How critical is consistent income when using the "house-hack" duplex method?

Question

I've read several of the blog's with regard to "house hacking" including @Scott Trench's experience with his first property as well as @Darren Sager's podcast on his duplex ventures, and I've decided this is the path I'm going to take.

My income is relatively inconsistent, as I own an e-commerce business that has its ups and downs. However, I am preparing to launch a product line that should (hopefully) stabilize that a bit.

I was able to secure a private loan that will cover the cost of my first property. How critical is a strong source of consistent income when investing in my first duplex? I've spoken with several realtors in my area (DFW, particularly Plano, Allen, and McKinney) that suggest if I wait much longer, prices are only going to go up and up, limiting my options.

Essentially, I'm sitting on a private loan, no debt, $5k in savings, and time. Should I get moving and make offers, or is my cushion too weak?

Joe Fairless · Answer

@Josh Foret I would talk to some wholesalers in the DFW area and see if you can get a property through them. That, or take a look at other ways to find properties that have a little cushion for cash flow. You're super smart for not wanting to buy at the high of the market but there still might be some opportunities to find good deals.

Darren Sager · Answer

You'll have to read the terms of your loan on both @Josh Foret.   I took possession and lived in one side for about 6 months before renting it.  I'm not sure the amount of time I was in there since it goes back to 1998.  Not sure what I did was good with the loan agreement either.   I did move back in though after I paid off the piggy back loan.

Mindy Jensen · Answer

How comfortable are you with the payments? Where are you living now? What would you charge the people renting the other side of the duplex?

From what I gather, duplex house hacking gets homeownership, landlording experience and starts building equity, while the person you are renting the other part of the property to pays the mortgage, or at least a significant portion.

So let's work with nice round numbers because I suck at math. You buy a duplex (triplex and fourplexes also work for this exercise.) You buy the property for $100,000. Your payment is $1,000 a month, and you rent out the other side for $900. Can you come up with the $100 a month consistently? Can you come up with the entire $1,000 a month if the other side is empty? How long can you afford to have the other side empty?

The realtors are right, prices are going up all the time. We are recovering from the housing bust, and prices are starting to hit their stride again.

How comfortable are you with fixing up a property? Does your market have distressed properties? My market is so hot there are almost no distressed properties or foreclosures. Buying a property with old appliances and ugly paint is easily fixed. Make sure you have a home inspection so you know what you are getting yourself into.

Good luck!

Hattie Dizmond · Answer

@Josh Foret

I'm guessing you're paying rent somewhere now, so your income is consistent enough to keep a roof over your head.  If you have a private loan, you've already taken care of the biggest obstacle, which is getting approved for a loan with the inconsistencies in your self-employment income.

The key here is to find a property where the other side of the duplex (or multiple units, if you find a multi-plex) are paying as much of your monthly mortgage payment as possible.  Once you have that in place, even if your business hits a downturn, you can flip burgers to cover your expenses.

Josh Foret · Answer

@Scott Trench Thank you for your input! Based on your recommendations along with @Darren Sager's input, I'm closer than I had thought after reading some of the other replies.

I like your perspective, Scott. While real estate does provide shelter, it truly is a business from the investor's mindset. If I were able to increase the amount of the loan in order to cover a few of those upfront costs you mentioned, would that give me more flexibility with regard to savings?

@Joe Fairless Thanks for the suggestion, Joe! Hopefully I'm able to get into a property sooner rather than later, but I should probably get familiar with wholesalers in my area anyway. Do wholesalers tend to deal with foreclosures? Anything outside of a foreclosure in this area is likely outside of my price range.

Jordan T. · Answer

Consistent income is important, but you always need the working capital to keep you going in a worst case scenario.  Think about having to evict a tenant that missed a payment, paying the court costs to take care of that, replacing paint and carpet when the tenant moves out, and then taking a couple of months to get a new tenant in place.  Adding the mortgage costs in the interim, you're looking at a few thousand in costs.  What if that happened during a slow period in the e-commerce business?

Real estate is a wonderful business.  Step one is building the cushion to handle that adverse scenario, step two is getting that first property and building up additional savings through cash flow, and step three is to add properties and spread out those low percentage events so that you truly get consistent income.

Scott Trench · Answer

@Josh Foret

You talk about inconsistent income.  Assuming you get a tenant in there in a timely manner and do your due diligence, you are about to experience consistent income in a powerful way in the form of rent checks from your tenants.  As was mentioned previously, a correctly purchased duplex with a quality tenant should pay most or all of your loan payment, private or traditional.

Isolating house-hacking on its own, income is really only an important factor in the acquisition of financing.  Most lenders won't loan to you if you can't demonstrate an ability to pay the loan without a tenant - luckily for you, this obstacle has been removed due to your advantageous position of having access to a private loan.  In my case, and in isolation to my duplex, my income matters very little.  Between my roommate and my tenants, the entirety of the mortgage is paid, and I have a small cash surplus each month after minor expenses, so the entirety of my earned income can go straight into reserves for the purchase of my next property.

What matters much more to me, as far as my house-hacking business is concerned, is my cash cushion, which you lightly touch on.  I began my investment with just over $20K.  That proved sufficient, but I was surprised at the amount of upfront costs and small expenses that homeowners and investors face - taxes, assessments, energy bill one time charges, etc, etc.  Personally, I think that you should focus on accumulating a more conservative cash reserve before purchasing a property.  After the $5,000th dollar spent on tools, equipment, taxes, insurance, and all those other nice surprises, you might be up a creek if the next few months don't go as planned with your business.

Bottom line is this - you are purchasing a business.  The business should produce the consistent income, regardless of your personal position.  The important thing for the business, in it's early stage, is to be well-capitalized.  Get a larger cushion, then attack the house-hack as a business problem, not a personal income one.

My $0.02.

Darren Sager · Answer

@Josh Foret

When I purchased my first one my income was far lower than what I could afford.  Without the help of my BoM in both the down payment and the loan there was no way I would have ever been able to get into that place.  I had to move out of it because I couldn't afford to live in it however in the end it was one of the best decisions and risks I ever took.  I would do it again knowing what I know in a nanosecond.   I didn't know much about fixing homes but I was mechanically inclined from working on cars.   Utilize all the information that's out there and take advantage of it.  Even if you don't have the skills, you can learn them.  If you've started a business this is no different.  You'll learn it.  Just make sure the basic numbers on the property work as is so that it can cover everything including future expenses.   If so go for it!

Arun Chandra · Answer

Hi Josh,

Congratulations on making a decision to house hack. I think you are definitely on the right track with having someone else help pay the mortgage.

Unfortunately I think you should wait until you have stabilized your income to make sure you can payback the loan. Taking on any kid of debt is a huge responsibility that should not be taken lightly. You don't want to end up biting your nails at the end of the month trying to figure out how your going to make the next months mortgage, deal with property repairs, or just cover your living expenses.

I was born and raised in your neck of the woods and understand your market. It's pretty hard to get a property out there without paying well above list price and it will continue to rise as Toyota and Fedex move in. So I wouldn't say time is on your side, but I think patience is key here. Launch that new product first and decide from there.

Hope this helps, good luck!

-Arun Chandra

Arun Chandra · Answer

@Josh Foret

Hey Josh,

Just wanted to touch base and see how things are going. Any updates or recent activity?

-Arun Chandra

How critical is consistent income when using the "house-hack" duplex method?

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