Turn my primary into an DADU STR or Downpayment on a new property

Seattle, Washington
House Hacking
4yFollow

Turn my primary into an DADU STR or Downpayment on a new property

Nick LittletonPro Member
Bellingham WA and Nashville, TN · Member since 2021 · 12 posts · 6 votes

Hey all,

Looking for general advice. My wife and I are currently living in our primary house, and we have been trying to think of creative ways on how to house hack our primary to lower our DTI and scale faster. We probably would have house hacked before buying a primary residence, but that was before we started educating ourselves with real estate investing. Short Term Rentals are allowed where I live, as well as DADUs. My thought process is to cut out a piece of our property (we have 10 acres) that is surrounded by trees but close enough to the house to run power/plumbing and build a DADU/tiny home with 2 bedrooms to rent out on AirBnb/VRBO.


However, this would cut deeply into our reserves and our "investing" savings that we have created, and would take some time to gain that back. The whole idea would be to use our cash to build it (ideally little to 0 leveraging), and turn our primary into a cash flowing house hack/STR.


I love this train of thought, not the lack of money, but the idea of lowering our DTI to be able to qualify for more/larger loans and scale faster. However - I also think I could achieve this by just utilizing the same amount of money as a down payment, ideally shooting for 4-5 bedroom house (more beds more heads), buying another property that I could run as a STR, and now we have an additional appreciating asset. I am torn - and I don't know what direction to go. Looking for advice from people out there who are more experienced that I am. Thank you all in advance.

Nick

1Reply
59 views

Most Popular Reply

Michael HaasBusiness Member
Real Estate Agent · Sammamish, 🌧️ Seattle Investor-Agent | 🤑 Helped 400+ Clients Invest in Real Estate | 🏘️ Owns 23 WA Rentals & Airbnbs | 🏗️ Built 5 DADU's | 📈 You Can Do It Too · Member since 2016 · 725 posts · 3k+ votes
4y

@Nick Littleton my wife @Jess Haas & I lived in a Tiny House for years, and now rent Tiny Homes on wheels, Yurts, and other unique accommodations on Airbnb. HouseHacking and Glamping / Landhacking are two of the most profitable and low cash investment beginner strategies in WA, so I like where your head is at!

A few years ago I would have said to buy a second property - with interest rates around 3-4% and appreciation roaring above 10% yearly buying more real estate almost always we more profitable than optimizing the real estate you already owned. That has changed though - we're not expecting as significant appreciation for the next few years, and interest rates are above 6%, so I don't think you lose as much by waiting to buy property #2 now. Yurts and A-Frames are some of the most cost effective structures to put up, and around here it is pretty common to skirt around the permitting issue by building them under 198 square feet (no permit required for outbuildings). The septic, water, and power hookups would still require permits, but depending on your risk tolerance and the size/privacy/location of your lot this is something that is often skipped as well. Without permits a Yurt can be built and outfitted for $40,000 (or less if you do the work yourself!) and can rent for $3,000 a month on Airbnb to break-even in a year or two. Those are good numbers, and with a 10 acre lot like yours you could repeat that process with multiple Yurts or other Alternate dwellings.

Tiny Houses are more expensive - when we had our first one designed and built in 2013 it was just $39,000, but that was before they became popular and everything became expensive. The same builder is now charging about $105,000. The break even point is a little longer for $105,000, but still a good investment option if you have the capital and don't want to put in any sweat equity - the best part of tiny houses is they can be built off-site and rolled right onto your lot, which is great in rural areas where finding contractors is difficult.

DM me if you'd like to talk more about the weird and wonky (but highly profitable) side of real estate investing :). Cheers & best of luck!

[email protected]408-439-7873
HouseHack Seattle | Michael Haas & Team572 Reviews
WebsiteView Page
6Reply
See this reply in the discussion

9 Replies

Jump to latestLatest
  • Andrew Garcia
    Lender · Charlotte, NC · Member since 2022 · 739 posts · 410 votes
    4y

    Hi @Nick Littleton, if lowering your DTI is the goal so you can get more loans and scale, converting your primary into an STR will not get you there. At least not immediately.

    For the conversion from a primary to an investment property, the property must have a lease for that income to be included in your DTI.

    If you want to use the STR income, you will need to have that income show up on your tax returns.

    As for whether you should do the DADU or buy another property, that question would be better answered by local investors/investor friendly agents that are familiar with the area.

    Hope this helps! Let me know if I can be of any assistance.

    4Reply
  • Nick LittletonPro Member
    OP
    Bellingham WA and Nashville, TN · Member since 2021 · 12 posts · 6 votes
    4y

    Thank you @Andrew Garcia! I appreciate the input

    0Reply
  • Sergey A. Petrov
    Real Estate Consultant · Seattle, WA · Member since 2022 · 1k+ posts · 784 votes
    4y

    That depends on where you are. Your post is tagged Seattle but then you also say you have 10 acres so I suspect you are outside of the city. Buying in Seattle most likely won't help you with your DTI, at least immediately, since barely anything cash flows in Seattle as a long term or even a mid term rental. A short term rental, as others mentioned, will need to show up on your tax returns so there is some time there as well. Building a legal DADU will again depend on where you are as local rules vary.

