The House Hacking Strategy: How to Use Your Home to Achieve Financial Freedom by Craig Curelop

Author:Craig Curelop [Curelop, Craig]
Language: eng
Format: epub
Publisher: BiggerPockets Publishing
Published: 2019-10-17T05:00:00+00:00

Applying the Metrics

Just by learning the first three metrics, you will be able to safely analyze a deal and confidently be able to move forward with a high probability of success.

You have all the tools you need to start analyzing deals. A box of tools that you can’t use is the same thing as a box full of paperweights. You need to be taught how to properly apply these tools. Thankfully, it is ridiculously easy. When analyzing a house hack, you should completely disregard any form of appreciation. The only thing to analyze is the cash flow, which also encompasses the loan paydown. The equation you will want to satisfy is the following:

Monthly rent – monthly debt – reserves = expected profit

The monthly rent is how much you believe you will be able to charge for rent. As described in the previous pages, this involves a bit more research, but you should be able to get a good estimate—and one that will not change drastically assuming that you are looking at similar properties.

The monthly debt payment is given to you directly by your lender. If you have already decided on an area and a property type, it is likely that the property values you are searching for will be similar in price so the loan amount will not drastically change.

Figuring out the right number to set aside for reserves is akin to Goldilocks picking the perfect bed to sleep in. There is really no right or wrong answer, just reasonable and unreasonable. Setting aside too little is unreasonable and you will end up losing your shirt. Setting aside too much is unreasonable and you will never find a deal that works for you because all of your cash flow will be going to reserves. You need to find a sweet spot that allows you to set money aside while still increasing your financial position.

The reserve number is the highest variable in the equation so that is the one you will be toggling to satisfy “expected profit.” As shown in the equation above, expected profit is taking your monthly rental income and subtracting out your monthly debt obligation and reserves. Your expected profit should be above the profitability bar that you have set for yourself.

What should that bar be? Unfortunately, I cannot choose it for you. In many cases it will change based on your market and investing strategy. If you are in a market that has a high likelihood of appreciating, it is expected that the prices are already high, which means lower cash flow. If this is the case, then your profitability bar will be lower because you are betting that the property will appreciate, and appreciation is not accounted for in the formula above.

I know what you are thinking . . . “I thought we weren’t supposed to bet on appreciation.” This is true. However, betting on appreciation is like speeding on the highway. We are not supposed to do it, but we do anyway—within reason. When you speed on the highway, it is likely you are going five to ten miles per hour over the limit.

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