How Does The 1% Rule Apply in House Hacking?

Question

Hey everyone,

So I'm a travel nurse ready to get started into this world of real estate. I have a potential duplex but wanted to understand how the 1% rule would apply if I live in one unit and rent out the other.

Let's say the property is 190k and I have to put 100-150k into a complete renovation. Ideally, the unit that I’d rent would be around 1,700-2,000 a month.

How does the 1% rule work here? Do I also include how much I would charge if I were to rent out the unit I’m living in as well or no? Because I would need to make 1,900 a month to make it a good investment (according to the 1% rule). So is this 1,900 split into both units or should it only be accounted for the one I’m renting?

I’ve got lots more questions but I figured this would be a good start. Thanks in advance for the help and advice!

Charles Carillo · Answer

@Christin Nguyen

I have house hacked a couple of properties over the years (3 family buildings) and I don't think that the 2 units I was renting ever met the 1% rule (if I rented all 3 units it would). My goal when I house hacked was really to have the other tenant(s) cover the majority of my expenses at the property. If your tenant(s) could cover your mortgage, insurance, and taxes; that is a huge win. In this situation, you would really just be coming out of pocket for repairs and maintenance.

Chris Allen · Answer

Look into the FHA 203k Loan. There are drawbacks on the loan, but I would at least look into it if you can not find other ways to finance the rehab. Only have to have a small down payment; not the full 20%.

If you have the cash available and can put down 20%, are you wanting to buy this as a primary residence, or would you be okay with just buying it as an investment. There are plenty of HML type lenders out there that can finance the purchase, rehab, and then you can refinance and get your cash back out.

Christin Nguyen · Answer

Hey Charles,

Thanks for the feedback, I’m realizing the 1% rule is not a hard rule and more of a guideline.

Christin Nguyen · Answer

Hey Chris,

So here’s another question to go off the home and renovation loan: Can I pay a portion of the renovation with my own cash and a portion with a purchasing and renovation loan? Is it wise to use my own money in such a large amount for a renovation? Let’s say the property is 190k and I can put 25% down, so 47,500. Now I need a loan of 292,500. Instead of taking out this much, what if I put another 50,000 cash into the renovation? Then should I only take out a loan of 252,500?

After this is all said and done, how much would my mortgage be? Is it based off of the entire loan amount that I took out? Or is it based off of just the property price of 190k?

Christin Nguyen · Answer

Hey Jesse,

That definitely makes sense, thanks for the feedback!

Chris Allen · Answer

Hi there, fellow travel nurse here as well! I would look at this a few different ways.

1) Like @Jesse L. Weaver mentioned, after you are all in for $340k, will the property rent out for a total of $3,400/mo? From what you mentioned one unit would rent for, if the one you plan to move into would do the same, then yes; even after renovations you would be at the 1% rule.

2) What is the After Repair Value (ARV) of the property after you put the $150k into it? Will it be worth at least the $340k or more?

3) Is there a better property and use of your money? Do you have cash for the renovation or would you be using a loan product to do the purchase and reno?

Keep in mind that the 1% rule is more of a "rule of thumb" and does not actually mean that a deal is a good deal, just means that it is worth looking more into. If this property would be a good investment without you living in it, then I think it is worth you looking into. If not, you might consider whether the rental savings you would get from the tenant helping pay your mortgage vs what you could re-sale the property for in the future might be. As a travel nurse, you could always try renting your units out as a furnished unit to other travel nurses to increase the rental income as well!

Jesse L. Weaver · Answer

Hi Christin,

Welcome to the world of real estate investing, you are on the right path! When I'm looking at deals like this, I take into account the purchase price and renovations- $190k purchase + $150k (renovation costs often lean towards the more expensive side, especially for less experienced investors). So $340k all in, will the property rent for 1% of that?

You will struggle to find house hack deals that meet the 1% rule while you occupy 1 of the units. Not saying it's impossible but just less likely since you will be missing a big chunk of the income in the unit you occupy. The goal is to eventually move out and rent the unit you were living in right? I would add the market rent amount for your unit to calculate if it hits the 1% rule.

When you (eventually) rent both units, will they rent for $3,400 combined? If so, I would look further into this deal. Happy Investing!

How Does The 1% Rule Apply in House Hacking?

Most Popular Reply