How picky do you need to be with #s when house hacking?

Question

Hi all! My husband and I live in the central valley of CA and are planning to purchase a house hack in - hopefully - early 2020. It sounds like in order for an investment to be a good deal, we need to have double our mortgage and then some in rental income? We're planning to buy a SFH with one or two units in the back. If we're able to find a deal with two units, we should have our mortgage payment covered by those rents (we'll be using a VA loan). The SFH would probably rent for about 80-90% of whatever our mortgage payment ends up being once we move out (maybe more with improvements, but I'm trying to be conservative with my guesstimates). My question is, with these numbers, will we actually be able to get ahead financially? The more I learn about evaluating the numbers on a deal, the more I'm worried that we won't actually be able to save that extra $ we think we'll be able to, from having the rental income to cover the monthly PITI.

Due to our family circumstances, moving to a cheaper cost of living area won't be an option until 2030 at the earliest. We were hoping a house hack like I've described would allow us to save up really aggressively to start doing out-of-state rentals, but I'm concerned that we'll just break even compared to where we are now.

Thoughts and advice are appreciated!

Adrielle Tecklenburg · Answer

Hi @Jeff Zimmerman & @Chace Fraser, thank you both for the encouragement and reassurance! I really appreciate it. It's important to me that this next purchase is the right one, since I believe it will provide the base we need to make even more real estate investments in the future.

Chace Fraser · Answer

Hi @Adrielle Tecklenburg. The question is how much can you save (or make) by house hacking. If you are using a low down payment, it's not really realistic to expect to be cash flow positive while you're living in the property.  When an investor is looking at being cash flow positive, they are typically putting down 25 percent or more. If you are in a high demand metro area, it's simply not realistic to expect to be cash flow positive if you are putting down 0-10%.

Now if that is all the capital you have, that is what it is....is it better to keep renting than to buy? Typically it is better to buy. Better to build your own equity through the debt pay down, enjoy the tax benefits of ownership, and garner the equity of an appreciating asset. You just can't expect to cash flow on an initial purchase with a low down payment.  Now with time and rent growth, what could be a negative cash flow property might very well become a cash flow king, but that takes patience. Also, keep in mind that in my opinion, you would still be winning if your monthly housing costs went from $1,400 to $900... that would be like producing an extra $500 per month in cash flow you could save up for your next investment.

If I were you I'd get in touch with @Jeff Zimmerman to find out what a good deal looks like in your area and what you can really expect.

Oscar Cardenas · Answer

@Adrielle Tecklenburg

Covering PITI just from back house rentals is a wonderful deal. A lot of the well known rules only work in specific areas and markets.

Just pencil out how much PITI will be. How much expenses in utilities/HOA/fees will be. Consider some % vacancy loss. Some Cap ex % loss depending on condition. Some % saved for maintenance every month. Some % for proper management.

Do that for each deal. Anything above this is cash flow. For house hacking and in particular California, the goal for many is breaking even or have abit if cash flow considering you will be paying nothing down with a VA loan so it’s infinite return on investment.

Jeff Zimmerman · Answer

@Adrielle Tecklenburg. good questions!!  House hacking is a great way to go.  The first thing you have to remember is that the only person who gets to define a good deal is the person making the deal.  Start with your goals in mind (i.e. how much money you want to make, how long you want to hold it, live for free vs. cash flow...etc...) after that you can usually find a place that meets your goals and allows you to do what you want to do, it just takes some sweat and creativity.  I'm in Fresno and know this market pretty well, if you'd ever like to chat about the process, possibilities etc... feel free to message me, happy to help!

Theresa Harris · Answer

@Adrielle Tecklenburg  If you are house hacking and can get the tenant to cover the cost of the mortgage and some other expenses, so you are almost living for free, you are doing good.

Adrielle Tecklenburg · Answer

We are planning to buy an SFR with additional units in the back, so it's still a househack, since we'll be renting out those units 😊 Reason for this instead of a "traditional" duplex or triplex is because we need a 3 bedroom. Rent from one side of a 3 bedroom duplex won't come close to covering the monthly PITI and I haven't seen any triplexes in the area we're looking that have even one 3 bedroom unit.

Brian Garlington · Answer

Instead of an SFR , why not buy a duplex to house hack? That’s what I did with my VA Loan.

How picky do you need to be with #s when house hacking?

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