Need HELP with this house hack deal! Does it make sense?

[Kevin G.]

am considering purchasing a 3-unit property in my area and house hacking it with my family. Currently, I am renting in the Bay Area, CA and paying $2750/month for rent, not including utilities. The property I am interested in is a 3-unit property with 2 separate units in the main house and an ADU in the back of the property. The property is currently for sale for $1,050,000, and I plan to put as little down as possible, so I am considering an FHA loan with a 3.5% down payment.

Based on my calculations, the back unit should rent for $2600/month (2 bedrooms, 1 bathroom) and the ADU should rent for $2200/month (1 bedroom, 1 bathroom). The ADU can command a higher rent since it has its own garage and is very large.

Assuming my calculations are correct, my effective mortgage payment should be $7838/month. This includes principal and interest of $6091/month, home insurance of $233/month, PMI of $490/month, and property taxes of $1024/month. However, with the rental income factored in, my effective mortgage would be approximately $3000/month.

My current income is around $145k/year, and I've been told that FHA loans will use rental income towards your income to help you qualify. The property has been on and off the market, so I am thinking of offering less for the property. If the seller agrees, I can effectively get my mortgage payment to be the same as or less than my current rent and save money.

I would appreciate any thoughts and ideas from the experts on this forum. Is this a bad idea given that I'm not saving a significant amount of money with the house hacking situation?

Is the home just too expensive and interest rates too high for this to work? Also I would HAVE to break my current lease to move into this property if I was to purchase it. 

Thank you!

[Dan H.]

Quote from @Kevin G.:

Quote from @Dan H.:

FHA will not work for this 3 unit property due to sustainability requirements on 3 units and more. FHA sustainability requirements do not apply to 2 unit and less.

As has already been mentioned, you are missing a lot of expenses/missed revenue in your calculation including maintenance cap ex, vacancy, PM (even if self managing, include the expense because it requires work), misc (umbrella policy, LLC, accountant/tax man expenses, office expenses, etc).

You did not indicate what the market rate on the main house is.

My belief is in the short term, your current renting situation is cheaper.  However, if you purchase the largest expense P&I is fixed versus rent goes up every year.  In addition, historically there has been outstanding appreciation.  10 years from now, the purchase is very likely to look to be a great investment. 

How long do you expect to keep the property?  If 10 years or longer, I recommend to purchase.  If less than 5 years I recommend to not purchase.  

Good luck

@Dan H. 

Yes, I have also heard that this property may not pass the self-sufficiency test. However, most properties in the Bay Area do not pass this test. I have been told that there are some lenders who are willing to work on this issue and be more lenient. I won't know more until I talk to a lender though.

The market rate rent for the house we would be living in would be about $3000/month. So the total rent would be $7800/month.

I appreciate your other insights. My plan would be to hold onto it long term and use it as an equity play. If I can refinance down the line, then cash flow would be on my side as well if we move out.

I have not heard of FHA ever dropping/ignoring the self sustainability criteria. This is why FHA in high cost areas like San Francisco are for 2 unit or less. I also believe FHA keeps the PMI for life of loan even if RE appreciates such that LTV is below 80% (confirm this has not changed). Most loans do not have this limitation.

I think with your intent to hold long period, buying makes sense. It will likely need to be 2 units or less with you limited funds and the high RE prices. This can still work well. Especially RE with ADUs can be a good purchase as the value being associated with ADUs is far below the costs of adding the ADU in most markets.

Recognize in the short term this may cost more than renting.  Do not get frustrated about this.  Realize you are in this for the long term.  So far every 10 year hold period in your market, the purchase has produced good/great return.

Good luck.