First Property: House hack or MFR?

Question

I’m currently in the Army and looking to start out real estate investing near Fort Lewis-McChord in Washington. I’ve focused in on the Tacoma market and plan on using my VA loan to purchase a home for house-hacking while I am there, but I am not opposed to other opportunities or strategies. House hacking would be ideal for me, but I only have 1, maybe 2 buddies that don’t already have leases signed… I feel like this is pushing me towards purchasing an MFR, but there are very few available in the area and many of these are out of my budget. I’ll either need to find some other Soldiers that are willing to live together or somehow increase my budget in order to get an MFR. What would y’all recommend when deciding between house-hacking and MFR for my first property?

Sherief Elbassuoni · Answer

@Brock Salgado, inventory is very low for small multifamily. You will also need to pay a premium price.

House hack will get you similar cash flow while buying something that has way more inventory than a duplex/Triplex

Forrest Williams · Answer

If you can house hack the MFR, that's the way to go. Rent out the other units to randos and live with your soldier buddies in one unit. But if that's out of your budget, I would do the regular house hack. It's the best way to get started, in my opinion. I've done it several times. It teaches you so much about owning a house as well as managing tenants, what to fix and how, and the basics of investing you can't learn in a book or on forums.

Good call with the VA loan too, that's the best option possible!

Susan Authement · Answer

Yes, THANK YOU FOR YOUR SERVICE !

Always check the area your buying for restrictions/zoning etc.  Couple of weeks ago i looked at multi family unit for sale in the area i wanted to move to that looked in photos like it was adult/elderly care facility with a 3 bd apartment home on the same lot. I thought that i could live in the home and rent the 10 available rooms in the multi family unit to college students, they could use the kitchen and living room area as common use areas. Turns out the previous owner angered the city council by getting a zoning change approval to open a multi family property by saying he was going to house elderly people and instead brought in parolees and drug addicts coming out of rehab into transient housing . The home was located in a residential neighborhood on the outskirts of the small town not in the city area.  I was told that they would refuse to grant any continuation of the zoning allowing "room rentals" and that it would be a nightmare trying to get them to grant me anything similar that allowed a person to rent a room instead of home or duplex. A bunch of GI's (I was one lol) sharing a home would fall under that type of rental unit, by the room with common areas. So be sure to carefully check the laws, regulations and even attitude about doing that in the community your looking to buy in. Good luck !

Mark DePaul · Answer

Good question. Rezoning allows you to put more units on one parcel of land and get more return on your investment (more doors on one parcel). You are right, this is more complex (financing, repairs, dealing with contractors, city permits). But it's an option to think about either now or further down the line. Let's say for example you decide to go the house hacking route and buy a SFH. You get your practice in, learn the ins and outs of repairs, tenants etc. Then when you're ready to expand your portfolio you have more options as you could

A) Sell House Hack

B)Rent as a SFH

C)Convert to a duplex

The key is finding a property that could be easily split so that you could go option C down the line without sinking so much capital into the project it doesn't pan out.

I agree with what Forrest and Leah said. House hacking an existing MFH is probably your best route. Inventory is tight, but it's not impossible to find a MFH in the South Sound. There are places that I see on the market currently that have sat for months because their cap rates aren't up to snuff for traditional buy and hold investors. But if you're house hacking and using it as your primary residence you may be able to afford the time for rents to catch up. This does carry risk though (I.E. rents stagnate)

Scott Johnson · Answer

Thank you so much for your service, @Brock Salgado!

Does a VA loan require you to live in it for a year before you use it as a complete rental property? That's the only consideration that comes to mind when you decide to house hack. If you get transferred or deployed (and the bank finds out, of course) could that cause a problem?

My cousin @Alyxandria Welch and her husband are house hacking in Wisconsin and may be able to provide some insight.

Hope that helps!

Nico Dandini · Answer

For what it's worth, I'm house hacking a 750sqft 2bed/1bath condo in the Greater Boston Area. I live in one bedroom and rent out the other for $950/mo. I don't have a positive cash flow, but the expenses are cut in half. I get all the benefits of homeownership while only paying half of what I could be paying.

I'd be happy to talk about my experience if you'd like.

Leah Tesch · Answer

Is your goal to have cashflow right away or would it be ideal to have a bit less work with the potential for cashflow later on? House hacking probably won't earn you cashflow right away, but it sets you up for future cashflow while allowing you an easier way to get there.

Echoing what Forrest said, it sounds like house hacking a duplex could be your best route. That's what I did too and highly recommend for new investors. Brandon's book on Managing Rental Properties was really helpful for learning how to find and manage tenants. It's a lot easier to learn how to be a landlord when you're living in the property, and then you only have to worry about one other unit until you get the hang of it and want to grow your portfolio.

It becomes an easy way to add more doors too because once you're ready to move onto the next one, you can house hack again and rent out the unit you just moved out of. Depending on the type of financing you use for the next deal, you should be able to get a low down payment and your rental income from the first property might help you qualify for more. So in other words, house hacking multi-families can really set you up for a lot of future possibilities and an easy way to grow when you're ready.

Mark DePaul · Answer

House hacking can work well if you're willing to live with strangers and can also help you hone your tenant screening skills as you get started. I started with a house hack (by accident) 5 years ago in Tacoma and had success with both long term renters and targeting short term traveling professionals (travel nurses, military, grad students). If you're uneasy living with strangers then it would be best to focus on MFH. If you can get over that hump then you have to ask what's your exit strategy with a house hack? It would be best to find something that can work as a SFH rental as well as a house hack. That way when you're ready to move on you have multiple exit strategies.

As for MFH, I know exactly what you're talking about in regards to inventory and price of MFH in the south sound area. A lot of time as a straight investment they can't cashflow unless you find something that needs some work and have the capital to upgrade. If you're interested in a BRRRR strategy there's opportunities in the City of Tacoma proper as the rezoning from SFH to MFH takes place this year.

Brock Salgado · Answer

Scott, you are correct about the year-term. The VA urges customers to stay in the home for a year until they sell, but the reason I say urge is because I a have heard of quite a few people selling before this year long term is up. As for a deployment or PCS (permanent change of station) I will not be penalized, but of course I will have to take that possibility into account by making a rapid exit strategy as a contingency.

Brock Salgado · Answer

Thanks for the reply and advice. I think obviously the easiest thing to do would be to forgo immediate cashflow for a simple, low-work entry, but I am certainly tempted by fixer uppers. I have heard much on the BP Podcast about struggling to reno homes/rentals with a full time job, but this warning was also tempered by an appreciation for the lessons learned and profit earned. For my first deal I'd prioritize a simple entry or something with repairs I could learn to complete. How much work would be too much for a full time job? I suppose this question also depends on how much time I'd be willing to spend or how much capital I have available for contractors.

First Property: House hack or MFR?

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