New investor looking for advice- househack property analysis, CPA

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New investor looking for advice- househack property analysis, CPA

Grace Olinger
Greater Boston, MA · Member since 2021 · 6 posts · 10 votes

Hello everyone, 

First of all, thank you for all the information that everyone has provided on this forum, it's very helpful for someone like me who is new to real estate investing.

I am a first time homebuyer who only learned about benefits of real estate investment and house hacking within the last two years. I have just taken my first action and got a loan preapproval letter for owner occupied multi family few days ago and was hoping that I could get some advice from people who have been at this position in the past.

  1. For house hacking, what would you say are some of the big things to take into consideration when analyzing the property?
  2. How have you dealt with tenants that come with the property at the time of purchase?
  3. In areas like Greater Boston where it is seller's market, I have heard that it's expected that you do cannot add home inspection contingency, what is the best way to deal with this to make sure that you are not purchasing a property with big issues?
  4. What should I look for in a CPA and what kind of fees can I expect to pay? I have always had "easy" tax returns that I could file via Turbo Tax, but since I would like to continue to invest in real estate after the first property and I do not know all the implications of rental income, I was thinking about finding one.
  5. (Greater Boston specific) Do you have a CPA that you can recommend to a new investor?
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Ty AshBusiness Member
Real Estate Agent · Milwaukee, WI · Member since 2018 · 201 posts · 132 votes
4y

@Grace Olinger

Hi Grace! Very excited to follow your house hacking journey. I also got my start using this strategy almost 4 years ago and still can't believe how beneficial just one investment property can be in accumulating wealth. Here are my thoughts:

1) I'm in agreement with @Danielle Jackson that many first time investors get caught up in the "perfect" house hack where you're living rent free. It's a great goal but the biggest win is offsetting your current housing expenses to accelerate your progress to your next property. Run this analysis as well as how the number will look after you move out. If the numbers are even breakeven post move out when factoring for PITI (principal, interest, taxes, insurance), Maintenance, Capex, Vacancy, and Management you likely have a good investment on your hands.

2) I lean towards trying to select my own residents as soon as possible (which could mean having current long term residents reapply). Knowing the history/employment/credit/background of who is living in your property will improve your chance of success and peace of mind. I also believe there is a lot to be said about "training" your residents from the beginning by setting clear expectations at the lease signing. You might find that the existing long term resident isn't a fan of your rules and procedures and might resist change.

3) As an agent, I avoid removing the inspection contingency if at all possible. We've found that looking at properties with 7+ DOM (days on market) have a higher likelihood of accepting an offer with contingencies. In many cases, these properties have been poorly marketed, bad photography, mis-priced, etc. Otherwise, I have paid to have an inspector walk through a property with me just to be aware of what pitfalls there may be.

4) I'm currently searching for an investor friendly CPA myself. The top factors for me are number of investor clients they have worked with and do they invest in real estate themselves. Expect to pay more than turbo tax (you pay for what you get) but making a mistake on taxes could lead to thousands of dollars of lost deductions.

5) Definitely ask around and start networking. As David Greene always says, "Rockstars know Rockstars".

Best of luck, reach out any time with any questions as you work through your analysis!

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  • Danielle Jackson
    Phoenix, AZ · Member since 2021 · 504 posts · 282 votes
    4y

    Hi Grace. Congratulations on starting down the path for your first property. Good for you for starting with a multi-family property you can house hack. So many successful investors started this way (and I wish I would have!). 

    One mistake I see with many is when evaluating a deal, they don't take into consideration the opportunity cost of rent. By that, I mean I see all these negative cash flow numbers when house hacking, but you have to account for what it would cost you to live. You would pay rent if you weren't otherwise house hacking. Secondly, factor and focus on the long-term cash flow. When you move out, and are receiving market rent, what do those numbers look like? 

    As far as existing tenants, learn their history. If they are good long-term tenants, do what you can to ease them with the transition. No one likes a new landlord/change when they had a good relationship with their existing one. Reach out, introduce yourself if you care to keep them. If you are worried about their not paying market rent, then open the discussion with what you believe market rent is, the disparity between what they are currently paying, and discuss a plan to gradually achieve market rent. Good, long-term tenants are worth keeping (in my opinion). Help educate them on if they tried to rent a similar property, what the economics look like, and slightly try to beat it!  If they aren't good tenants and worth keeping, well that is a completely different approach. 

