Start House Hacking or Wait?

[Ryan Smith]

Good afternoon! 

Hello there, My name's Ryan, and coming up this December I will be graduating from college. During this time I was able to save up a considerable amount of money for a down payment on a multifamily property to house hack. I consider myself by no means an expert and would appreciate any words of advice. I will be moving back to the Minneapolis area after college and have already begun looking at Multifamily properties in the area. While conducting research in the area I can see that many of these properties are not producing enough rent to cover the high housing prices in the area along with the high interest rates. I would have to offer at around 65%-70% asking price on most properties to receive a positive CoC. My question is simple but yet complex. Do I wait to House Hack and just rent for 6-12 months due to high mortgage rates and high property prices? Or should I begin lowballing these asking prices and hope something connects? Seems very hard to find a good deal in Minnesota right now and I will sincerely appreciate any help! Thank you and have a great rest of the week!

[Bradley Buxton]

Why not do both? You can continue saving and will still need a place to live while putting in offers. If you can cover costs and you buy in rising popular community why not house hack break even? Get the equity gains and when interest rates fall you can cash-out refi. If you know the town well talk to people your age about what neighborhoods or areas they like or are thinking of moving to. Are there major upgrades to a downtown area coming, new job centers in St Paul, can you buy a SFH and add value adding another bathroom, or finishing a basement.

[Ryan Smith]

Thank You! Huge help! I think this is definitely the way I am going to go. Just felt a little cautious entering the market at record-high prices and rates. 

[Benjamin Sulka]

Ryan, 

I have the same qualms as you do and have asked many of the same questions. The goal of house hacking in this market is to pay less than you'd pay renting while also building equity and getting on the job landlord training. 

Are you looking at the numbers for when you live in the property or when you move out? When you're occupying one of the rentable units it will never cash flow. Do your analysis consider what things look like when the property is fully rented out. 

This is definitely a long term wealth building strategy and after a couple years of debt paydown and rent appreciation, your numbers will look a lot better.

Best of luck to you, brother. We got this! 

[Jaron Walling]

@Ryan Smith In your situation it's smart to study the market then attack. Think of renting for 12 months as boot camp. With an investor mindset you'll learn more in 6 months than you did in 4 years during school. A similar situation happened to me when a friend moved out and I could no longer afford rent. I was financially forced to change my mindset. I studied my market and looked for B/C class neighborhoods. This stuff is not rocket science. Eventually you start walking properties and find/buy/create deal you can't pass up. 

[Bryon Andrews]

Hey @Ryan Smith I have been house hacking in the Twin Cities since 2019. You can look at this two ways. 

1.) I think there is nothing wrong with renting for a few months to determine your desired location and gain knowledge regarding that specific rental market. 

2.) If you are simply waiting for interest rates to come down, my "crystal ball" tells me that as soon as that happens, prices for properties will raise due to a lack of inventory and more demand in the market from buyers. There are a lot more benefits to house hacking than just cashflow. 

[Rick Albert]

Don't rush into anything that doesn't make sense. With that said, here are a few things to consider:

1. If and when rates drop, FOMO may kick in. So even though rates dropped, you have more demand, thus pushing prices higher. 

2. When you do your calculations, consider loan buy down, tax savings, and appreciation. You are young and can focus on time. If rates drop in 12 months, you can consider refinancing. Buy then you would have made some impact on the principal balance. Keep in mind it is not a guarantee.

3. Nothing wrong with looking at properties that have been sitting on the market and offering lower prices. The worst the Seller can say is no.

4. Instead of asking for price reductions, consider asking the Seller to buy down the interest rate. Your payments would be lower and the Seller nets more money. It is a win-win. 

5. Even if you have to pay something out of pocket, you would be anyways because you would be renting. That money is gone regardless. It just depends on into who's pocket.

[Julien Jeannot]

@Ryan Smith

Welcome!

A note on waiting to see if rates drop: nationally we have the lowest inventor on record, per my lender for ever 1% rate drop 1MM people will jump into the market to buy. Supply and demand dictates prices will raise accordingly. Run the math, with lower rates and higher purchase prices, your monthly payment will likely be large and require a bigger deposit.

[Jake Andronico]

@Ryan Smith

Congrats!! Good for you for thinking this way at your age. I house hacked right after I graduated and it's changed my life . 

But after house hacking two properties over 4 years, I've realized house hacking is fundamentally a completely different strategy. 

What I've Learned:

This may seem obvious, but: You must factor in that you're living there. 

Analyzing a house hack like a traditional rental is not comparing apples to apples.

