Should I Buy an Investment Property or a House Hack

Should I Buy an Investment Property or a House Hack?

If you are new to real estate, you may be wondering if you should buy an investment property or a house hack. In a world of podcasting and blogging where snap-shot answers are all the rage, you may be thinking – it’s not so simple..

Congratulations. It’s not! Furthermore, I am not sure that I can give you a definitive answers much better than ‘depends’.

So, let us walk through some of the rationale together and see if we can’t put things in perspective.

3 Considerations for Investment Property or a House Hack

When it comes to business of making money, the way I see it what we are really doing is synthesizing several elements, namely 3:

  1. Profit Potential
  2. Risk Assumed
  3. Time

Ideally, then, we want to see the most profit, for the least amount of time commitment, and the least amount of risk. In every potential monetary enterprise there exists a golden mean, a sweet-spot whereby for the least amount of risk and time commitment we can drive the highest monetary gains.

That said, the question Should I Buy an Investment Proeprty of a House Hack, can be translated as:

Will buying an investment property or a House Hack generate the highest returns on my time and money, with the lowest risk exposure?

If phrased this way, the original question becomes much less conceptual in nature, and more pragmatic and calculable. In order to answer we simply have to analyze the reward, risk, and time commitment of both/either. So, let’s try.

My House Hack

At the time I released my book House Hacking, I only had a few months worth of data and had to make certain projections. My projections, and in the book I walk you though the entire underwriting process, called for me to finish the year with $15,000 – $16,000 of cash flow.

Seven months into my house hack, and I’m already at $9,200 of cash flow. Thus, it seems likely that we will hit our projections. Especially considering that the top-line revenue is on the rise for the rest of the year.

So, here’s the question:

Would you be able to generate $15,000 of Cash Flow easier, faster, and with less risk by buying a dedicated real estate investment or a house hack?

Doing the Numbers on Real Estate Investments

Follow me on this:

Step 1

In order to produce $15,000 of leveraged annual Cash Flow you would need at least $45,000 of Net Operating Income (NOI). Out of that NOI you would pay the debt service of about $30,000 per annum and be left with $15,000 of Cash Flow.

Step 2

In order to buy $45,000 of NOI at a market capitalization rate of 8%, which you would be lucky as all get-up to find in current market conditions, you would need to spend $562,500:

Value = NOI / Cap Rate

Value = $45,000 / 8% = $562,500

Step 3

In order to buy a $562,500 asset you would have to make a down-payment of 25% – a cool $142,000.

Unleveraged Acquisition

If you didn’t want to finance, you could simply buy an asset capable of producing $15,000 of NOI, which in this case would also be your Cash Flow. At an 8% market Cap Rate you would then need to stroke a check for $187,500. This is what it would take to buy $15,000 of annual cash in pocket in un-leveraged form.

Conclusion

Thus, in order to buy $15,000 of cash flow in a pure investment vehicle you would need $142k for a leveraged acquisition, or $187k un-leveraged. In addition, you’d need more capital in order to fix things that need fixed.

Question – is this easier, do you think, than making a 5% down-payment on an owner occupied SFR with a house hack component? I don’t think that it is for most people. And this is what makes a properly executed House Hack a much more efficient proposition relative to finances. There is a ton of financial gain for a very subdued investment of capital!

What About Risk?

Let me paint you a picture:

I own a really nice 10-unit building. At the time I bought it, I paid a bit under $400,000. I did not put any money down, because while I did have a 25% down-payment requirement I managed to finance it. For more on how to do that please reference the CFFU.

Now, I’ve had this building for about 4 years now, and most years it throws off $12,000-$13,000.

A Few Points on That:

First of all, understand – my Luxury House Hack, which enables me to live almost for free in a really upscale home, throws off same or more income than a 10-unit building.

Secondly, in order to maintain this income, in case of my house hack all I have to do is maintain 1 solitary Casita. On the other hand, to keep the money coming from the 10-unit I have to maintain – 10 units! I have to service 10 tenant’s needs. I have to replace flooring, HVAC, etc. in a 10-unit building.

Finally, to own that 10-unit I have to expose myself to additional debt, property taxes, and other costs. But, in the case of my Casita House Hack all of those costs are absorbed into the house. In other words, the income doesn’t cost me hardly anything.

So, do you think one is less risk than the other?

What About Time?

Do we really have to talk about this…? lol

Conclusion

The difficult thing about advising is that we obviously must take into account our individual personal circumstances. All we’ve considered here are the numbers. And yet, your desired way of life has to be figured into this equation. House Hacking may not be appropriate for you no matter how much sense it makes in terms of dollar signs if your life cannot accomodate. However, I am loving it, and I’d say that as a statement of generality, a proper Luxury House Hack as I describe in the House Hacking book is the most efficient and appropriate way to invest in real estate for most of you guys reading this article.

