First-time homebuyer/house hacker: what should I look out for?

Question

Hi BP,

First, I'd like to thank everyone involved in running this amazing site, that's been a huge source of knowledge as I embark on my Real Estate investing journey. It's been an interesting journey so far but I am excited to take that leap and enter into this world!

I am in the process of buying my first home (4br 3bth SFH), as the title states, and plan to house hack by renting out 2 of the rooms. My closing date is set for April 30th and I am in the process of searching for roommates. I read Brandon Turner's articles on Renting your House and Tenant Screening: Ultimate Guide (excellent resources), and feel more confident in going ahead and marketing the rooms for rent.

Since I am not quite the owner of the property, what are some things I should look out for as far as screening tenants go? For example, since I am not going to be occupying the home until after April 30th, how should I go about showing the home to prospective tenants and are there any specific laws to limit what I am able to have them agree to before becoming the official owner?

Nathan Platter · Answer

Hey @Rodney Reeves ,

Also, check out the local laws regarding rental licenses. Some cities (e.g. Minneapolis) require the landlord to buy a license both multi-units as well as renting out bedrooms. There are sometimes penalties if the licenses are bought after 60 days of closing.

Joe P. · Answer

@Rodney Reeves a separate account is fine, but it goes beyond that - you want to track those dollars. Its easy to see that in a year you spend $800 on maintenance from Home Depot, and called a plumber for $300 to fix a broken pipe, or had to replace freon in your AC unit for $200, or something along those lines. That allows you to project actual vs. expected and see where you need to adjust.

You can accurately track utilities and adjust rent accordingly. Your tenants should be contributing to everything in a house hack, but you, as the owner and occupant, have a benefit to getting the lowest prices AND splitting those costs with others.

I would open a separate thread for house hacking and ask people what they do and don't do with their tenants, and that can help you develop a guidebook that you can refer to. Me personally, I operate well when I have a plan for 80-90% of the things that may come up. But do what works for you, but make sure you're treating this A) a business and B) a business asset that helps you meet your designed goal.

And finally, CONGRATULATIONS. I wish I had done this when I was looking for my first home, and if done correctly you can set yourself up with a producing asset that can help guide you along your overall real estate goals!

Rodney Reeves · Answer

@Derek Luttrell Yea I am hoping to attract a good amount of interest since I am in the metro Atlanta within 30 min of downtown. I plan on furnishing all of the common items myself as well, i.e. living room, dining room

@Joe Papp That answers another question I had. I was not sure whether I should open a separate checking account to keep income from rent or Capex since the house is in my name and I'll be in the same unit as the roommates. Now I know. As far as lease agreement goes, I am making sure I fully understand what I am getting into before posting ads and screen thoroughly to avoid any issues long term. I may even consider a month-to-month lease, at least initially, to make sure it's a good fit. Thanks!

Joe P. · Answer

Good points, especially from @Nathan Platter, in this thread.

If you're in a major city you will most likely have at the least a business license and/or landlord license. In Philadelphia we have both of those and are renewed every year.

This brings me to my next point, which is track EVERYTHING. Track your expenses, track your income, anything related to this house hack -- it is now your business and you need to treat it as such. This isn't a "hey, you live here and give me money every month" scenario. You're doing this (I assume) to parlay all that money you save (or earn on top of PITI/Expenses/Capex) into your next real estate deal, so treat it like you aren't living there. Every dollar should be watched, managed, scrutinized, and evaluated.

Make sure you also (point #3) build a lease agreement with the incoming tenants. House hacking scares the hell out of me because what if you have a non-paying and/or hostile tenant? Now they have direct access to YOUR living quarters. PROPER and THOROUGH tenant screening should mitigate 99% of any issues, but the risk always exists - use professional means if needed. Spend money where you should spend money with the aim of a smooth house hacking experience.

Derek Luttrell · Answer

@Rodney Reeves at least here in Chicago, I had tons of interest, and I was able to be picky in who I chose to live with me. All the living room furniture, TV and kitchen supplies are mine, so I think it was appealing for people to just bring their bed and their toothbrush and be ready to go.

In terms of screening, after meeting them in person I had them send me their latest 2 pay stubs, and I ran credit/background checks. They also both have a 12 month lease. They pay rent via Chase Quickpay and Venmo.

Omar Khan · Answer

@Rodney Reeves Best bet: Go to craigslist (or local equivalent) and see how many ads there are. Call around the neighborhood inquiring on renting and ask them how much demand they've seen.

You can call property management companies but that seems like too much work for the 1 house.

Omar Khan · Answer

@Rodney Reeves You will be limited in showing off the property before April 30 unless the existing owner allows you to do it.

More importantly, you should do your research on rental rates and occupancy #s in your market. If you're in a hot market, I would put up an ad 1 week before you take possession going over all the details (be sure to include as many pictures and description as possible).

Rodney Reeves · Answer

@Joe Papp thanks for the kind words! I think I was able to answer my biggest questions about tracking expenses through another post from a fellow house hacker.

@Kierra Moore I asked a few friends at first too since that would be an easier transition to owning a home, but they already had plans. I am getting some responses back already from ads I posted so that's good news. I looked up some comps and found a good price range I think would fit for asking.

And I am planning on trying out the SmartMove site BP had recommended in a few articles for background checks. Any others you recommend?

Kierra Moore · Answer

@Rodney Reeves welcome to BP! I did this when I bought my first place rented out the other two rooms to cover the cost of the house. I luckily had a few friends move in to town that needed rooms and then met some coworkers over time who needed a place to stay. I researched comps in my area to figure out what rooms/homes were going for in rent where I live. There are also a few apps out there that you can find roommate through that make you do a background check etc.

First-time homebuyer/house hacker: what should I look out for?

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