    As far as the contingency piece, do you have someone who would walk the property with you to help you get a better understanding of work that may need to get done? Or do you have that expertise?  If you can find someone with a good background in construction, they can be just as helpful given inspectors don't open up walls. If you know no one, and have no background, tread lightly. 

    The CPA piece is very market specific. I would reach out to your local REIA to help guide you with a recommended CPA.

    Congrats again and good luck!

    4Reply
  • Ty AshBusiness Member
    Real Estate Agent · Milwaukee, WI · Member since 2018 · 201 posts · 132 votes
    4y

    @Grace Olinger

    Hi Grace! Very excited to follow your house hacking journey. I also got my start using this strategy almost 4 years ago and still can't believe how beneficial just one investment property can be in accumulating wealth. Here are my thoughts:

    1) I'm in agreement with @Danielle Jackson that many first time investors get caught up in the "perfect" house hack where you're living rent free. It's a great goal but the biggest win is offsetting your current housing expenses to accelerate your progress to your next property. Run this analysis as well as how the number will look after you move out. If the numbers are even breakeven post move out when factoring for PITI (principal, interest, taxes, insurance), Maintenance, Capex, Vacancy, and Management you likely have a good investment on your hands.

    2) I lean towards trying to select my own residents as soon as possible (which could mean having current long term residents reapply). Knowing the history/employment/credit/background of who is living in your property will improve your chance of success and peace of mind. I also believe there is a lot to be said about "training" your residents from the beginning by setting clear expectations at the lease signing. You might find that the existing long term resident isn't a fan of your rules and procedures and might resist change.

    3) As an agent, I avoid removing the inspection contingency if at all possible. We've found that looking at properties with 7+ DOM (days on market) have a higher likelihood of accepting an offer with contingencies. In many cases, these properties have been poorly marketed, bad photography, mis-priced, etc. Otherwise, I have paid to have an inspector walk through a property with me just to be aware of what pitfalls there may be.

    4) I'm currently searching for an investor friendly CPA myself. The top factors for me are number of investor clients they have worked with and do they invest in real estate themselves. Expect to pay more than turbo tax (you pay for what you get) but making a mistake on taxes could lead to thousands of dollars of lost deductions.

    5) Definitely ask around and start networking. As David Greene always says, "Rockstars know Rockstars".

    Best of luck, reach out any time with any questions as you work through your analysis!

    6Reply
  • Jonathan BombaciBusiness Member
    Real Estate Agent · Lowell, MA · Member since 2019 · 1k+ posts · 1k+ votes
    4y

    @Grace Olinger Congratulations on deciding to househack. I started with a househack myself and I think it is the BEST way to get started in real estate. You'll learn a ton and definitely self manage it so you get the full experience. To answer your questions:

    1. 1. For house hacking, what would you say are some of the big things to take into consideration when analyzing the property?
    2. A: Analysis the property as if you're not living there. Most househackers plan to live in the property 1-2 years then holding it as a rental long term (10+ years). So analyse it based on what you'll be using it for the majority of the time you own it. Also even though I'm going to tell you to self manage it make sure to put in a property management fee between 6-10%. I don't know about you but I don't like to work for free. The property should be able to a pay a management fee or else you just bought yourself another job that doesn't pay you anything.... 
    3. 2. How have you dealt with tenants that come with the property at the time of purchase?
    4. A: That depends. Do you like the tenants and just need a rent increase or do you want to motivate them to move somewhere else? If you really dislike all or some of the current tenants then you can request that unit to be delivered vacant. Otherwise we work with our buyers (along with our in house PM company) to come up with a custom plan to help our new landlords deal with the inherited tenants. Every situation is a bit unique but thats what makes real estate fun. 
    5. 3. In areas like Greater Boston where it is seller's market, I have heard that it's expected that you do cannot add home inspection contingency, what is the best way to deal with this to make sure that you are not purchasing a property with big issues?
    6. A: I don't care what other people are doing. The risk of missing something massive on your first property is too great you should keep the inspection contingency in place. If we went and looked at a bunch of places and lost a ton of offers and you find "the one" then we can do "inspection for informational purposes only" and load up some other contingencies to protect you if we find a material defect but definitely don't start with that strategy. 
    7. 5. What should I look for in a CPA and what kind of fees can I expect to pay? I have always had "easy" tax returns that I could file via Turbo Tax, but since I would like to continue to invest in real estate after the first property and I do not know all the implications of rental income, I was thinking about finding one.
    8. (Greater Boston specific) Do you have a CPA that you can recommend to a new investor?
    9. A: You will want a real estate friendly CPA for your few properties but you really don't need to pay for a CPA with real estate EXPERTIZE until you have a much more complicated portfolio. They charge alot and are used to working with much larger clients. Focus on finding the property first, then come back for CPA referrals. That being said we can give you referrals to both types of CPA's when needed. 

