How Much Is Too Much for a House Hack?

Question

I've found that in the Greater Boston area, a lot of houses are affordable via house hacking. However, in my case, they're only affordable if I'm house hacking. In other words, I would not be able to make the payments on these houses if I didn't have tenants. Also, I don't have a solid rule to help me determine how much is too much for a house hack, and I was wondering if you did.

In the context of monthly take home pay (e.g. "No more than x% of take home pay") or any other context, how much is too much? How much is just right? Thanks!

Cheng Bin Zhang · Answer

@Nico Dandini - I think this is ultimately a question about personal risk tolerance. In the 10+ years we've been house hacking, we've seen people hack a 200k condo to a 2mil dollar multifamily around Boston. Since the 08 recession, underwriting requirements have really tightened up so if you're looking for a "hard" ceiling for how much you could afford to borrow/purchase, a good lender will have an arsenal of metrics to make sure you qualify (ex. DTI, reserve requirements, rental analysis, appraisal, etc.). Around greater Boston, vacancy risk is relatively low. If you're looking for a "value-add" property that needs a bit of work, the biggest risk that most of our clients run into is deferred maintenance and capital improvements as labor and material costs have gone up. The most non-extraordinary way that I've seen people making millions from house hacking is by simply buying a multifamily at a fair price, in a B- area, consistently raising rent, minimize vacancy, address maintenance issues, and just hold on (refinance and repeat).Hope that's helpful. Always happy to connect with fellow house hackers.

Jon McCarron · Answer

HI @Nico Dandini I think it is case by case for every individual. I look at 2 numbers: The amount of money I am either saving or making by living in one of the units, and what will the gross rents look like against monthly expenses and financing. For example (quick numbers): if your rent is $1200/month, and you have the chance to purchase a multi and come out of pocket only $400/ month, I would say that is a very solid house hack. Here, you are saving $800/month, which you could apply to your next property, pay off bad debts, or build up cash for other investments. The next number would be what the gross rents produce against expenses and financing. Can the rents either keep you afloat or produce positive cash flow. If your strategy is to build up your portfolio over time, buying a house hack every year or 2 is a great way to do it. They will all most likely be base hits, but that's how you will win the ball game. Finding prospects that have value add opportunities will help out and build equity quicker. I'm on my second house hack in Salem, MA. The first house my wife and I house hacked in Beverly, MA will make around $1800/month over our financing, and that $1800 for the most part will go into reserves until that is padded. Then we will put the rest to work in other deals or other investments. Also, for everyone else reading this, if you are looking for a personal trainer, talk to @Nico Dandini !Have a nice day!Jon

Nick Riccio · Answer

@Nico Dandini great questions. I think a lot of that is very subjective. I've done 4 house hacks in Boston and each is very unique. My goal (again, personal) is to make sure the property will be a good investment when I move out and it becomes a "true" investment property. I've done this through value-add (major renovations). Turn-key properties will be a challenge, but not impossible. My advice would be to find something that'll be a good investment when you move out. Also, try to leverage low-down payment and try to have as much reserves left over post-close (I know can be a challenge when starting out). If you stick to that criteria, I think you'll be in a great spot. Happy to chat - love seeing other fellow house-hackers in our area!

Tom Wagner · Answer

Great question and I think this is something that a lot of house hackers / investors wrestle with. To answer your question, I think the only things limiting the size of a potential house hack are conventional and FHA loan limits. Before moving to Boston I closed a four-unit property in Jersey City for $999,000 and financed in $470,000 in repairs using the FHA 203(k) loan, ultimately coming within $3,000 of the FHA max loan limit for a fourplex. Similarly, if you found a suitable property you could house hack a four-unit property in Boston that cost over $1,400,000 with only ~$60,000 down. However, finding a property like this will be very difficult. A two- or three-unit property for $700k to $1.2mm may be more obtainable.And to address your concerns about paying the mortgage if you don't have tenants: When underwriting and analyzing a property using Bigger Pockets calculators or other analysis tools you have the ability to include vacancy in your analysis. If you want to stress-test your deal, enter 10%+ for vacancy and see what happens to your cash flow. And while I personally think prolonged vacancy is unlikely in Massachusetts, this is one reason it is important to keep reserves on hand.Happy to chat further here in the forums or via DM -- but in my opinion there is no such thing as "too much" for a house hack!

Theresa Harris · Answer

First question will be can you get a mortgage? The banks will use your income to determine how much you can borrow and if you are saying you can't afford to pay the full mortgage without renting out rooms, you may not be able to qualify for a loan. Usually housing is 30-40% of your income.

Nico Dandini · Answer

@Jon McCarron you're the man, Jon. Thank you for the advice and the shoutout!

Nico Dandini · Answer

@Theresa Harris got it. Thank you, Theresa!

Nico Dandini · Answer

@Nick Riccio great advice. Thank you, Nick!

Nico Dandini · Answer

@Cheng Bin Zhang thank you. That's very helpful!

Nico Dandini · Answer

Great advice. Thank you sir!