Breaking Down the Numbers of My House Hack
Earlier this month, I purchased my very first property. But this isn’t your ordinary property. What sets it apart from other properties is that it’s a duplex, meaning that it’s split into two separate units. The reason I decided to purchase a duplex is so that I could do what’s called a “house hack”, which is when you buy a multi-family property as your primary residence to live in one unit and rent out the others.
The main benefit of doing a house hack is that it allows you to purchase a 2-4 unit property with a lower downpayment and interest rate since you’re making it your primary residence by living in one of the units. If you use an FHA loan your downpayment would be 3.5% of the purchase price and if you use a Conventional loan your downpayment would be 5% of the purchase price.
If you were to purchase a property as an investment, you’d have to put down between 15% to 25% and your interest rate would be 1% to 2% higher, costing you tens of thousands of dollars more over the life of your mortgage.
While you’re living in this property, the rent from the other units will help cover most of the payments you’re making toward your mortgage. After you live in this property for at least a year, you can move out and rent the unit you were living in. Once all of the units are rented, you should be collecting enough rent to be cash-flowing, which is the difference between the rent you’re getting and all of your expenses, which include the mortgage payment, repairs, capital expenditures, and vacancy.
I put the other unit in my property up for rent a few days after I settled on it and within a week I accepted an application for it. My first mortgage payment isn’t due until a month from now and I’m collecting rent on it already. Now that I have the other unit rented out, I have some free time on my hands to write this blog where I’ll be giving you a breakdown of how much it cost me to purchase this property and how much I expect to make from it. My hope is that sharing all of this information will make you more confident about doing a house hack if it’s something that you’ve been thinking about doing.
Before I go over all of that, let me give you a quick tour of the property. It’s located in Curtis Bay, which is a neighborhood in the southern portion of Baltimore City. From my property, I have a direct view of the bay and the Key Bridge or I guess what’s left of it…
As I said, it’s split up into two units with separate meters for the gas and electric. Both units have one bedroom and one bathroom and have been completely updated by the previous owner.
The unit that I’m living in is on the main floor, with the entrance to it located in front of the property. It’s set up like a studio, so when you walk in you’ll find yourself in the living room that opens up to the bedroom with the kitchen and bathroom located in the back. The backyard is pretty spacious, which me and my family spent quite a bit of time cleaning it up as you can see in these before and after pictures I took.
The other unit is located upstairs and the entrance to it is on the left side of the property. When you walk up the stairs you’ll find yourself in the hallway. To the left is the kitchen, the middle is the bathroom, and the right is the bedroom. All of these rooms are very spacious as you can see.
Now down to the basement, which is what really sold me on this property. All of the systems were replaced, which includes the HVAC unit, air furnace, and water heater. With this property being a duplex, there are two of everything as you can see. On top of this, all of the electrical, plumbing, and the roof were replaced. I know that I could’ve built more equity by purchasing a fixer-upper and updating it myself to raise its value, but I didn’t want to take on that large of a project because I’m so busy with other things at the moment.
With all of the work that has been done to this property, I knew there wouldn’t be many repairs for me to make, which is important for me because I didn’t want to have to worry about the cost of repairs eating into my cash flow.
Ok, now that you’ve seen the property, let’s talk numbers. I purchased this property for $200,000 which is how much it appraised for. I used a Conventional loan and since it’s my primary residence, I only had to come up with 5% for the down payment, which is $10,000. If I purchased it as an investment property, I would’ve had to come up with around 20% for the down payment, which is $40,000. Also, I got a much lower interest rate at 6.25% where rates for an investment property are close to 8% at this moment.
Along with the down payment I had to pay closing costs, which came out to be roughly $11,000. The closing costs are composed of fees that I had to pay my lender and title company. I also had to pay for transfer taxes, recordation fees, and pro-rated items such as interest, property taxes, and water.
I was able to negotiate $6,000 in concessions from the seller. This was the most I could receive because Conventional loans only allow the seller to provide up to 3% of the purchase price in concessions. Also, with me being a realtor, I recieved a commission of $3,000 after I paid the splits to my team and brokerage.
With all that being said, my cash to close, which is the amount of money I had to pay to purchase this property was around $12,000. My mortgage payment is roughly $1,700 a month, which is made up of principal, interest, taxes, homeowner’s insurance, and mortgage insurance. I was able to rent out the other unit for $1,100 a month, so I only have to pay $600 a month toward my mortgage.
Once a year goes by I plan on moving out and renting my unit for $1,100 a month as well. This means I’ll be receiving $2,200 a month from both units. After paying for my mortgage, I’ll be left with roughly $500 in cash flow every month, which is $6,000 a year.
The fact that I’ll be making this much a year from one property is mindblowing to me because that’s around how much I make from my part-time job. For the past couple of years, I’ve been investing in stocks because I knew that to become financially independent, I had to put my money to work for me. All those years of investing have led me to this point in my life, where I finally own my first property.
One other thing I looked at when doing my analysis on this property is the cash-on-cash return it would yield for me, which is a percentage that shows me what my return would be. This is calculated by taking the amount I’ll earn from it every year and dividing that by the amount of money I invested to purchase it.
The total amount I’ll end up investing in this property will be around $24,000. This includes the $600 I’ll be paying every month toward my mortgage while I’m living here. It also includes the money I spent on updates I made throughout the property. As I said, once both units are rented out, my cash flow will be around $6,000 a year. Dividing my annual cash flow by the total amount of money I’ll be investing gives me a cash-on-cash return of approximately 25%, which means it will take 4 years for me to get back the money that I invested.
This is quite the return for me to be getting, especially on my very first property. To give you an idea of how solid of a return this is, I was looking for a property that yielded a cash-on-cash return of more than 10% because that’s around what I could get if I invested my money in the stock market. Since there are more risks involved with investing in real estate, I needed to get a higher return on the money I’m investing, so this property checks the box on that.
For my first property, I wasn’t really looking for the best deal out there. I just wanted to find something that would generate some cash flow and help me learn how to invest in real estate. But I feel that I hit a home run with this property as it exceeds what I was looking for.
Now that I have gone over all of the numbers for my house hack, let me share with you a few other benefits that come with doing a house hack.
Part of your mortgage payment goes towards paying down the principal, which is the money that you borrowed to purchase your property. So not only are you receiving cash flow, but your tenants are paying off the balance on your mortgage for you.
There are a TON of tax write-offs that you can take from owning a rental property some of which are the mortgage interest, taxes, repairs/maintenance, and the depreciation of the property. Between all of these tax write-offs, you should be able to get away with not having to pay any taxes on the cash flow you receive.
You can house hack as many times as you want as long as you’re living in the property for at least a year. If you’re in your 20s like me and you do a few house hacks over the next couple of years, then you’ll have a bunch of cash-flowing properties that can help support you and your family once you’re ready to settle down.
Hopefully, all of this information gave you a better understanding of what a house hack is. If this is something you’re interested in doing yourself, please reach out to me. I’d love to guide you through the process of doing your very first house hack so that you can get one step closer to becoming financially independent.