    We help lots of people househack in MA and NH. These are great questions and you're definitely thinking about the right things. That being said the opposite of success is in-action. You don't need to know EVERYTHING before getting started. I believe in "just in time" learning. Get out there and start doing real estate. You'll learn what you need along the way and that's how you'll build your team. 

    Best,

    Jon

    [email protected]978-710-8611
    Candor Realty4.760 Reviews
    WebsiteView Page
    2Reply
  • Grace Olinger
    OP
    Greater Boston, MA · Member since 2021 · 6 posts · 10 votes
    4y

    @Danielle Jackson Thank you for the great advice on things to keep in mind when evaluating a deal, that is a good point and it's been difficult as much of the information out there are talking about strictly rental property rather than specifically for house hacking strategy. Thank you for the advice on the contingency piece as well. There is someone in the family who can help with inspecting the property, so I plan on inviting them to come to open house.

    0Reply
  • Grace Olinger
    OP
    Greater Boston, MA · Member since 2021 · 6 posts · 10 votes
    4y

    @Ty Ash Thank you for the encouragement and the information. It's good to hear about how to analyze house hacking deal as it'd be impossible to have positive cash flow or "free rent" in this market. Your comment about the tenant is very helpful as well since that is another thing that I will need to learn during this process.

    0Reply
  • Grace Olinger
    OP
    Greater Boston, MA · Member since 2021 · 6 posts · 10 votes
    4y

    @Jonathan Bombaci It's good to hear from someone from the Greater Boston area! Thank you for answering my questions. The tips on the analyzing house hacking property is a good point and I can see that existing tenant situation is a complex issue that is dependent on the people there. Also, thank you for the tip on CPA as well. 

    As for the home inspection contingency, what are some other example contingency that can protect the buyer? 

    2Reply
  • Jonathan BombaciBusiness Member
    Real Estate Agent · Lowell, MA · Member since 2019 · 1k+ posts · 1k+ votes
    4y

    @Grace Olinger standard ones we use depending on the situation are financing contingency, appraisal contingency, P&S contingency, rehab budget contingency or HUD approval on 203ks. We also require estoppels (tenant certificates) or any occupied unit at closing. Depending on the property and the plan you can really write in anything you want and make sure you have adequate time to do your due diligence.
    Best,

    Jon

    [email protected]978-710-8611
    Candor Realty4.760 Reviews
    WebsiteView Page
    0Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    4y

    @Grace Olinger

    House hacking makes your tax situation more complex.
    You purchased a property that is treated as both an investment property and a personal residence. As such, payments that you make need to be prorated between business deductions and personal deductions.

    Payments that you make normally fall into one of 3 buckets
    100% of the payment can be factored in somewhere on the return
    Partial payment can be factored somewhere on the return
    0% of the payment can be factored in somewhere on the return

    House-hacking also has considerable tax implications in the event that you want to sell this property.

    You can potentially defer a portion or all of the gain on the investment property with 1031 exclusion.
    You can potentially exclude a portion or all of the gain on the personal residence with section 121 exclusion

    [email protected]917-280-8544
    Basit Siddiqi CPA4.979 Reviews
    View Page
    1Reply
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