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Today I'm gonna start by showing you guys exactly how I run the numbers and analyze different potential investment properties.
We're going to look at two properties, one in Oklahoma and then another out in Pennsylvania.
We're gonna specifically look at multifamily properties that you could house hack, as I think that's what's the best way to get started investing.
The first one we're gonna do here on the white board, and second property I'm gonna show you guys how to use the Excel calculator that I built that is super simple. you just type in your numbers, and it spits out your cash flow amount, your return on investment, all the necessary information that you need.
Here is the link to my house hacking deal calculator.
The first property we're going to look at is a duplex that I found in Oklahoma City and the purchase price for this duplex was $120,000. This is a 1-bed, 1-bath on each side, and there are a couple of things you want to know for your upfront investment box.
You want to know how much money you're putting down, so we're going to assume that you're using the FHA loan or something like that, and we're gonna have a three and a half percent down payment.
I also need to know what my interest rate is going to be, and interest rates fluctuate every single day. I like to run my numbers with an estimated four percent just to be safe.
So I've got my four percent interest rate, and basically this is all the information I need to know at this point to get my initial investment numbers. And so what I do here is pull out a simple mortgage calculator app on my phone.
I put in the purchase price, I put in how much I'm gonna put down, my three and a half percent, my interest rate, and usually I'm looking at a 30-year mortgage so I put that in.
From here, you can go back to Zillow and scroll down to the monthly cost estimates and you'll be able to get an idea of what the taxes might be for that property and what the insurance might be. These aren't going to be exact numbers, but we're just trying to get an initial snapshot of what this deal might look like.
Once I get those things in, there may be one more thing I need to add, which is PMI or basically mortgage insurance which comes into play when you put less than 20% down.
Oftentimes your mortgage percentage is gonna cost you about 1% annually, and so this is something that a lot of people forget. If you're putting less than 20% down because you're using an FHA loan or a VA loan, make sure you include at least 1% for your mortgage insurance in your calculation.
So from here, my mortgage calculator tells me the first important number that I need to know, which is my PITI. It's the entirety of what I'm going to owe every single month to the bank: my principal on my loan, my interest on my loan, my taxes, and my insurance.
And for this deal, it looks like my PITI is going to be $799.71, so I'm just gonna go and round that up to eight hundred dollars.
The last few numbers that I need to know are the numbers that make up my initial investment.
When I go to the closing table to sign and get the keys for this deal, what am I going to need to pay at that moment?
It's going to include two things: your down payment and your closing costs. So we already know our down payment is gonna be three and a half percent, so I just go ahead and calculate that $4,200.
And then second, I'm gonna have my closing costs. And you can negotiate a deal with a seller where you have to pay zero percent of closing costs. That happens sometimes, but there's also the possibility that you're gonna have to pay some closing costs on this deal.
They can be anywhere from 2 percent to 6 percent, depending on your lender. But when I'm running my numbers I like to estimate a 4 percent closing cost, which puts me at $4,800 for closing. And I'm looking at an initial investment of $9,000.
So I've got two really important numbers here for the $9,000 initial investment to close this deal.
If you're interested in hearing about how I bought my duplex and paid $0 for a down payment, I have a video walking you through exactly how you can get down payment assistance.
If you qualify, you can get your entire down payment covered for you, which will basically cut this initial investment that you need by half.
So once I know my initial investment as well as my PITI, I move over to the income box. And this is where I want to know how much income this property can bring me every month. Some Zillow listings will tell you. If there's a tenant already in the unit, they'll tell you how much that tenant is paying for a month.
But if they don't, there's a great website that I like to use which is called rentometer.com.
It's a free website where you can enter in the address of a property and how many bedrooms and bathrooms the unit in that property will have, and it'll tell you average rent for that type of property in that area.
So when I did that, I saw that this property can get me about six hundred and twenty five dollars a month.
And I also want to think about if there is any other additional income that I can get from this property.
Is there parking? Is there storage fees or is there anything other than the rent that I can get income from at this property?
And for this example, I'm gonna say no. I'm gonna say the $625 is all I'm getting, because remember I'm renting out one unit but I'm living in the other one myself.
From here, we're going to look at our expenses, and expenses are the silent killer of every real estate deal. When you run your numbers, don't skimp on your expenses.
Owning a home comes with costs, and so you need to plan for those things up front so you don't think you've got just a great deal on your hands, you buy it, and then you're out of luck.
So some of the initial expenses I like to think about, especially when I'm thinking about house hacking, is that I'm still going to have to pay my own utilities.
So I'm gonna estimate that every month in this one-bedroom, one-bathroom apartment, maybe I'm living by myself so I'm gonna pay about two hundred dollars in utilities.
It's also really important as an investor that you plan for things like vacancy and repairs.
And so I'm gonna have vacancies slash repairs, and I'm gonna set aside $50 each every month.
I then also have the lawn care as well as trash. Some cities have trash and water, and I'm gonna go $50 and $25 each for my lawn care and my trash.
And that's gonna put me at 375 dollars every month for my expenses, not including the actual investment I'm making in the property.
And this is where, once you have these numbers, it's gonna be super easy to figure out if this is a good deal or not for you.
So first I know that I've got to pay $800 per month in terms of PITI, and I'm gonna have six hundred and twenty-five dollars coming in which is gonna leave me with a deficit.
I'm gonna have to basically pay myself a hundred and seventy five dollars in rent.
But that's not it. Remember, I've got one hundred and seventy-five dollars left to cover my eight hundred and PITI, but I still need to account for all the expenses of being a homeowner every single month.
I'm gonna add this with my $375, and that's gonna mean I'm coming out of pocket five hundred and fifty dollars every month.
This is what I call a “house hacker’s return.”
