house hacking in hot market or rent until it cools?

Question

Hello Everyone!

I was looking for input on the situation I am in.  I currently live in Austin where housing is pretty hot.  I rent a small apartment for 850 a month and don't mind the situation too much.  I also was previously roommates with a friend and that worked out well enough.

My question is, would there be any merit in looking for a moderately nice duplex to house hack in this market? Specifically, one that I could rent out the one side completely, and also rent a room to my friend on my side?  I could get 400 to 500 from the friend depending on the location (any more than that and he wouldn't move).   I also would need a home that a potential wife wouldn't object to living in.

I wouldn't be insisting on a grand slam of an investment, but something that could immediately lower my cost of living while building equity.  I would be interesting in holding the house for the long term as well.  I just wouldn't want the investment to be a total train wreck if the market were to bubble. It is my hope that the extra income from renting a room on my side might enable me to purchase in this market.

Is this feasible in Austin/surrounding areas or should I rent until the market levels out?

Thanks for any input!

Will R. · Answer

First off... I think this has been the first thread I have agreed with on Austin in a while. People use a lot of scare tactics regarding a bubble. I think Austin has enough population growth to sustain units.

As for hous hacking, I think there is always a way. I have done a few of them. To me, the reason you should buy now is the interest rates. I cannot imagine when we will see these interest rates again.

Vincent Crane · Answer

Austin definitely won't be dropping anytime soon. There's a lack of inventory, and the job and population growth, and tax breaks in Texas... Austin isn't dipping anytime in the near future. Probably one of the safest bets there is. I'm also in the same exact boat in Atlanta wanting to house hack but the market is expensive, and it's top 3 in job growth so I don't think it'll drop here either...

Scott Sutherland · Answer

I agree with Bruce. I wouldn't bet on a drop in prices in Austin. Even in the period from 2008-2010 (worst housing collapse ever) we saw a small correction of roughly 10% over the entire downturn. Then came back like mad.

I think you could find a duplex for $250-$300K in a decent neighborhood that your potential wife wouldn't object to. As long as there wasn't significant deferred maintenance you should be able to live for cheap or free in one bedroom.

I have a client/friend that is doing something similar in north Austin 78758. I'm personally a fan of south Austin (78745/78749), but it depends on where you work and play in Austin. Our traffic gets worse every day so making the North /South decision is an important one.

Bruce Myers · Answer

I think it's feasible, and I'm not an expert by any means, but Austin is a little harder to "house hack" than a lot of other markets based on the looking that I've done.  I'm looking for a multifamily strictly for an investment, and we looked at some pretty awful duplexes for the $250k range, in very blue-collar neighborhoods (although not too far from desirable areas).  I don't think you'll be living for free even if you can convince a roommate to live with you in one side, but you might come close depending on what you can put up with.  Good luck with that.  To note, though - I don't necessarily think the market is going to slow down in the near future with all of the growth that's happening in Austin.  You may want to try to find something before it gets even more expensive.

Russell Brazil · Answer

One thing to consider in your idea of waiting till the market cools is how long it will take for that to happen. Between mortgage reduction and appreciation you could miss out on a substantial amount of money.

Andre Key · Answer

Joel,

Everything is dependant on what your time frame is and your overall goals.  I have a Duplex in area 7 ( near zilker Park and after doing my research I found some very interesting numbers.

A duplex is on sell at around 560k, now this area has seen increases in sales prices of over 24.3% from Jun'14' to Jun '15' and is predicted to increase over 20 percent again from now til summer.  So although you may not be able completely house hack you will see substantial growth as long as the city continues to see the growth that it has. This leaves you some equity to play with for your next purchase in the near future.

Justin Kane · Answer

if values drop so will taxes, and you can deduct based on loss value, your rents will maintain with very minimal hit so hacking a hold is as strong of performance as you can get id look at cashflow over appreciation as you could essentially live for free if you do it correctly

Mike H. · Answer

One thing I would want to be sure I knew before I did something like that would be

1) Would the house cash flow if both sides are rented (i.e. you're no longer living there)?

Ultimately, what do you care if the prices drop as long as you're still making money off the rents minus the PITI etc.

Obviously, you wouldn't want to buy if you knew the prices were going to go down. But if the house is cash flowing, then I don't know that you care if the only risk you have is that the prices might go down.

But you do want to make sure the property will cash flow if you have both sides rented out.

Michael McCartney · Answer

"It is my hope that the extra income from renting a room on my side might enable me to purchase in this market."

It seems like you're planning on using the potential rental income you will get from the other side of the duplex and the rent from your roommate to help you qualify you for the loan to purchase the property. When buying it as your homestead the underwriters will not use the potential income to help qualify you for the purchase of that home. I believe you need to have 2 years of rental income on your tax returns before you can use it to help qualify you for a mortgage.

Alex G. · Answer

@Joel Allen I believe Scott Sutherland is right on the money with getting a duplex in 78758,78745,78749 in the 250-300K range. I would add 78748 to that list of areas steadily growing in value.

I would also seriously consider a 4plex rather than a 2plx as your rent/price ratio will usually be higher on 4 units. However, with 4 units your maintenance expenses will be higher too. You also have to prepare for a lower grade tenants and more management intensive ownership.

Another advantage of a higher rent/price on a 4plx is it will help your DTI ratios during loan qualification process.

house hacking in hot market or rent until it cools?

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