HCOL (Seattle) house hack vs Out of State (midwest) rental?

Question

Hi BP Community!

I've recently been diving in to learn about the different RE niches in pursuit of my first deal. Very much still in the education phase, but 2 strategies have caught my attention and I'm wondering what thoughts are on the different approaches:

Option 1: House hack a Seattle duplex

Cons: Expensive home prices, taxes, and renter friendly laws are intimidating. Requires big loan for 1st deal. Likely no to low cashflow

Pros: I am the PM, education, pay rent to myself instead of to my landlord, build equity in property in desirable location

Option 2: buy a SFH or MFH (preferred) in LCOL area like midwest.

Cons: higher % down payment, a portion of profits would go to PM and I am still having to pay my own rent each month.

Pros: cash flow, affordability

Would love any insight the community is willing to share. Is it really even feasible to pull off a house hack in Seattle? Happy to provide more info if needed.

Cheers,

Monica

Michael Haas · Answer

We house hacked our way to 3 properties in Seattle and have 5 now - it really works! With the WSHFC down payment assistance program you can get into a house for pretty much just the closing costs- could be just 6k up front cash to close on a $500k house. If that house has a unfinished basement you can finish and rent out, or even just extra rent-able bedrooms, your mortgage payment will likely be significantly less than you currently pay for rent, + you reap all the tax benefits and forced savings effects of home-ownership.

I've had success with cashflow rentals in Seattle by getting off the beaten path- there are established investors bidding up the price (and therefore compressing the cap rate) on many small multi-families, but those same investors are not going after large 6-9 bedrooms SFHs that you can rent by the room to young professionals and college students. Most are also are not establishing STRs, especially now that Seattle regulations limit most families to just 1 Airbnb/STR outside their primary residence.

Always happy to talk more about house hacking if you have specific questions you want to message me about- its a great and low cost way to get started, and we wouldn't have been able to reach financial independence so quickly any other way!

Jack Medford · Answer

As others have suggested, house hacking is a great way to start. However, that doesn't mean it is the best choice for you. Figuring that out will depend on a few factors. Off the top of my head, here are the relevant questions:

• How much money do you currently have for a down payment?
• Assuming the Seattle market is too expensive to cash flow, how much are you left paying every month after receiving rent?
• What is the difference between the above number and your current rent/mortgage?
• Are you saving enough to make a significant impact on your finances?
• Would buying Midwest rentals net you more money every month than if you house hacked?If yes, is the difference enough to make you comfortable with the potentially increased risk?
• If yes, is the difference enough to make you comfortable with the potentially increased risk?

• If yes, is the difference enough to make you comfortable with the potentially increased risk?

Without going too much further into the weeds, I think these are the important questions to make sure you have an answer for if you want to really weigh both options.

As an example, I went through this process recently. While Madison isn't as expensive as Seattle, it is very expensive by Midwest standards. Instead of choosing to pay ~$1,800/month to rent a 2 bedroom, and then using my down payment to buy more rentals, I bought a duplex outside of the city. The monthly mortgage on this duplex is roughly $1,400/month. I rent the 1 bed side for ~$800, giving me ~$600/month to cover myself.

If I decided to rent that $1,800/month house, could I have generated the $1,200/month income gap with my down payment by buying cheap rentals? Definitely not, so the decision was clear.

Lane Kawaoka · Answer

@Monica Munoz

I used to live in Seattle for 14 years. I would not invest there personally. It could appreciate but we have been in a bull market fro the past 10 years.

San Francisco, Hawaii, Los Angeles, Seattle, Boston are examples of primary markets which are NOT ideal for cashflow investing.

Sophisticated investors invest on cashflow where the rents exceed the mortgage plus expenses (and enough money to pay for professional property manage to do our dirty work).

Sophisticated investors look at the Rent-to-Value Ratio and look for at least 1% or more to be able to cashflow after expenses. You find the Rent-to-Value Ratio by taking the monthly rent dividing by the purchase price. For example a $100,000 home that rents for 1,000 a month would have a Rent-to-Value Ratio of 1%. Most people I work with live in primary markets (as opposed to Birmingham, Atlanta, Indianapolis, Kansas City, Memphis, Little Rock, Jacksonville, Ohio, or other secondary or tertiary markets) where the Rent-to-Value Ratios are under 1%.