I'm not making money on this property, but am I willing to have 80% of my mortgage payment covered for me by my tenant, own a home, be building equity, paying myself a hundred and seventy five dollars in the form of rent, as well as kind of taking care of some of the necessary things that I need to take care of as a homeowner.
Working from the computer, let’s take a look at the second property which is a triplex in Philadelphia that I found on Zillow.
Looking at this property, I can just kind of take a look I can see pictures of it.
It doesn't look to be in too bad of shape, but really what I am interested in is understanding what is the unit breakdown of this property. How many places can I rent out, and how much money can I get for each of those units?
So basically, I can see in the description that it's a three unit property, so I know there's three units: a one-bedroom, a studio one-bedroom apartment, as well as a two-bedroom apartment.
My thought when I'm house hacking is that I want to live in the smallest unit, which I would basically get the least amount of rent for, and use that for myself.
Then I’d make as much income as I can from those other units.
So this is where I just pull up the rentometer website on my phone and I do the same thing that I did with the last property.
I type in the address, and I can see that for that one-bedroom apartment I'm looking at about a thousand dollars a month. And then I type in the exact same address, but bump it up to a two-bedroom property and that looks like I can get about $1,200 a month.
So once I have that information, that is all I need and then I can go over to using the Excel calculator that I built.
You can find this calculator on my website.
I'll show you guys how to use that right now.
So you want to only input numbers into the gray boxes, you don't want to change anything else, just the gray boxes. And so this triplex costs twenty to thirty thousand dollars.
And let's imagine that you've saved up and you're gonna put down 20% on this duplex. This is what you have to put down in order to avoid that mortgage insurance that we talked about earlier on the last deal.
So put down 20% and we're also going to look at this deal in two ways: one, by using mortgages or down payment assistance and then another, without using down payment assistance.
And I'll show you what that looks like in just a minute. So basically, for a down payment of 20%, I'm gonna estimate the same four percent for my closing costs.
Let me say there's no repairs because this property said it was move-in ready. Sometimes it is, sometimes it isn't.
That's when you decide, “Hey, this is something I'm interested in,” that's where you kind of go forward and do more due diligence and really narrow down your numbers.
But this is just kind of an initial look to see if this is a good deal or not. I'm gonna say no repairs and there I have my initial investment. I'm also going to look at my interest rate. We're gonna do that same four percent interest rate, 30-year loan that tells me my debt service that's the P-I in PITI, which is my principal and interest that is actually going towards paying down my debt.
But as we know, PITI includes your taxes and insurance.
So I take a look on Zillow and I go down to the estimated monthly cost section, and that tells me $188 a month for property tax and eighty one dollars a month for home insurance.
So once I've got my monthly numbers for my insurance and my taxes, I'm gonna put those in and then it tells me my PITI.
I'm looking at $1,147.44, so just around twelve hundred dollars a month for my investment, that's what it's gonna cost me.
So now I'm coming to my second step. I'm looking at my rent. If I can make a thousand dollars from that one bedroom apartment and twelve hundred dollars from the two-bedroom apartment while living in the studio, I'm looking at $2,200 a month.
If there's any additional income like parking, storage, anything like that, you can put it here.
And then I go into my expenses. When I'm estimating my expenses, I'm gonna estimate about two hundred dollars and utilities for my unit.
Something that I recommend when you're looking to house hack is to find a property where the utilities are separate so everyone can pay for their own electricity, their own water, all that good stuff.
And you as the owner don't have to worry about that, so I'm going to estimate 200 for my own expenses, $100 both for repair and vacancy.
This property’s a little bit bigger than the last property. It’s a triplex, not a duplex, so that means I'm gonna bump up the amount of things that I have to repair, the amount of vacancies that I might have.
I'm going to say another $50 for lawn care, whether it be cutting the grass or managing snow. And $25 for trash. If someone's going to manage your property for you, you can put the percentage that they're going to get every single month right here.
I recommend managing the property especially if you’re house hacking and you're living there. Any problems that arise, you're already there and you can take care of it.
The property manager isn't going to come over to fix the toilet, they're not going to come over and fix the water heater, they're going to call the handyman and charge you for whatever the handyman costs.
You can do that same thing if you're managing your own property.
If there's a problem that arises you depend on your team that you've put together, your handyman your electrician, all those different things.
Manage your property, get that experience and save yourself on expenses every month, and then if there are any other expenses that come up, you can put that below.
That put my expenses at $475 a month. Now, the return is already calculated for me.
Here I can see that I'm looking at five hundred and seventy seven dollars of cash flow monthly.
I'm looking at an annual return, which is just that number multiplied by twelve, of almost seven grand.
And I can see that my ROI, my return on my investment, will be around thirteen percent.
But the second thing I want to show you is how your return on investment can increase with the down payment assistance that you can get.
So I'll come back to the top and I say that I'm getting three and a half percent of downpayment assistance, which knocks down my downpayment to $37,950, knocks down my initial investment, and bumps up my ROI.
When I have down payment assistance, I have less of an initial investment that I'm putting down, which then increases my ROI to fourteen point seven percent.
By the way, if you're interested in knowing how to calculate your ROI, or what some of these terms mean, you can check out the video I did on that.
But basically, your ROI is going to be your monthly income multiplied by 12. So you want to take that 577 and multiply it by 12 to get your annual return, and you're gonna divide that by the initial investment, your down payment, your closing costs, and any money you have to put towards repairs.
Annual income divided by initial investment spits you out your return on investment.
If there's a city or a property that you want me to analyze, make sure you let me know. Thank you so much for reading, and I'll see you in the next post.
So, now that you've gotten an intro to using my house hacking deal calculator, are you ready to start?
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