Is a negative cash flow house hack in the DMV a bad idea?

Question

I graduated college over a year ago and would like to live in Arlington specifically Ballston, VA Square, or Clarendon for it's nightlife, metro access, and vibrancy. I'm interested in house hacking to build equity while having a place to stay. My primary concern is the properties are significantly cash flow negative. From what I read, this is pretty typical of the entire DMV area and a lot is appreciation plays. My question is how much if any negative cash flow is too much.

For example, a few 3b3b townhouses in Ballston are around 800k. With current interest rates, a 20% down payment is around $4500 monthly. Rents for look to be around 1100-1300 per private room. Taking the best possible case of the other two rooms being filled for $1300, I would be paying the rest at $1925 a month. I need a place to live as well so let's consider my cash flow is a  negative $625 per month not even including capex, vacancies, and other expenses.

I understand that if I tried farther out, I could find places in the 400-600k range that could cash flow better but I really don't want to live in the suburbs when I'm in my early twenties. If there has to be a sacrifice made, I'm willing to give up a better investment than where I have to live. At the same time, I don't want to make a terrible house purchase that will financially doom me when I could have rented.

I'm looking to build equity and wealth long term. I'm lucky that I landed a great job where a $600 monthly loss or a big repair won't affect my finances. Considering my circumstances, is buying a townhouse at this price point an unwise decision?

Joaquin Camarasa · Answer

The situation is exactly as you described it.

If you are ok dealing with more property management, you could provide furnished rooms and target traveling nurses that will be in the area for a few months. Typically you can charge about 30 - 40% more per month than the values you shared. However, every three - four months you'll have to screen somebody new, sign leases, etc.

Nathan Gesner · Answer

Yes, it is unwise. You don't buy for appreciation when the market is already at a peak. You do it after a crash when you know the market is going to increase.

If you lost $1,500 a month, that would cost you $90,000 in five years before accounting for vacancies, capex, and other expenses.

Appreciation plays are for the wealthy. Educate yourself and look for cashflow markets.

Grant P. · Answer

I don't see too much of an issue of negative cashflow when it comes to a house hack if your intention from the start is to treat a similar property as your residence along with your abilities to afford the expenses without any rental income as a supplement. I'm in a similar position looking for my third property; what you've described is exactly what we're experiencing. As others have said, what doesn't cashflow today in this market will likely appreciate and cashflow in the long term, which is why I haven't been dissuaded. It'll just take a bit more work on the front end to find a deal that fits your criteria as a resident and investor, along with more work managing the property by renting by the room, even if you need to move out.

Russell Brazil · Answer

Properties in Arlington will be break even at about 25% down. Less than that and as a strict rental and it would be cash flow negative right off the bat.

However the value, and the rent will generally rise a lot each year. So something thats break even today, will likely be a cash cow in 110 years, as well as making you wealthy on the equity growth.

Renting by the room works a little bit better in DC and MD where 6 and 5 unrelated people can live together. In VA it is just 4.

Tiara Jackson · Answer

I don't necessarily think it's a "bad" decision. Cashflow for a house hack is a bit different than a stand alone rental. The point is to lower your living expenses not necessarily cover ALL of your living expenses. If you were looking at a property that was going to be exclusively an investment then I would absolutely say this is a bad idea. However, I live in the DC Metro area and am very familiar with the Ballston area and I know it will maintain its value and as you mentioned and is likely continue to increase in value. I have 2 properties and I also house hack my primary residence - my househack covers 55% of my mortgage which is a win for me because there is no way I would find a rental for what I pay in mortgage and the extra income from the house hack is essentially pure cashflow that goes towards acquiring the next property considering i have to pay my mortgage regardless. Only you can define your goals, a house hack is essentially a way to leverage an asset you have to supercharge your savings for the next property. Just my perspective!

Bud Gaffney · Answer

@Brian Kim Yes.

Nicholas L. · Answer

@Brian Kim

I think you're asking a personal question mixed with a real estate question.  Which is why you're getting the varied answers.  And most people don't refer to their primary residence as a "place to stay"  =-)

As @Russell Brazil says I think DMV real estate is a solid investment.  I lived in a one bedroom condo in Clarendon that I absolutely loved, and kept it as a rental when I moved out.  I break even on it each month, but I have great tenants and it has appreciated quite a bit.  I'm keeping it for the next 110 years.

One way to think through this is - what impact will this purchase have on your financial situation and ability to continue investing in 2 to 5 to 10 years?  Is it going to crush your DTI ratio?  Or be absorbable?  Will rents support a break-even situation once you move out?  Etc.

Joe Villeneuve · Answer

Yes

Lexie De Stefano · Answer

I personally think it's worth it, because the point of a househack is to reduce your expenses, and most househacks are tough to breakeven (and especially cashflow) in this area unless you are basically Airbnbing out the rooms. My first househack was similar to the situation you reference above, and was completely worth the negative cashflow for my case. My HOA had 30 day limits + I wanted to keep a guest room, which meant I paid up to a third of the mortgage myself per month (depending on who was there/what the tenants paid at the time). Fast forward 3.5 years later and I moved into my next place, and now property #1 cashflows as a long term rental, whereas it wouldn't have been cashflow positive as a LTR in the beginning. Also keep in mind you'll get some awesome tax deductions for your househack, and will be able to write off a portion of those condo fees. If you factor some of the tax return savings per month into your calculations, you might actually end up profiting more than you think!

Cassidy Burns · Answer

I personally would do 3 of the following:

1.) Change your criteria to be a little more investor focused.  Buy something that may be in that $450,000-$550,000 range with 3-5% Down and save the additional cash.

2.) Take that 25% down and buy a strict rental property that may have a little more appreciation built in.  It can be in this area or a little outside of this location so you can self manage if thats what you want to do. For your living situation you just simply rent where you want to live.  At least you now have put your money to work on a property and still get to live where you want (Grant Cardone strategy)

3.) Do a mixture of both.  Use the 3-5% down strategy on a primary residence and then take the remainder and buy an investment property.

You are in a great situation as you have the 25% down for a $800,000 property.  Use that money wisely !

Is a negative cash flow house hack in the DMV a bad idea?

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