    If I were you, based on the very limited available info you provided, I’d build a DADU just to dip your toes into being an investor and a landlord and then see if you enjoy that experience (or if you are in a more remote area, buy an existing cabin near you and short term rent that). It’ll be close to you so it’ll be easier to manage…Once you have some investing experience, you can look at all the other available options.

    1Reply
  • Dave Skow
    Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
    4y

    @Nick Littleton 1) get some actual bids and estimates in place for permit timing/ cost and actual construction costs ....my guess is this will end up being much higher than you expect and also will take a much longer time that you expect 2) consider getting a HELOC in place on your home if you have equity in case you need/ want to use these funds 3) house hacking and adding income from present residence will not allow you to lower your DTi immediately ...you will need to have a tax return ( possibly 2 ) showing rental income from the primary home in order to help lower dti 4) if you are buying a new STR that is a SFH - down payment will be 15% or more of purchase price and if buying a 3-4 unit the down payment needed is 25% of purchase price

    0Reply
  • Sherief Elbassuoni
    Realtor · Bellevue, WA · Member since 2019 · 882 posts · 1k+ votes
    4y

    @Nick Littleton, to finance the construction of the DADU, you may want to consider taking a HELOC on the main house. If you are house hacking the mian house or convert it to a STR or long-term rental, many lenders will want to see the rental income reflected in 1-2 tax returns before considering it as part of your income.

    5Reply
  • Jonathan Hankins
    Rental Property Investor · Member since 2022 · 37 posts · 28 votes
    4y

    I like where you head is at man. You have to get some income one way or another, and either way you choose will be better than doing nothing at all. I LOVE the idea of tiny houses... but I have never seen a situation where the stupid things aren't so expensive that you feel like you shouldn't just build a proper structure. I am out in Las Vegas, and here at least, the water and sewer hookups are such a high percentage of your total cost that I have never seen a case where anything but traditional structures were put up.

    There are definitely cash-flowing short term properties out there if you want to the route of just buying an investment property - but I don't think Seattle would be my first choice for a market, so that may add a little complexity.

    Good luck out there!

    0Reply
  • Nicholas Coulter
    Real Estate Agent · Southern California · Member since 2019 · 681 posts · 281 votes
    4y

    @Nick Littleton I would ask did you run comps on the amount your STR would bring in? I would say if you can reclaim the cost of the DADU in 2 years or less you can go for it. An Idea to super charge your returns might be live in the DADU and rent out the main house to get more cash in!

    0Reply
  • Michael HaasBusiness Member
    Real Estate Agent · Sammamish, 🌧️ Seattle Investor-Agent | 🤑 Helped 400+ Clients Invest in Real Estate | 🏘️ Owns 23 WA Rentals & Airbnbs | 🏗️ Built 5 DADU's | 📈 You Can Do It Too · Member since 2016 · 725 posts · 3k+ votes
    4y

    @Nick Littleton my wife @Jess Haas & I lived in a Tiny House for years, and now rent Tiny Homes on wheels, Yurts, and other unique accommodations on Airbnb. HouseHacking and Glamping / Landhacking are two of the most profitable and low cash investment beginner strategies in WA, so I like where your head is at!

    A few years ago I would have said to buy a second property - with interest rates around 3-4% and appreciation roaring above 10% yearly buying more real estate almost always we more profitable than optimizing the real estate you already owned. That has changed though - we're not expecting as significant appreciation for the next few years, and interest rates are above 6%, so I don't think you lose as much by waiting to buy property #2 now. Yurts and A-Frames are some of the most cost effective structures to put up, and around here it is pretty common to skirt around the permitting issue by building them under 198 square feet (no permit required for outbuildings). The septic, water, and power hookups would still require permits, but depending on your risk tolerance and the size/privacy/location of your lot this is something that is often skipped as well. Without permits a Yurt can be built and outfitted for $40,000 (or less if you do the work yourself!) and can rent for $3,000 a month on Airbnb to break-even in a year or two. Those are good numbers, and with a 10 acre lot like yours you could repeat that process with multiple Yurts or other Alternate dwellings.

    Tiny Houses are more expensive - when we had our first one designed and built in 2013 it was just $39,000, but that was before they became popular and everything became expensive. The same builder is now charging about $105,000. The break even point is a little longer for $105,000, but still a good investment option if you have the capital and don't want to put in any sweat equity - the best part of tiny houses is they can be built off-site and rolled right onto your lot, which is great in rural areas where finding contractors is difficult.

    DM me if you'd like to talk more about the weird and wonky (but highly profitable) side of real estate investing :). Cheers & best of luck!

    [email protected]408-439-7873
    HouseHack Seattle | Michael Haas & Team572 Reviews
    WebsiteView Page
    6Reply
  • Steve Clifford
    Member since 2022 · 25 posts · 31 votes
    4y

    Hi guys,

    I love the idea! A great way would be to take out a HELOC, or Home Equity Line of Credit, on your current home. This can easily be done through your local credit union. This allows you to access the equity you have in your home as a line of credit and pay yourself back over time. Depending on how much equity you have in your home, this could be a fantastic option to help you build your DADU and use the rental income to pay off the HELOC which is usually less expensive than a cash out refinance. I hope this helps you achieve your goal!

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free