House hack locally or BRRRR out of state?

Question

Hi Bigger Pocketers,

I'm a new investor trying to make a whole bunch of things work all at once and I'd like to borrow your wisdom to help choose some priorities.

About me: I just changed careers to my dream job (yay!) but the pay is poor and I'm trying to supplement income with rental properties. I have plenty of cash saved for a down payment, but my own personal risk preferences means that I would like to keep my first real estate purchase under $200K. I am living in an over priced miserable apartment and I would like to get out of it ASAP.

About my local market: The area I live in (Asheville, NC) is a tourist/retirement hot spot. That means that median home prices are a solid $100K above what median incomes can afford. It also means that a "cash flowing" property makes about .75% of its purchase price in rent. Most homes under $230K are mobile homes, tiny homes, or in such a state of disrepair as to not qualify for conventional financing. A typical MLS listing might be a 1930's 2/1 for $160K with an estimated market rent of $1200 and at least one structural issue (leaking/cracked foundation, expired roof, insufficient septic, old wiring)

HOWEVER! In nearby Greenville, SC there are a host of properties that are newer, nicer, cheaper, and more in line with what a typical 1% rental property might present. Just a cursory search the other day turned up a foreclosure Zestimated at $95K with a market rent estimate of $1150/mo.

My goal is to take my chunk of cash, which is sitting in the bank doing NOTHING for me since I neither trust the stock market nor have the patience/spare nerves to deal with the government's HORRENDOUS treasury direct website, and make it start producing income for me as soon as possible. The way I see my choices now are:

A. House hack a local property that I would otherwise consider a bad investment save for the rent savings that I would make with it.
B. Continue over paying for rent, but buy an investment property out of state with some kind of creative financing and a big down payment, but which cash flows nicely and also gives me a solid COC return.

By my numbers, *if* I can find a non-gut-job 3/2 or better locally, I can reasonably expect to make $1100-$1300/mo renting two rooms and to pay $850-950/mo for conventional financing ($170-190K purchase price, around $30K down). Subtract $100/mo for utilities and another, say $150/mo for maintenance and that gives me a NOI of -$100 (worst case) to $200/mo. So by itself, not the best investment, but once you include the $650/mo I save in rent you get a range of

House hack cash flow increase: $550-$850/mo average.

The numbers look great, but the key takeaway here is IF. So far in a month of searching I've found exactly ONE property that could make these numbers work. I put an offer on another two days ago that would make the numbers work and it was $40K below asking price and roundly rejected.

Now, when I consider investing out of state what I come up with (generally) is that I could, probably within a month or two, finance and own a $130K house generating $1300/mo in rental income. I'd have to finance it however investors finance single family buy-and-holds for which they do not qualify for conventional financing, but I imagine that's a "how" not an "if" question. Let's say I have to finance it at 5% on $110K with private money or seller financing. That puts my payment at $770/mo. Now my NOI is $1200, but my cash flow is $1200-770 = $430.

Out of state cash flow increase: $430/mo expected.

So either way I'm making money over letting my cash rot in a nearly-no-interest savings account, but in the house hack scenario I don't know how long it will be until something functional shows up -- could be months while in the out of state investment I could own something almost right away, but I'd be stuck paying rent for a miserable apartment and would have little ability to control my living situation OR the rental property.

So what would you do? I can suffer a lot if I know it's going to serve my goals. I'm leaning towards house hacking because I think it accelerates my savings towards property number 2 and gets me out of throwing money out my proverbial apartment window, but the lack of options is leaving me antsy and frustrated. Would love to hear your input.

Thx

Jon A. · Answer

I really like the house hacking idea but I don't think it's for everyone. You will have vacancies and it may be more difficult to find a tenant/roomate that is to your liking. When I think  of house hacking I think of separate units. You have more leniency if you are renting a room out in your home about whom you choose to live with, but if things go sour you are living with your potential worst enemy. I have been in both sides of that situation where I was living with my friend that owned the home and then I bought it from him and proceeded to have roommates. I always had roommates that I knew personally and it was never that random. So I know it can work as I have done it.

