Converting House Hack into Long Term Rental
I just finished refinancing the house I bought on Jan 2018 and house-hacked.
Check out the backstory: Living for free out of college
I wanted to go over the numbers for this new loan and my decision-making process for deciding to convert this home into a long term rental vs. selling it.
A quick recap from when I initially purchased this home and house-hacked it (Jan 2018).
Purchase Price: $185,000
Appraised: $204,000
Loan Amount: $179,500
Interest Rate: 4.5%
PITI: ~$1,410 (includes $120 PMI)
Total Money Out-of-pocket: $8,500 (includes closing cost)
Rental Amount: $1,850 (plus I was living in a room)
Bed/Bath: 5/3
Cash-on-Cash (Annual): 62%
Here are the up-to-date figures (June 2020).
Loan Amount: $193,800
Interest Rate: 3.375%
PITI: $1,190
Long-term Rent Amount: $1600-$1700
Cash-on-Cash (Annual): Infinite
The return is infinite because my original loan had been paid down to ~$173,000. So with the new loan, I paid off the original loan and after closing costs and a few repairs I kept ~$12,000.
This returned the original capital I had put into the home plus I had some leftover.
ROI is calculated by the following equation (how much money you get out/how much money you put in).
As you can see, I now had zero dollars “put in” therefore I would have a zero in the denominator which gives you an infinite return.
For those who are familiar with the BRRRR Method (Buy, Repair, Rent, Refinance, Repeat), I essentially did a variation of this.
I also want to note that part of the reason I decided to rent instead of sell and take the tax-free gains (your gains on real estate are tax free if you lived in the property 2 out of the last 5 years) is due to the large gain in appreciation.
This house is located 6-7 minutes away from UCF and is an area experiencing high growth. In two years, my house went from an appraised value of $204,000 to $248,000. That is ~10% in appreciation per year.
After looking at the massive appreciation and positive cash flow, I decided go ahead with the refinance. The decision ultimately followed more closely with my strategy for long-term investing.
Feel free to drop a comment below or reach out to chat about real estate.