Expecting a high CoC, cash flow, or even breaking even with today's interest rates will likely leave you on the sidelines.

And unfortunately, I wouldn't be shocked when rates come down that prices will likely be quite a bit higher. 

The quote "Be greedy when others are fearful, and fearful when others are greedy", very much comes into play in these times. 

Right now people are fearful. 

We're seeing some of the best small multifamily deals here in Reno, NV that we've seen in quite a few years. 

If you have the cash to go on the offense, it's a great time to do it IMO. 

If you're able to buy now, and over 4 years you improve each unit you live in by living in one for one year and moving into the next, you'll have a fully renovated 4-plex while covering your living expenses, paying down principal, and forcing appreciation through increased rents. 

If that's all you ever did and waited another 26 years and had it paid off, depending on the market you could probably live off of that income. 

You certainly could here. 

This is ALL assuming that you can afford to make the payment. Things will NOT go perfectly (at least in my experience). 

That being said, I remind myself that you don't need a massive portfolio to be financially free, and typically people that do flex that number instead of flexing the real value of real estate investing IMO: 

Freedom of time.

[Benjamin Sulka]

Quote from @Jake Andronico:

@Ryan Smith

Congrats!! Good for you for thinking this way at your age. I house hacked right after I graduated and it's changed my life . 

But after house hacking two properties over 4 years, I've realized house hacking is fundamentally a completely different strategy. 

What I've Learned:

This may seem obvious, but: You must factor in that you're living there. 

Analyzing a house hack like a traditional rental is not comparing apples to apples.

Expecting a high CoC, cash flow, or even breaking even with today's interest rates will likely leave you on the sidelines.

And unfortunately, I wouldn't be shocked when rates come down that prices will likely be quite a bit higher. 

The quote "Be greedy when others are fearful, and fearful when others are greedy", very much comes into play in these times. 

Right now people are fearful. 

We're seeing some of the best small multifamily deals here in Reno, NV that we've seen in quite a few years. 

If you have the cash to go on the offense, it's a great time to do it IMO. 

If you're able to buy now, and over 4 years you improve each unit you live in by living in one for one year and moving into the next, you'll have a fully renovated 4-plex while covering your living expenses, paying down principal, and forcing appreciation through increased rents. 

If that's all you ever did and waited another 26 years and had it paid off, depending on the market you could probably live off of that income. 

You certainly could here. 

This is ALL assuming that you can afford to make the payment. Things will NOT go perfectly (at least in my experience). 

That being said, I remind myself that you don't need a massive portfolio to be financially free, and typically people that do flex that number instead of flexing the real value of real estate investing IMO: 

Freedom of time.

 The last bit of that post was on the money. If I've learned anything from talking to other investors, you do not need a massive portfolio to build long term wealth and be successful in real estate investing. The freedom of time is ultimately what we are chasing after. 

[Yu Liu]

Don't do any BAD deals BUT also

It's never a bad idea to low ball, especially since it's winter and everything will be slower anyways. 

Also, it doesnt have to fully cover your mortgage. Just because you pay some $500 or so out of pocket does not make it a bad deal. Think about it, if you are out of pocket $500 or even $1000 a month, how does that compare to you if you were renting?

The entire point is to build experience when you're young. It doesnt have to be a home run deal but if you're saving on rent anyways not to mention tax benefits and principal paydown, it's still good. Just underwrite it so that you're not losing money if you were to move out. I recommend everyone to start doing it!

[Ryan Thomson]

@Ryan Smith you have to pay to live somewhere! Buy real estate and wait, don't wait to buy.

I wonder if your criteria may be a little unrealistic for the current market.

House hacking is tough to cashflow in year one (with current house price run-ups and interest rates) for a couple reasons:

1. You are living in one of the rentable units

2. You are only putting 5% down so your loan amount is much larger and therefore your mortgage payment.

I would consider your net worth ROI. What I mean by this is considering how much your down payment returns to your net worth (appreciation, loan paydown, tax benefits, AND rent avoidance). Don't forget to include rent avoidance in your numbers! You have to live somewhere.

You may need to lower your return or cashflow expectations so you can get into a house hack that will allow you to avoid throwing rent money away every month. You know this, but don't forget all the other ways real estate makes you money. Paying down your mortgage and owning an asset that will appreciate over the long term.

If you are paying close to what you pay in rent to cover PITI and expenses then owning a house is a much better financial decision than renting.

[Ryan Thomson]

@Ryan Smith an additional point here. Good time to buy bc there is way less competition right now and if rates drop you can refinance.