House-hack: "Over-niching?", LLC?, does + $flow 1st yr matter?

Question

I am a 24yo in the Buffalo, NY area. I have been living with my parents, and I saved roughly $45,000 to start my financial journey. I currently work in the healthcare field, and I am interested in house-hacking for my first property. I am anticipating using an FHA loan for this. As we keep hearing, this sellers-market is causing multiple offers on many of the properties I see on Zillow. I am working on access to the MLS. I am very green to this, as I have only been reading and listening to BiggerPockets over the last 2 months. I have a few questions, and any help would be greatly appreciated.

1) Experience in a graduate science-based program gave me insight to the fact that these programs are highly-competitive, and they draw in many students from out-of-state. Also, these programs typically require an in-person clerkship/rotation at a nearby clinic/hospital, which offers some back-up plan to the "remote learning" problem. I am looking at Multi's within 10mins of the local Colleges of such programs, and the respective hospitals, etc. Any advice on this type of college rental set-up? Too much of a niche to attack?

2) The average of rent charge in the areas I am looking are between $400-500 per person. I am becoming discouraged because every time I calculate $ flow or COCROI, I obtain negative numbers for each. Seems like I need to stiffen my payments to a house that is around the $130K range & minimal rehab to ensure that the total investment leaves me with a positive COCROI, but it is still practically splitting-even when I calculate. I am conservative with my income, and exaggerate my expenses a touch. My friend tells me a +cash flow the first year is not that important because when we move out, we can rent the full house at full rental potential with over 100% COCROI. Is this true?

3) Lastly, I have a good friend whom I have lived with before who is also in this same frame of mind, and same goals. All I know of LLC benefits are the tax breaks. Could I even use an FHA loan if I form an LLC? Any guidance would be appreciated.

If anyone is in the Buffalo or WNY area, or has experience in this market, I would love to hear from you. Thank you.

Timothy Smith · Answer

@Nicholas Bossert congrats on your discipline and jumping into this with your eyes wide open. You have some great questions here, and hopefully we can meet at one of the upcoming BP events here in town. Some quick thoughts for you:

I'm not crazy about the "per person" rental idea. It's a lot of turnover, and then you get to deal with the issues of tenants not getting along. For some LL's, this works out really well, but I just don't want to be bothered with it. If you want to be more hands-on and manage the turnover on a yearly or more basis, go for it.

You won't be able to get an FHA loan with an LLC. Once you use an LLC you are into commercial loan territory, with higher interest rates, usually 20-25% downpayment (or more if you are getting into 5+ unit buildings, depending on the lender), and the loan will be approved moreso on the income approach of the building than on your personal financials. Granted, each lender is a bit different. If you use the FHA, I believe you need to live in the property for 1 or 2 years before moving out and turning it into a total rental property. Plenty of info out there about this.

Regarding the house-hack, I think your numbers look pretty good. Remember, house-hacking isn't necessarily meant to turn a profit, but cut your expenses considerably. I have a significant mortgage payment on our SFH, but we also have a garage apartment that cuts that in half. I'd call that a successful house-hack.

My advice on what you should do? Explore residential construction loans and buy yourself a "fixer upper". You get a taste of the renovation process, and the bank will evaluate your ARV based on your scope of work. If you're in over your head, they will let you know. A few banks around here offer this product, including Alden State, Lakeshore, and I think Bank on Buffalo. You will typically need 20% down on the purchase price and 20% of the construction/rehab costs. For example, you find a $100K property that needs $50K in rehab. You bring $20K to closing (plus closing costs if the bank doesn't wrap them in) then put $10K of your own cash towards the rehab. If you do it right, you will have equity left in the property when you are done. So using the same example, let's say that property is now worth $180K after you rehab it. You are into it for $30K of your own cash, and you have a $120K mortgage. AND you have $60K in equity. Plus (what I think is especially important in the current climate) you are only leveraged at 66% which is not overexposed at all.

Just my $.02

Matthew Irish-Jones · Answer

@Nicholas Bossert there is still quite a bit of inventory out there.  Usually FHA offers have to be over other offers for a seller to accept due to the extra inspection.  There is a lot of interpretation on things that need work.  Unless you are using a construction loan or an FHA 203 loan you can't purchase a property that needs a lot of work with an FHA loan.  The property will need to be able to pass an FHA inspeciton.

If you wanted to go that route you are probably best looking for something that is dated.  That way you can use the FHA loan, and it will pass an FHA inspection.  Once you are in the property you should not have to deal with major mechanical issues or roof issues, etc... and you can update the unit to make it more modern.

Zachary Ray · Answer

To be honest finding a house hack investment is difficult. You must look heavily on all the sites quite often. Investors will jump on these as it can spring them forward financially. Tough competition out there.