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8 Comments

  • ken vance Reply

    Ben I have your book and loved reading it. Your writing style is unique and enjoyable to read. Although I doubt we will be doing a house hack in the near future, I see us buying a cottage and using most of your logic identified in your book to subsidize the purchase. CFFU is great and so is the book. Thanks – and Chandler Arizona sounds like a nice place to raise a family.

    • Ben Reply

      Thank you so much, Ken!

  • Steve Reply

    Hi Ben, always appreciate how you boil things down to simple fundamentals and comparisons, so that it reads like common sense stuff. Case in point – this article.

    Revisiting Step 1. What assumptions did you make for the debt service? Then, what if you factor in maintenance/cap ex/vacancy/etc costs (using whatever assumptive methods of your choice), how much cash flow is left over?

    Trying to get a gauge on how optimistic the 15k cash flow for step 1 is. My expectation: very. Then reduce the cap rate from step 2 and the picture gets worse 🙂

    Thanks Ben,
    Steve

    • Ben Reply

      Steve, please reference the House Hacking Book for complete underwriting of all of the numbers. I fully believe that I’ll hit at least $15,000 of cash flow. Some CapEx may need to come out of that, but here’s the difference:

      In any home I would have CapEx, but without the revenue this CapEx would necessarily come out of my pocket. So, this is definitely cheaper to handle than a house plus a multi to facilitate the cash flow, each one of which would come with the CapEx…

      As to the debt service, I did not need to make any assumptions. Investment property is 25% down. The type of investment property which is capable of $15,000 of cash flow is almost certainly over 4 units, therefore a commercial portfolio note is the only way. Makes sense?

      I will be absolutely shocked if I don’t hit $15,000. It’s all in the book 🙂

      Thanks, Steve!

      • Steve Reply

        I don’t need any convincing 🙂 I like the general concept you have proposed and I will be getting the book for the full story and finer details.

        My original comment was actually about the traditional multifamily presented in step 1. Basically, I anticipate your house hacking is even better than shown here comparatively speaking, for the reasons you mentioned in your response, but also because the financial numbers presented for the multifamily are optimistic. Sharing your assumptions per my original post might illuminate this 🙂

        I don’t doubt at all your 15k is well on its way.

        • Ben Reply

          Oh, Steve – yes. I made allowances for my estimates for multi-family. The thing is, I don’t have to guess. I have numbers of trailing financials for my portfolio available to me. In light of that, House Hacking, though it has its’ problems and difficulties, is on balance the better opportunity. It’s why I wrote the book 🙂

          My booking rates for the rest of the year are close to 20% higher than what’s called in my underwriting as described in the book. The pricing power is very strong in this model. It’s a game changer!

  • Joakim Esaiasson Reply

    Good as always Ben,
    We have a cabin that we rent out on AirBnB and VRBO. We have done this for the past 4-5 years, I think. This year we are on track to hit 30k in gross and 180 day of renting. Not bad sense the peak season is 8-10 weeks in the summer.

    Last year i did some math on the gross income divide with numbers of booking and time spend on cleaning, cutting grass and email etc, I think my salary come out to 110/h not sure how accurate that is but anyway that vs working at Lowes for 12/h…

    My biggest problem is that I am so dependent on Airbnb and Vrbo. Our first year we had 90% of booking from VRBO and 10% from Airbnb, the follow we got more and more to Airbnb and then last year when VRBO added on there Service Fee we stop getting bookings from them… all of it was picked up by AirBnb. So fare this year I have 5 booking with VRBO and 40 bookings with Airbnb….

    I would like us to get a website etc so might be able to get some bookings from other sources then Airbnb and Vrbo.

    We want our cabin to be rented as much as possible iam very active with aggressive prices etc. So to me i rather have someone pay 40$ (plus 70$ in cleaning fee) to stay one night then have it empty. I dont have issues with the cleaning part “they pay me $35/h vs $12/h working at Lowes”.. We had people last week arrive at 10.30pm, they texted us at 7am next day saying they just left – the pay out was $187..

    My tip if you starting out is
    1) Make sure you have a CLEAN place, we are talking SUPER Clean set it up so it’s easy to clean..

    2) Start with very low prices so you get bookings. Bookings will get you reviews and good reviews get more booking..

    3) People reading reviews!!

    4) When you got the booking and reviews going to can jack the price up..

    Sorry for a very confused post!

    Joakim

    • Ben Reply

      People absolutely read the reviews, and people complain about bad bedding!

      Thanks, Joakim!

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