House Hacking & a Fresh Financial Start

[Morgan Reinart]

We (myself, wife, and two kids - 2 and 6 months) are making a move in the next couple months from a rural college community in Oklahoma to Oklahoma City. I'll be starting a new job, and my wife stays at home with our kids. We're opting for a pay cut ($60,000/year to $40,000/year) and better work/life balance over our current situation; however, OKC is a more expensive market than our current home. 

We're looking to house hack our way into the downtown/historical OKC area with either a duplex or, more likely, a house and guest house. Surprisingly, my wife is actually pushing to minimize to the point where we can live in the guest house for 1-2 years and rent out the main house. After 1 or 2 years, we're looking at either moving into the main house and renting out or AirBnB'ing the guesthouse or moving on with both as rentals. 

We currently own 3 rental properties in college community; however, I don't want to manage them from 2.5 hours away and didn't figure property management into my numbers when purchasing (I've learned a whole lot since buying them). 

Here's what we're working with; 

Home

Mortgage: $90,664

Market Value: $130,000

Equity: $39,336

Property 1

Loan: $43,909

Market Value: $70,000

Equity: $26,091

-Leased through 7/1/18

Property 2

Loan: $55,430
Market Value: $75,000

Equity: $19,570

-Leased through 12/31/17

Property 3

Loan: $53,200

Market Value: $80,000

Equity: $26,800
-Vacant & on the market

Auto Loan: $13,596 (First ever auto loan, and I hate every second of it)

Here's a rough plan of what we're planning to do; 

• Sell Property 3, use a 1031 exchange, and use it for the down payment the investment property/multifamily we're going to purchase. I know this is a tricky topic, but from what I've read it can only be used toward the portion that will be occupied by a tenant. I'll be consulting someone local who specialized in this to guide us through the process. 
• Sell our current home, which we've lived in for 2+ years, pay off the auto loan, giving us ~$25,000 tax-free. Am I looking at that correctly?
• Properties 2 & 3 are up in the air right now. 

Any recommendations on 2 & 3; 

1. Cash for keys to break the contracts and walk away with the equity, but taxed?
2. Sell each of them when the contract is up and try to 1031 exchange into other properties
3. Sell each of them when the contract is up and take the taxed cash. 

We're really excited at this opportunity for a few reasons; 

1. Even though the new job is a pay cut, it has the potential for growth at a much quicker rate than my current position
2. Having a tenant pay our mortgage, insurance and taxes drastically increases the ability to make the move and save at the smaller salary. 
3. Wipes out our $250/month auto loan. 
4. Quick cash on hand boost to invest locally and keep for reserves/emergencies.
5. Downsize and live minimally. We're in a 4 bedroom, 3 bath house now, and it's way too much for us. We're both ready to live simply. 
6. It gives us a fresh start financially by rethinking/decreasing our housing expenses and future investments. 

Other Questions:

• Any OKC locals know of a property that fits the bill?
• With our particular situation should I worry less about cash on cash return for future rental projections and more on covering all current housing expenses? Especially with using all the proceeds from Property 1's sale towards the down payment instead of doing a 3.5% FHA loan.
• Anything else I'm missing? 

[Billie Miller]

We house hacked with our little family and I would totally recommend it. I've never 1031 exchanged so I can't speak to that, but house hacking is a great way to get a leg up in the real estate market when you first move to an area. We moved to Denver in late 2014 and had no idea where we would want to live long term. So we bought a duplex in spring of 2015 to give us a couple more years to find what we really wanted. 

We lived for free (with the exception of any repairs/cap ex items we had to cover while living there, but the duplex either paid us back for those items or we will get that money back out when we sell it) while we were living in one side. Now that we've moved out, we will collect $600 a month in rental income, while our tenants are paying for the mortgage and all expenses. It's a pretty sweet deal!

It's definitely a lifestyle that you need to think about before diving in, but the financial benefits are worth it, hands down.