4-3-2-1 Strategy Possibilities in the DMV Area?

Question

Hi everyone,

I just signed what we agreed would be our last one year rental lease in Washington, DC with my partner. We plan to start the real estate buying process of finding the lender, real estate agent, etc. sometime in early Fall of this year with the intention of closing on a place around March, 2024 when our rental lease ends.

We are very interested in house hacking. I've read lots of the main books on the topic and now am just figuring out how to tailor the approach to our specific market. I'm especially attracted to the 4-3-2-1 strategy.

As I'm sure many of you know, 4-3-2-1 works by starting with a four-family property. After getting your four-family property, you will live in a unit for at least one year, according to Federal the FHA conventional guidelines. You can then lease out the other three units for rental income. This extra income will pay your mortgage and provide your cash flow. The next step is to refinance your first FHA loan after 12 months or once you get to 20% equity. Then you repeat with a three-family unit and then a two-family unit and then you ultimately purchase a single family home. Depending on how everything goes, I could see us delaying that single family home purchase if we're happy with the cash flows we're getting from the house hacking.

But I'm not sure where the best places in the DMV area to start this approach are. Based on my living here for many years and what I've read, it seems the only house hacking opportunities in DC are english basement/ADU opportunities or SFH rent-by-room strategies.

We both work remote but my partner has some things that keep her attached to the DC area. I think we'd be willing to go around an hour outside of DC for the right opportunity. We can likely afford something in the 800 to a mil range, but are really only interested if we think we can get good cash flow. I've heard previously that it might be hard to get good cash slow at those ranges, but then again DC also demands some fairly high rents, so maybe it's possible in this area. This is all just what I've heard as we have not run the numbers yet on any specific properties.

Any advice on where to look to potentially find cash flow generating quadruplexes in the DMV area? Do those even exist? Or would it be better to reduce our expectations and shoot for a triplex at the upper bound?

I'm new to the forum, so thanks for any advice!

Jack Seiden · Answer

Ohio lol, there are occasionally decent ones in Frederick but frankly even that is rare, if you don’t want to house hack your best option is gonna be to go far enough into the suburbs (30-40 min from the city) rent out the basement or a single bedroom and pay less than renting, if you want to live in the city or close in suburbs, you need find a place you want to live in the next 3+ years to allow rents to increase to mortgage payment.

Christian M. Conroy · Answer

Thanks @Tim Jacob. Yeah, I think Baltimore is firmly on the list of places we'll be exploring. I am not as familiar with the neighborhoods there as I am in DC, but we've got some time to do some legwork research this year. And @Jack Seiden, you mentioned going far enough into the suburbs (30-40 min from the city) to rent out the basement. What areas do you think are likely good areas to look? And you're saying that likely the only rental opportunities that aren't rent-by-room are likely English basement situations in those areas? Those would be considered ADUs as opposed to duplexes, correct? Thanks!

Tim Jacob · Answer

@Christian M. Conroy the neighborhoods you noted along with a few bordering them all have multi family and you usually can find 1 or 2 available. Some of those neighborhoods fluctuate from good to bad blocks and hence things can go from A to D grade fairly quick. Beyond that many of the buildings are old and might have older infrastructure like a boiler. I own and manage buildings in all of those neighborhoods and additionally have renovated a few multi families within the area. They are all close to Penn Station where the MARC train is and many walking distance to it. Let me know if you want to discuss things.

Joe Norman · Answer

Baltimore for sure is going to be a good bet for you to find a multi-family, in a decent area, for well within your price range. All the neighborhoods you listed should have opportunity, although there will be more multi-family buildings in Reservoir Hill and Bolton Hill than in the other three.Baltimore is a very different city then DC though, so be sure to come up and spend some time driving, and walking, the neighborhoods you are interested in to really get a feel for them.

Christian M. Conroy · Answer

Thanks @Tim Jacob. That's an option I've been considering. I don't know Baltimore that much beyond some internet researching I've done. Heard Hampden, Old Goucher, Station North, Resevoir Hill, Bolton Hill good to look into for example.

Tim Jacob · Answer

Considering you are willing to go an hour outside DC I would consider Baltimore. It will have the most inventory. For the price point you are looking for you should be able to get something in an A grade part of the city. I see a lot of renter applicants that have remote jobs based in DC living in Baltimore. They make the commute maybe once a week a lot of times by MARC train. Its a growing trend with the surge in remote work.I've seen an A grade 4 unit go for low 400s recently. It wasnt totally turnkey but pretty sure add another 100k you are there.

Christian M. Conroy · Answer

@Jack Seiden thanks for the response. Yeah, that seems to be the case. My partner and I have animals and there are just past the point of getting a single family home and doing a rent by the room strategy.In terms of when we'd be buying (Spring 2024), my thinking was that even though rates are high right now, we'd be able to use that to get a lower price or secure some concessions in a market where sellers have less leverage. And then the timing would work out to where we'd refinance somewhere between a year and 2 years later after hitting 20%, which would allow us to convert to conventional loan and then reuse the FHA somewhere else all the while benefiting from what would likely be low interest rates by then. But that's just the theory right now. But I figured we would not find much good MF in DC. That's why I'm considering surrounding areas. Baltimore, Alexandria, other places in NOVA and Maryland, etc. Any insight into basically how far out of DC one needs ot go to start to find duplex, triplex, quadplex opportunities?

Ryan Thomson · Answer

@Christian M. Conroy I like that idea! It is hard to stop and get a single family home once you experience the reduced expenses of house hacking! :) So I could also see you delaying that single family purchase and continuing to house hack. I would try to find local meetups and learn from other house hackers and investors in the area. Search facebook, meetup.com, bigger pockets events, and eventbrite for "Real Estate Meetups"Best of luck!

Jack Seiden · Answer

Try the 1-2-3-4 strategy lol, I was just having this convo yesterday, the market has shifted to where it’s often cheaper on a monthly basis to buy a single family or townhouse vs multi family, most multi family in the DC area is gonna start around 1 mil and in a nice area be 1.3+ (multi more or less only exists in city property) financing that with 6.5 rates is not necessary better than a 500-600k property single family, a lot of investors/agents haven’t adjusted there strategies to this new high interest rate market though.