utilities ($2400), and maintenance ($1000).  Would that change your opinions at all?

Sorry that these posts have been scatter brained.  I've never evaluated a real estate deal before and I'm trying to figure all the math out.

$8200/year divided by 12 is $683/mo for those expenses you outlined. $1000 is way low (IMO) for long term maintenance/capex on a duplex, too.

So if you're at $683/mo for the overhead (I think that's low, but whatever). If you financed 100% (you won't, but that's how I like to evaluate this kind of thing - your downpayment would otherwise be invested elsewhere) your P&I will be in the ballpark (assuming 4.5% interest rate and that you'll have $5k of closing costs/fees/etc) of $983.

In the end, you're at ~$1700 a month in costs. Sounds like you can get roughly half of that in rent, so your personal overhead (setting aside the work to manage tenants) is going to be ~$850/mo.

It sounds like you really want to do this. So go for it. I wouldn't buy the place, but that doesn't mean you can't or won't succeed.

-W

Jrr85

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Re: Calculating House Hack
« Reply #8 on: May 08, 2018, 12:34:00 PM »
Some numbers:
-Rent would be $800 conservatively, $900 possible
-P/I would be $709
-In the 100 year flood plain in post-Harvey Houston, I've wrapped in about $2000/year insurance

The current rent on my current apartment is $850/month including utilities.  According to my numbers, this house would save me between $400-$500 a month under that rent.  The other unit would not be covering all costs.  I'm wondering, is it worth it to tie up 30k of our cash in a house to save that much money on a potential 5 year timeline for holding the home?
Questions that come to my mind-
What would the rent be for the other side of the duplex? And what would PITI be? Does your $300/mo carrying cost include expenses (common area utilities/water/etc), vacancy, maintenance, capex and management in addition to PITI? My carrying costs would be $540

You mentioned that the neighborhood isn't great. Does that mean C+, C, C-, D? What kind of tenant would the other side of the duplex attract? What's the vacancy rate for 2-4 unit properties in that neighborhood? If you decide to move in 3-4 years, what are your management options? Do the good management companies work in that neighborhood? (You should be able to get answers to all the questions in this paragraph by talking with property managers.) Thank you for these questions, I'm reaching out to property managers tomorrow!  To clarify, the neighborhood is working class.  Seems like a solid C from what I've read on classes.  Is there an objective measure of crime rates that could help illuminate me on this question?

If the flood insurance is actually $2,000 per year, you don't need to buy it. 

If the flood insurance is really ~$600 per year (which should get you $250k of coverage in an AE zone if you are above the BFE or grandfathered to be treated as above the BFE), then $2,000 might be a reasonable fudge factor if you are worried about the NFIP being scaled back (but realize if you are below BFE, the NFIP will probably consider your non-subsidized rate to be closer to $7k or $9k per year, depending on how far below BFE you are). 

Dicey

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Re: Calculating House Hack
« Reply #9 on: May 29, 2018, 06:56:56 AM »
How old is the building?
What is the general state of repair?
Have you had the property inspected?
How long has it been on the market?
How knowledgeable is your wife's employer with the area and this type of property?
We just bought a house in what's technically a flood zone. We shopped hard for insurance. We went with the highly rated provider that was 1/3 the cost of the first estimates. How many quotes have you received?

I am pro-RE, but the biggest concern is the simple math. The area might gentrify in 10 years, but your stated timeline is 3-4 years. What's the chance you'll be writing in looking for advice on how to get rid of this albatross In 2022?
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RePatriot

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Re: Calculating House Hack
« Reply #10 on: May 29, 2018, 02:44:33 PM »
How old is the building?
What is the general state of repair?
Have you had the property inspected?
How long has it been on the market?
How knowledgeable is your wife's employer with the area and this type of property?
We just bought a house in what's technically a flood zone. We shopped hard for insurance. We went with the highly rated provider that was 1/3 the cost of the first estimates. How many quotes have you received?

I am pro-RE, but the biggest concern is the simple math. The area might gentrify in 10 years, but your stated timeline is 3-4 years. What's the chance you'll be writing in looking for advice on how to get rid of this albatross In 2022?

We did a lot of worst-case number crunching (and our worst case is limited by our inexperienced imaginations), and decided that the risk vs the reward did not make sense for us this time.  I came to essentially the same conclusion that you pushed at here.
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