Considering investing in Greenville I would look at the county millage and state tax rate and observe the rate for non owner occupied homes and that may help you make a decision.  You may have already done that but I thought I would throw that out there. I would also drive down there and look at some vacant units. Make a list of 15 homes on the market and drive by them. Call some landlords. Look at units for rent.  Get some lunch somewhere in an area that you like and check out some stores that may cater to your interests or hobbies. Make a day of it. At least once. One reason would be to see what your comparable rents are and the other is to see if you could live there. The reason I say that is because it really sounds like you want out of your current living situation and you need to know exactly how much rent you can get for your place if you decide to house hack in that area or buy an investment property. Greenville and Asheville are two different worlds.

https://www.biggerpockets.com/forums/12/topics/759361-south-carolina-property-tax-non-resident

@Cassi Justiz has a very good point that if you are house hacking a SFH you aren't only buying an investment but you are also buying a home for yourself and I don't think you should only consider cash flow.

From what I understand you have only made offers on 2 houses and you have money in the bank. You are not in a bad situation at all.  Keep making offers that you can afford on homes that you like. You never know what someones motivation is for selling and I'll bet if you make 20 offers someone will bite.

Have you considered Johnson City, TN? It is only an hour away. Or the Jupiter/Barnardsville area? Old Fort or Marion, etc? Asheville is way overpriced for a SFH investment right now but so is much of western North Carolina but the further you go from Asheville the more reasonable prices become obviously. I think lots of people are putting their homes on the market to cash out while the market is hot. Lots of people wanting to 1031 exchange into something else and lots of homes are owned by OOS investors and in the county, homes are selling to the potential STR market. Keep looking. If it was easy everyone would be doing it.

I can tell by your determination you will find something. Just give it more time. The more duds you look at, the more you will know when you see the right one. It took me over a year and 3 realtors to find a duplex I could house hack. I would rather be slow and dilligent and make the right purchase than quick and reactive and make the wrong one. Just my 2 cents.

Cassi Justiz · Answer

I say try to find something to house-hack. Even if it doesn't seem like the ideal rental scenario from a strict number's perspective, you are paying rent either way. So if you can get roommates to help pay down your mortgage and cover your living expenses, I would consider that a win. Even if you are not living for free, if you can decrease your "rent" from $650/month to $300/month while the roommates pay the rest. That's still awesome! You don't always have to meet the 1% rule for it to make sense, and you don't have to live for free for it to be a successful house hack.

My first rental was a house hack. It was a SFH with roommates.  I didn't profit while I was living there, but I lived in a nice house that was cheaper than an apartment. My total living expenses were around $500/month and I had a nice 3/2/2 SFH that people were paying me to live in! At the time that I bought it, it likely wouldn't have hit the 1% rule and I didn't know about "house hacking" so I didn't know living for free was an option. That was 7 years ago, so rents have increased, property values has increased and my mortgage payment has stayed the same. (Taxes have increased a bit but not as fast as rents). It was an awesome way to start my portfolio.

Costin I. · Answer

@Danni Catambay - Option A definitely. You are new at this and have plenty to learn yet about financing, rehabbing, renting, property management, tenants management. Keep it close and under control. Plus, you want to get out of the miserable overpriced apartment you are renting now - why not get an asset partially paid by someone else, that you can remodel to your taste? Once you have experience, go for OOS BRRRR.

Matt Castle · Answer

Bump for @Jon Arsenault 's comments.

JC is a solid market, as is Kingsport. Bristol is so so.

I generally tell people to look at Gray b/c it's a good commuter city for families with one spouse working in Kingsport and second spouse in JC. Bluff City is also a nice town to consider.

Lots of family friendly towns in the Tri-Cities area who have thousands of nice old homes that haven't been updated since the 50s-70s, which can later be flipped to Millennials or down sizers who want turnkey.

Danni Catambay · Answer

@Costin I. That's pretty much my thinking.  Frustration is making my mind whirl. I have a chunk of cash that I've been trying to generate income with for years and I just wanna do something with it already...

But I guess I should take this self reflection and remember that negative emotions can lead to bad investments, too.

Thanks

House hack locally or BRRRR out of state?

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