Does this make sense? House Hacking Project

Question

I will be moving soon, and would like to purchase a house since it is highly likely that I will be living in this area for a minimum of 2 years, and likely 6-9 (Or beyond).  Due to this semi-permanence, it would be much preferred to dump my rent money into equity in real property if at all possible, and get a few others to do the same for me.

My thought right now is to purchase a house that is listed at $199,000 due to its location, style, etc., I could definitely see myself living in it through the remainder of school.  This will put my monthly mortgage payment (Not to include taxes/insurance/PMI) at approximately $1050.  The house's upstairs consists of a bedroom, bathroom, and second seating area/office, so I would like to take that for myself so I have my own space as well as room to study.  Then the main floor consists of the kitchen, two more bedrooms, a bath, dining room and living room.  I plan to rent out those two rooms one to a friend for approximately $400, and the other at market rate, which is going to be around 500-600 more than likely.

The basement has its own access as well as a wet bar.  I would like to turn this initially into short term rental area by placing a door on the stairs that can be locked from the top side, and converting the bar to a kitchenette.   The exterior access will need a digital lock pad placed on it so that the code can be changed after the rentals, etc.  This space looks like it could fetch between $600-$900 a month using limited data sources from a less desirable neighborhood.  (This location is nearby a major expo center).

Finally, more long term: the garage.  There is a two car detached garage that has potential for an accessory dwelling unit to be built on top of it.  As a personal preference, I would like to keep the garage if at all possible, but I am not above merely converting the garage itself into an accessory apartment for more long term rental potential.  This could fetch $700-$900/month as well based on preliminary assessments.

Some things to overcome:

1.) Qualifying for the loan: I used some basic calculations to come up with how much I could qualify for and the max was 215,000.   This was based on a gross income and a DTI of no more than 43% on a 30 year term with interest rates between 4.0-4.15 (My credit is currently excellent, and I intend to borrow from a bank at this point unless a better option reveals itself).  However, I am still concerned about my ability to find a lender willing to go this high.

2.) Doubt: this will be my first purchase/investment like this, and it is- as many of you I am sure know- terrifying.  While the numbers more than make sense, my concern is the ability to bring these numbers in, and what happens if I for some reason can't.

3.) Finding funding for the accessory dwelling unit over the apartment: My current thought is to look into a FHA 203k loan, and whether or not it could be used for the improvements I listed (As well as redoing a fireplace), and the apartment over the garage.  If this can't be done- are there any other options to secure funding for this type of improvement?  Looking at it from a cash flow perspective, it would make sense and provide some more security as I am somewhat leery to rely on ABNB rental of the basement.  Also, this is going to be additional permits and dealing with contractors that I am entirely new to.  Any advice would be extremely helpful.

The monthly payment: -$955

Insurance: -$85

PMI: -$48

(EDIT) Forgot Taxes: -$185

2 Roommates: $900

ABnB potential: $700

Potential garage apartment: $700

Net income potential: ~$900

The cost of permitting/construction of the garage apartment is a huge unknown at this point.  Would anyone have any suggestions on a ballpark estimate in making this decision?  The structure can be no more than 650 sqft per city code.  Is there a recommendation you would have about determining this cost?

Everyone, thanks for reading!  I look forward to any suggestions, modifications, and constructive criticism.

Mods, if this is the wrong place- please feel free to move it.  I wasn't sure if this should go here or the, "Starting out", forum.

Elijah Miller · Answer

Aidan,

That is a great point regarding changing the garage into an apartment!  Thanks for bringing that up!

If you wouldn't mind DM'ing me that information, I would really appreciate it, just so I can learn a bit more about how you guys are figuring your numbers on the front end.  One thing I thought of after posting this is that the ABnB is not going to have a 100% occupancy rating.

For a first property, how would you personally view the $275 in cash flow?

P.S.

Another thing that I need to consider in this strategy is that I will be starting medical school in two years, so there may be some other educational loans potentially.

Aidan Mulligan · Answer

Based on some really rough estimates I would say adding a 650 SF living space above the garage is going to run you around $30,000 but that is a very unscientific guess. I'm making some assumptions so take that number with a grain of salt.

I would advise against converting the car space into a unit because when it comes time to sell this home it won't be very marketable. Generally speaking, people in nicer neighborhoods like garages for storage, work space, or for their cars. If you convert it into essentially a big bedroom/apartment, it's going to be hard to sell.

As far as your potential cashflow I ran the numbers through my pro forma and I'm coming up with $275.30/month in cashflow. That's with the two bedrooms, the AirBnB, and the garage space included in the rent.

Financially, in general lenders don't like DTIs above 45% unless there are major cash reserves and a high credit score (760+).

If you'd like I can send you a screenshot in the DMs of how I came to the rehab guess and the Pro forma cashflow so you know what my assumptions are.