How to determine a criteria for a House Hack

Question

Hey BP!

I was studying Real-estate and a question came to my mind. When determining if a potential house will be great for house hacking what is the criteria to look for? Should i be using Cap rates, COC return, or which other metrics to guide me in this? Or just freely find a place I like and go from there? I believe there has to be some metrics to keep me in some boundaries when analyzing potential house hacks. Also if anyone has any ideas and have house hacked, how do you determine the rents on your rooms? I would assume that you don't just divide your total mortgage by each room and adjusting by square footage of each room. I'm curious to anyone who has/doing this and hearing your guys viewpoint. Thank you!

Basit Siddiqi · Answer

@Joey LlamasThe number one criteria for a house-hack.Do you want to live there? If the answer is no, throw away all the other calculations.Other important criteria's areHow much monthly savings are you having by living in this house versus paying in rent.Would you want to keep this property as a rental if you decide to move out.Then you can factor in all the other numbers such as COC, ROI, etc

Kyle Davidson · Answer

@Joey Llamas,

There are a few ways to analyze potential house hacks. The two main criteria that I look at are ensuring that my PITI is covered or close to covered while living in the property and making sure the property cashflows when I move out when factoring in Capex. I also look at COC return when I move out of the property. For example my first house hack I bought a SF home and my PITI was $2043, I got 3 roommates whose total rent was $2300 per month, utilities included in the rent. When I moved out of the property I ensured that the property would cash flow at least $100 when factoring in Capex. Currently I rent out the property for $2650 and am currently cash flowing around $250 per month. Granted the deal doesn't look like a home run when looking at the cash flow numbers but the SF home has appreciated over $100,000 and more importantly I got my real estate journey started.

In regards to renting out the rooms I monitored Zillow, FB marketplace, and Craigslist to look at local rentals in the area. On these sites I would both look at 1 bedroom apartments and individuals looking for roommates/renting by the room. I would then compare my property to those rent ads to help determine a price point, while ensuring that my price point was below the 1 bedroom apartment rentals. I would recommend including utilities if you decide to rent by the room as you can run into potential issues splitting the utilities between all the roommates. Personally, I charged $100 a person for all utilities.

Bradley Dosch · Answer

For location, I like to look at where the path of progress is. Are there new restaurants, buildings, apartments, etc being built in the area. I live in the Seattle-Tacoma area so neighborhoods that are outside the city, developing, and still an easy commute to downtown make sense for me. Especially because so many areas are insanely expensive. Todd Baldwin's BP episode is really helpful for me because he also lives here but you could get a lot of insight from him - I'm basically trying to copy his blueprint from that episode.

James Carlson · Answer

@Joey Llamas

At the risk of committing a sin on this site where the gospel says you must abide by some metric -- I say, keep it simple, especially if this is your first one. You can go down the rabbit hole of cash-on-cash vs. cap rates, etc.

I tell our house hacking clients in Colorado Springs or Denver to find the biggest house they can for the lowest price in a low B neighborhood. The real money seems to come when you can find a 5br house in a nice middle-class or working-class neighborhood. Rent each room for somewhere between $700-$850 (depending on which city and location) and you're looking pretty good even if you're living in the fifth bedroom.

Not sure what home values and room-rental rates are in your area, but see if you can find a home where you live for free and make $500/mo on top. That's a pretty good deal there.

You're never going to get the first one absolutely right. (Nor the second one or third one.) But you're also not going to f*** it up so bad. I think getting stuck analyzing is a bigger issue when you could be saving thousands on rent, having someone pay down your mortgage, and building appreciation/equity.

Good luck with your exciting new journey! Cheers!

Bradley Dosch · Answer

Hey Joey, good question. It all depends on your goals and preferences. I am a fan of CoC return because I love bringing low money to the deal but that's not everyone's goals. I look at holistically keeping in mind the location, loan paydown and tax benefits. I'd say the two biggest things for me are "does it cash flow?", and how much money will I need for renovations and down payment up front. I have found lots of luck renting out rooms in bedrooms. I usually look at the price to rent a studio in the area and then multiply by ~0.75 to get the rent for a bedroom. Hope this helps! Lmk if you have any more questions.

Jason Renner · Answer

I would echo everything that @Kyle Davidson shared. When I evaluated my house hack (townhome) I wanted to make sure it would cash flow well when I left, as well as it being comfortable to live in with roommates. PITI was $998/month and am able to get total rents of $1175 with two rooms. When I move out, rents for equivalent properties are at $1900, leaving enough for maintenance/CapEx with good cash flow. I also checked Craigslist to see what single bedrooms for rent were priced at, and followed those as guidance. Ultimately, you can evaluate the house hack in several ways depending on what your criteria is. Is it about just getting started in real estate investing, is it about subsidizing an otherwise unaffordable home to live in, is it about acquiring strong income producing properties? You pick, and then go from there.

Joey Llamas · Answer

Great point made thank you! Usually homes here go around 350-450 for a 3-4 bedroom house. Definitely make a good point on the biggest house with the lowest price. More bedrooms = more money. Definitely don't want to have analysis paralysis and stop me from making a deal your right just need to dive in! I have been in the workforce for 4 months total now after college so I'm saving AS much as possible to put a down payment on a house. Also was thinking of partnering with one of my coworker who is currently doing a flip and doing one with him or multiple and make some profit and some of that profit can go into my own house hack. Still weighing my options and education myself. Currently at this point of commenting i am ready the book on flipping houses by J Scott.

Joey Llamas · Answer

Great thank you I'll have to listen to that podcast very soon!

Joey Llamas · Answer

Wow very amazing information that I’m going to use throughout the week and weekend analyzing deals. I really appreciate this insight and your guys experiences aswell. Going to look at Facebook Craigslist and Zillow for renting and compare it to potential deals. Didn’t keep in mind the future if it will cash flow when I move out which sounds very important to consider. Thank you all! One quick question for you @Bradley Dosch, when you say you consider location what exactly do you look for low crime rate, high house values?

How to determine a criteria for a House Hack

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