House Hacking in Brooklyn, NY—is it worth it?

Question

Hi all, I'm looking to house hack in Brooklyn, NY and looking for 2 bedroom condos to rent out the 2nd room. Looking at Bed Stuy / Crown Heights primarily as I can get a 3.75% interest rate from First Republic as it's my first time home. I plan to live in the home for at least 2 years to get the tax benefits but possibly longer, then possibly do a cash out refinance to invest in another property.

Scenario 1: Current Rent

- $3000/month

Scenario 2: House Hack and rent out spare bedroom

- If I rent out a 2nd bedroom, I'd still likely pay around $2600-3200/month on mortgage, taxes, HOA, CapEx & Maintenance (est. 8-10% depending on age of bldg)

- The properties likely would break even around Year 5 or 6, so I may lose money each month if If I decide to move out before Year 5 or 6

All of the advice I've read on house hacking was it's a good strategy to use if you can reduce your living expenses but a lot of the homes in Brooklyn mean I'd be paying about the same or more on rent each month. I have a stable W2 income so can afford to lose some $$ when I move out, but I also don't know if this is a good financial decision if my longer term goal is financial freedom.

What factors should I consider when investing in a more expensive market? Do you think house hacking still a good idea to try and get tax benefits, potential appreciation, loan pay down, etc?

Dor Sagi · Answer

Hey @Maggie Blackburn! My husband and I are having the same debate. I feel like we have a lot to talk about! I will DM you now :)

Eric Hajdu · Answer

@Maggie BlackburnYour very smart to be attempting this at a young age, I would suggest considering a modest 3 family in lieu of a condo. I have owned several Brooklyn condos over the years and they are generally not very accommodating to the idea of owners renting out a part of their space. Also, you can’t control the monthly cost as much as you would think, there are always assessments, mait. increases, rapid property tax hikes, etc.What is beneficial about the multi fam is you can practically do whatever you want and you can adjust how much of the space you keep for yourself as your needs change. At some point, maybe you start a family, and make a duplex, etc. The best part is you have the option of turning the property into condos at some point down the road, which is where the real payoff happens. With rents being so elevated, I actually see many properties in bed stuy, bushwick, and other fringe areas where the numbers work really well.Best of luck!

Ecaterina Katerina Morosan · Answer

Hi @Maggie Blackburn! House hacking is still a great idea for first-time investors. We've worked with multiple BP investors who bought their first investments in Brooklyn and rented out rooms and were able to break even or cash flow from day one. Happy to discuss different options

Kimothy Bynum · Answer

If the numbers work after you move out of the condo and you cash flow from it then I would do it. Some properties just are not gonna cash flow at the prices they are and the average rent they would go for.

Jason Lee · Answer

I have many condo investor clients in NYC. About half of them used to owner occupy and then either traded up or moved out of state and became landlords, the other half buy all-cash or 1031 from higher maintenance properties. If you’re going to be negative cash flow if you move out in a few years then I don’t think it makes sense. I’d be looking for something where you can force some appreciation and cash flow by converting an alcove or den to carve out another “bedroom.” If you can get a third tenant in there somehow it will rent for a pretty big premium over just two and then maybe the numbers will start to make more sense.

Eric Hajdu · Answer

Maggie, I think a 2 bed condo is a great way to get started in NYC real estate, I just don't think it's a realistic tool for house hacking. In regards to your budget, you could certainly find a multi fam in many BK areas for around $1mil, they won't be as developed as the neighborhoods you mentioned, but certainly have upside.One final thought, if you do go the condo route, I would choose a more established area such as Ft. greene, Downtown Brooklyn, Park Slope, etc. where you could find a tiny 2 bed for just slightly above your budget, but you would be able to get rent about 50% higher than the areas you mentioned. Feel free to message me if you want any more specific info.

Maggie Blackburn · Answer

@Jason Lee Makes sense! This is my plan too (trading up or renting out or 1031 exchange later down the road). I've been also trying to look for opportunities to convert bedrooms, although most look like that will mean no living room or very llimited light in the living space. I'll keep searching and thank you for the advice!

Jessie Walls · Answer

Boring stuff but :- ask around if your network or friends or friends would rent your hypothetical condo. Maybe even have post a ad with photos and location and be upfront “this is not a real listing but research. Your feedback is very much appreciated”. Maybe send it to landlords you know and get their take if the market would rent- what is your staying power? 2-8months if you can get it rented out?now if your network can’t get this place rented or you have feedback that it’s weak or lack of feedback…well there’s your data set. Why do this? It’s $100k of your money that’s why. Is it worth it to do scenarios ? If it’s not worth it, don’t invest.

Maggie Blackburn · Answer

@Nicholas L. Moving out after Year 3 would look like a loss of about $1200 - $2500 per year (-.5% to -1% Cash on Cash Return). I plan to stay in NYC indefinitely but it's hard to predict when or if I'll want to move out of the NY area. I think I'll likely stay at least 5 years but could also be the place I settle down too. Hard to say for certain.@Eric Hajdu Since I'll be living at the property, I was looking for areas that I'd be willing to live in so the multi-fam in other areas of BK may be too far out. I was also looking in Bed Stuy / Crown Heights due to the fact I could get an Eagle Loan from First Republic who offers a really competitive rate (3.75% and $4000 toward closing costs). Ideally Bed Stuy would be the area closer to Clinton Hill and Crown Heights the area closer to Prospect Park so slightly higher rents than other parts of the neighborhood. I'll message you about the tiny 2 bed condo route. Have some follow up questions!

Nicholas L. · Answer

@Maggie Blackburn I don't know the Brooklyn market, but I like how you're thinking about this.What do the numbers look like once you move out and rent the whole property, say in year 2 as you mentioned? And do you plan to stay in the general NYC area?