Question For All You Househackers Out There...

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Question For All You Househackers Out There...

Tom Shallcross
Rental Property Investor · Chicago · Member since 2018 · 612 posts · 1k+ votes

I'm currently negotiating a deal that involves several 4 unit buildings in Chicago. We are going through different exit strategies and it may make sense to sell a building or two post-rehab as they'd make a great house-hacking opportunity for someone looking to get started. The rents cover mortgage and expenses, and since it's a 4 units, it qualifies for FHA.

We're doing some actual market research on this, but also wanted to gather some anecdotal opinions from those who have/will be in a househack situation.  Which situation would you prefer?

1. We merge the top two units into one large living for the owner where the he/she would have a large living space 3bed/2bath, in-unit washer/dryer, and 2 bottom 1/1 units paying rent at 800/m each. 

2. Keep it as a 4 unit so the owner would have a 1 bed / 1bath (plus a small 7x7 den room that doesn't have a closet so tech not 2nd bedroom), individual w/d hook-up in basement, 3 other 1/1 units all paying 800/m each.

In each situation all units would be fully-rehabbed and listing price would be roughly the same, just trying to determine if someone in this buying situation is looking to maximize cashflow, or since it's their own living space, take the larger area and be ok with just 2 tenants (which pretty much cover the mortgage/PMI/taxes/insurance, but no additional expense, maintenance).

I personally would take the additional income and suck-it up in the smaller space (which is purely theoretical since I'm expecting my 4th kid and neither of these scenarios would have enough space for my situation:) )   

Looking for your opinions, thanks!

@Mark Ainley

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Jake FugmanBusiness Member
Real Estate Broker · Chicago, IL · Member since 2016 · 256 posts · 250 votes
6y

@Tom Shallcross Very smart strategy to target house hacking buyers. I have worked with a lot buyers that are recently disappointed with the inventory will qualify for FHA. My rule of thumb is that the building more/less has to pass the 1% rule to have a chance at working (assuming taxes are reasonable) - would yours? If not, I would question if they could truly pass the FHA test. However, if you do have buildings in B class or better area(s), like the north and NW side, that will pass please let me know... Ill have buyers lined up!

In any event, I would recommend option #2 since most house hackers will ultimately want to hold the property as long term investment and prioritize returns over comfort. 

Good luck!

The Axon Group4.981 Reviews
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  • Jimmy M.
    Rental Property Investor · Chicago, IL · Member since 2017 · 21 posts · 29 votes
    6y

    I'll be interested to see feedback here.  What neighborhoods?

    0Reply
  • Brian Medansky
    Chicago, IL · Member since 2018 · 24 posts · 14 votes
    6y

    @Tom Shallcross I'm currently house-hacking and would likely look to move into a new one within the next year or so. I personally would go for the extra income as a 4-unit as I wouldn't be looking at it as a long-term living solution, but just an investment that I happened to live in for at least one year. 

    I would also like to see what neighborhoods you're looking at. That might potentially change my answer, probably not, but possibly. 

    1Reply
  • Tom Shallcross
    OP
    Rental Property Investor · Chicago · Member since 2018 · 612 posts · 1k+ votes
    6y

    @Jimmy M. - Historic part of Pullman 

    0Reply
  • Jake FugmanBusiness Member
    Real Estate Broker · Chicago, IL · Member since 2016 · 256 posts · 250 votes
    6y

    @Tom Shallcross Very smart strategy to target house hacking buyers. I have worked with a lot buyers that are recently disappointed with the inventory will qualify for FHA. My rule of thumb is that the building more/less has to pass the 1% rule to have a chance at working (assuming taxes are reasonable) - would yours? If not, I would question if they could truly pass the FHA test. However, if you do have buildings in B class or better area(s), like the north and NW side, that will pass please let me know... Ill have buyers lined up!

    In any event, I would recommend option #2 since most house hackers will ultimately want to hold the property as long term investment and prioritize returns over comfort. 

    Good luck!

    The Axon Group4.981 Reviews
    WebsiteView Page
    2Reply
  • John Clark
    Member since 2018 · 1k+ posts · 1k+ votes
    6y

    (plus a small 7x7 den room that doesn't have a closet so tech not 2nd bedroom)

    ---------------------------------------------------------------

    City code does not require a closet for a second bedroom, so it may qualify as one depending on other factors. I believe the MLS requires a closet to be counted as a bedroom, but that's not legally binding on you.

    Personally, I would simply say it's a one bedroom with a den. just as you are planning. It makes you sound more credible, since only an infant's nursery could really use a space so small.

    0Reply
  • Tom Shallcross
    OP
    Rental Property Investor · Chicago · Member since 2018 · 612 posts · 1k+ votes
    6y

    @Jake Fugman - it would be right at 1% rule with the 3 paying units, not with just the 2.  

    I see the same with lack of inventory you mentioned, but I also get it - you're eliminating one paying unit, adding PMI, and a higher mortg balance/payment. All of these really squeeze the deal.

    0Reply
  • Brendan F. Nagle
    Member since 2018 · 104 posts · 94 votes
    6y

    I look at option 1. Its a tough sell to come up with a big down payment and then live in a 1/1. Option 1 gives the owner more privacy. IMO an exit strategy if house hacking doesn't work for them. This also opens up to market to house hackers. Not limiting who can live in just a 1/1. A 3/2 allows for a couple or family to occupy.

    1Reply
  • Noah Mccurley
    Belfast, Northern Ireland · Member since 2018 · 128 posts · 56 votes
    6y

    @Tom Shallcross

    I would argue that a lot of house hackers still want a large comfortable place to live and therefore I would go with the first option.

    1Reply
  • Paul Bommarito
    Rental Property Investor · Detroit, MI · Member since 2018 · 47 posts · 36 votes
    6y

    @Tom Shallcross that’s awesome that you are doing this. I know a couple individuals that were doing this exactly selling specifically to house hackers. There is a group called X Plus Real Estate who has been specializing in the 2-4 unit brokerage space for the past 6+ years that might be of help to your question. They work with a ton of first time house hackers.

    We bought our 4 flat to house hack in Avondale, but it’s a unique property compared to everything we saw because it is 2 front and 2 back so we didn’t have the typical top smaller unit with a pitched roof.

    I think it’s tough to say with this as a generalization and very dependent on each situation. I know some people who are just looking to live for less, but still want to be comfortable. And others who are focused on cash flow. Another question buyers like me often thought about is what happens after. If they move out after a year, what will the 3b 2ba rent for? If it’s a good amount less than $1600, it would be tougher on the cash flow. But again, probably very situational on the buyer.

    If possible, I would see if you could even try to locate some buyers once you close and have them lined up and hear their thoughts. Not sure if this is possible, but might be worth looking into.

    Regardless, the demand for these properties is super high in Chicago so I don’t think you will have a hard time selling a nice rehabbed property, regardless of which direction you go.

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