Is now not the time to try and house hack?

Question

For two years I have been patiently waiting, studying my market, reading about how to invest and building my knowledge base on house hacking for when I graduate college.

Well in May, 2020 I graduated, mid-pandemic and started my job in July. Within the past two years I have saved close to $20,000 to invest in real estate and am more than ready to do just that.

But in my market, the houses are flying off the shelves in a matter of days at full asking price if not more. I’m worried it’s raising the market prices to points that are not sustainable. This virus, in my opinion is not going anywhere anytime soon and if we cannot sustain an economy in it, will this cause a crash that a rookie like myself with limited reserves can’t survive?

My father is an investor and thinks I should wait... but I feel like I have been waiting for so long and I don’t want to wait any longer, I am ready to take the next step.

What is your opinion? Is house hacking still a valid option for a FIRST investment even without a end date of this virus?

David M. · Answer

@Joseph Gisler

Like any other investing, timing your purchases and sales is still critical.  You are basically buying at a very strongly appreciating market.  Everywhere in teh country properties are being picked up with multiple offers and selling for $10k's over asking.  Unless you have a very strong deal, when it comes time to sell you house hack you will probably lose out hard on appreciation --- maybe.  That's why its not the best idea to buy now.

Are you going to short or long term hold your house hack?  If its short term, it won't make sense unless the market continues to appreciate for the next couple of years like it did in the early 2000's.  For a short term hold while living in it, you should be looking at taking advantage of the sec121 exclusion on the capital gains.  If you are going to hold it for long term (and thus move out), sure you are looking at a strong rental aspect.  But, you don't want to forget about having appreciation on your base asset.  You should realize that the stats show the real estate market pre-covid never recovered from the 2007/8 crash.  So, with the recent very strong appreciation, you are buying at historic highs.

Anyway, that's the general rationale.  You need to determine what is "right" for your investment choice and what risks you are willing to accept.  Sure, if we are on some sort of long term hot market like the early 2000's where people were making nearly 6 figures tax free moving every 2 years, then go ahead.  But, I can't predict the future.

Good luck.

Steve Oswald · Answer

@Joseph Gisler What type of house hacking are you considering?  I think that house hacking is a good way to mitigate risk because you are basically spreading the risk among other tenants.  Now I wouldn't say to buy a deal where the numbers don't work just to get in, but I think house hacking in a property where a portion of your mortgage (or maybe all) is covered allows you to learn hands on, without totally jumping in head first where maybe you have both your personal residence and a rental to worry about in a possible downturn.

Joseph Gisler · Answer

@Steve Oswald @David M. I plan on holding long-term, renting out by the bedroom to friends or young professionals in the area. I have ran the numbers conservatively to know up to what price I can still cash flow or at least break even in the area. But David, you bring up a good point about the appreciation spike occurring and while I am focusing on cash flow, appreciation is a very important thing especially if it can plummet in a short amount of time. Maybe I will begin to look off the MLS and try and find a deal that way to avoid the bidding wars and high prices. Thank you for the advice!