Dan Zitofsky · Answer

I have to disagree. I’ve been at this a very long time. Owned multis, singles, land, etc. if done correctly you have tons more exit strategies for long term wealth with singles. Once you learn long term vision with seller financing, collateral assignments, partials, etc you hit the ultimate holy grail. It’s just about doing it correctly in an emerging market with the right team in place and a vision you stick to.

John Barrett · Answer

@Monica Munoz House hacking is a great way to begin to invest.  I think your returns will be better by starting with a house hack just due to the ability to get the best loan terms.  Please note that you likely will not make much in the way of cash flow but total return (lower living expenses, principle pay down, leverage, tax benefits and maybe appreciation). I would challenge you to think a little more broadly about investing in the Seattle area.  While it is true that Seattle is a HCOL area, you can look at the greater MSA and invest further out in a secondary or tertiary markets that are more affordable.  There will be a trade offs (longer commutes, etc.) the lower prices maybe more workable with your budget.

My suggestion is for people to always start by managing their own properties.  This is simply a personal preference and there are many great reasons for not doing your on management.  As such, you will really need to think critically about how much do you want to learn this aspect of investing.

Best of luck,

John

Scott Passman · Answer

@Monica Munoz I am not in the Seattle market so it's hard to comment on the specifics there, however, when getting started it is tough to find a better or "safer" way to start real estate investing than by house hacking.  You virtually cannot fail because worst case scenario is you just end up paying more for your own personal rent than you would like, but in the end you have a place to live!  If you can locate a property in your area (likely a MF) that you can acquire potentially under market with some repairs needed it could be a fantastic way to build up equity, lower your own personal cost of housing, learn the ropes of doing some rehab to home whether it's you rehabbing or hiring it out, and learn to landlord.

While you could invest out of state, there are more risks associated with this compared to house hacking and can present a little more barrier to entry when first getting started.  You will need to establish trustworthy contacts in the market you look to invest in, learn the market, and start setting up systems to help you find, funnel, close, and oversee management of that property.   It really depends on what your long term goals are, but house hacking really does provide a lot of great opportunity with minimal risk.  If you are worried about the cost in your area, I would look for properties that need some rehab to allow you to build sweat equity and not buy at the top of the market.   Good luck!

Ivan Barratt · Answer

1. I own nearly 3,000 apartments. I started with a house hack! :)

2. Out of state turn key rentals are a broken model. Rarely they work out; at best to be a get rich very, very, very slow model.

John Barrett · Answer

@Monica Munoz It really depends on where you are located and what you want to stay close to proximity wise.  While Tacoma is extremely hot at the moment I think you can still find value in White Center, Burien & Tukwila if you are willing and able to take on a project with a more work required.

Being able to fix up a property and  add sweat equity works really well in conjunction with a house hacking strategy.  The challenge is to have a really good understanding of the scope of work you are taking on.  There are a lot of older housing stock in these neighborhoods but a good home inspection will really help you determine your level of comfort with the project.

Best of luck,

John

Monica Munoz · Answer

@Jack Medford great points. At the end of the day it comes down to if the numbers work. I think I’ll just have to start looking at opportunities in both areas and see how the deals compare. If house hacking is viable, then I’d prefer that route due to lower risk and less hands on learning opportunity. But that’s only if it financially makes sense too.

Thanks for the perspective and sharing your experience buying a duplex!

Monica Munoz · Answer

@John Barrett Learning is probably the most important aspect of this to me (besides not absolutely tanking a first deal). I'd like to be in this for the long term and I realize I need to build the knowledge-base first. Looking outside Seattle proper is a great suggestion. I think I'll need to run the numbers to see what will work. I have a great friend group and commute right now that would be hard to give up but realize that some sacrifices may need to be made.

Are there areas of greater Seattle that you'd recommend looking into?

Thanks for the insight, John!

HCOL (Seattle) house hack vs Out of State (midwest) rental?

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