Anthony Angotti · Answer

1) No, but analyze the building as if this isn't a thing. Analyze every building as a standard yearly rental and then execute a higher income strategy if you can. If the higher risk strategy doesn't work out you have a fallback.

2) Again, analysze them as traditional rentals. While you live there it will be difficult to cash flow tremendously most anywhere. But that's not the point. The point is saving money and getting into an asset that you wouldn't otherwise be able to afford while gaining invaluable experience as a landlord with training wheels.

3) If house hacking with owner occupant loan you aren't going to be able to buy in a LLC. So that's out.

Originally posted by @Nicholas Bossert:

I am a 24yo in the Buffalo, NY area. I have been living with my parents, and I saved roughly $45,000 to start my financial journey. I currently work in the healthcare field, and I am interested in house-hacking for my first property. I am anticipating using an FHA loan for this. As we keep hearing, this sellers-market is causing multiple offers on many of the properties I see on Zillow. I am working on access to the MLS. I am very green to this, as I have only been reading and listening to BiggerPockets over the last 2 months. I have a few questions, and any help would be greatly appreciated.

1) Experience in a graduate science-based program gave me insight to the fact that these programs are highly-competitive, and they draw in many students from out-of-state. Also, these programs typically require an in-person clerkship/rotation at a nearby clinic/hospital, which offers some back-up plan to the "remote learning" problem. I am looking at Multi's within 10mins of the local Colleges of such programs, and the respective hospitals, etc. Any advice on this type of college rental set-up? Too much of a niche to attack?

2) The average of rent charge in the areas I am looking are between $400-500 per person. I am becoming discouraged because every time I calculate $ flow or COCROI, I obtain negative numbers for each. Seems like I need to stiffen my payments to a house that is around the $130K range & minimal rehab to ensure that the total investment leaves me with a positive COCROI, but it is still practically splitting-even when I calculate. I am conservative with my income, and exaggerate my expenses a touch. My friend tells me a +cash flow the first year is not that important because when we move out, we can rent the full house at full rental potential with over 100% COCROI. Is this true?

3) Lastly, I have a good friend whom I have lived with before who is also in this same frame of mind, and same goals. All I know of LLC benefits are the tax breaks. Could I even use an FHA loan if I form an LLC? Any guidance would be appreciated.

If anyone is in the Buffalo or WNY area, or has experience in this market, I would love to hear from you. Thank you.

Nicholas Bossert · Answer

@Colleen F. "You can still purchase jointly with your friend without an LLC but you have to hammer out details on financials pre-purchase to be sure you are on the same page. You have to address the down payment , ongoing costs, how to hold title and mortgage. There is alot to go wrong if you aren't aligned."  - This is so important, and we both know we need to sit down together to sort it out. I have seen great friendships turn sour over money and titles. Thank you.

Nicholas Bossert · Answer

@Timothy Smith Thank you for the tip on the LLC. Wonderful insight regarding numbers for the house-hack, as well. I know cash-flow does not necessarily determine success of a house-hack, but sometimes I "over-obsess" on the numbers. The reason I said per-person rental is just because of my own experience renting in college - ours was phrased as "$500 per-person." I do have the average numbers for 2 and 3 unit properties for these areas (about $800 for 2). So it would be more like, the rent for my three tenants is "X", and they figure the split?

Colleen F. · Answer

You have to analyze the property as if you were not living there.  When you purchase,  an LLC and any first time buyer program is incompatible and your best advantage is a first time buyer program because you can put less down and maybe use the capital you have for improvements.  FHA is the same issue. If your state has a first time buyer program it may be better then an FHA.  In an addition  LLC isnt good if you live there and you need 20% down.

You can still purchase jointly with your friend without an LLC but you have to hammer out details on financials pre-purchase to be sure you are on the same page.  You have to address the down payment ,  ongoing costs, how to hold title and mortgage.  There is alot to go wrong if you aren't aligned.

As for a niche market, the reality is you will market when you live there to people you know and start a stream of people from programs you are connected with. If its a good place to live it will travel by word of mouth. Don't limit yourself unless you are getting a premium for doing so. Sounds like these are medium term rentals and the schools may have certain advertising sites you should be sure to use.

Nicholas Bossert · Answer

@Zachary Ray That is very true - so would you advise relying on the MLS?

Nicholas Bossert · Answer

@Anthony Angotti That makes sense, thank you for the advice!

Khaled Morad · Answer

I am in this market and have experience. Let's chat. It think a phone or zoom call would be easier. A lot of us started with a lot less capital and knowledge.

I also house hacked my first.

1) Spot on niche. I do the same!

2) Your friend is right. If you break even or even make money on your house hack, you're doing well!

3) I don't think so, but not 100% sure.

House-hack: "Over-niching?", LLC?, does + $flow 1st yr matter?

Most Popular Reply