House Hacking Fail

[Palani Willingham]

I recently bought a condo with the intention of converting it into a rental after a year of living in it then buy another primary and repeat the process. I used a real estate agent and told them that was my plan. After moving in, I read an article on my community saying that a man was forced to evict his tenants because no renters were allowed in the community. As you could imagine, I was very upset because this meant that I couldn’t house hack my place and turn it into a rental. I felt like my real estate agent failed me because he overlooked that huge factor about the property.

This leads us to my dilemma. I’ve only lived in the place for 5 months and I don’t know if I should:

1) sell the place after a year and buy another primary

2) stay in the property for 2 years to avoid capital gains tax

Please let me know your thoughts. I’d appreciate any advice.

Thanks!!

[Bill B.]

You can still house hack the property by having people live with you. What you can’t do is turn it in to a rental. This is something you should certainly have caught when you read the CC&R’s. They are given to you with 3 days to look them over. Then you sign saying you read them and understand them. 

Do you have any gains to be taxed? It will probably cost you 8-10% to sell. Are you saying the property is up more than that in 5 months? If so your agent did a great job finding you a steal. 

Figure out how much of a taxable gain you will have after paying all your closing costs. Then you can figure out the tax differences. Less than a year, taxed as regular income, after a year 15%, after 2 years tax free. But it’s probably almost zero today unless you got that steal. 

If you don’t want to move right away I’d just house hack it for a year or two until you’re ready to move out and then sell. 

[Robin Simon]

Have you fully reviewed the rules of the contract and HOA? You are probably right, but if its just one "article read" - there could be further options to review? For example, many HOAs are not 100% black and white - no rentals allowed vs. all units allowed for rent - there may be limits on # of rentals, you may be able to apply for a permit, they may allow rentals only after a full year or so of living in the unit, etc. Make sure you learn all the actual rules in place before chalking it up as a fail!

[Jake Andronico]

@Palani Willingham

Have you double checked the CC&R's and confirmed this is the case, or talked to the HOA board?

Definitely confirm this is the case IN the actual documents before making a large decision like that. 

They could have been a short term renter potentially..?  Maybe not, but definitely confirm. 

[Palani Willingham]

Quote from @Bill B.:

You can still house hack the property by having people live with you. What you can’t do is turn it in to a rental. This is something you should certainly have caught when you read the CC&R’s. They are given to you with 3 days to look them over. Then you sign saying you read them and understand them. 

Do you have any gains to be taxed? It will probably cost you 8-10% to sell. Are you saying the property is up more than that in 5 months? If so your agent did a great job finding you a steal. 

Figure out how much of a taxable gain you will have after paying all your closing costs. Then you can figure out the tax differences. Less than a year, taxed as regular income, after a year 15%, after 2 years tax free. But it’s probably almost zero today unless you got that steal. 

If you don’t want to move right away I’d just house hack it for a year or two until you’re ready to move out and then sell. 

Thanks for your advice! I do have someone living with me which I guess IS house hacking but I was hoping to move out after a year and keep it as a rental. I don't think the property is worth over 10% today so selling doesn't look like a great option right now. Considering a live-in flip? All depends on the ARV, looks like I have some homework to do. Thanks again!

[Palani Willingham]

Quote from @Robin Simon:

Have you fully reviewed the rules of the contract and HOA? You are probably right, but if it's just one "article read" - there could be further options to review? For example, many HOAs are not 100% black and white - no rentals allowed vs. all units allowed for rent - there may be limits on # of rentals, you may be able to apply for a permit, they may allow rentals only after a full year or so of living in the unit, etc. Make sure you learn all the actual rules in place before chalking it up as a fail!

I will definitely double check that. Let’s hope I find a better solution than selling! Thanks for the response

[Palani Willingham]

Quote from @Jake Andronico:

@Palani Willingham

Have you double checked the CC&R's and confirmed this is the case, or talked to the HOA board?

Definitely confirm this is the case IN the actual documents before making a large decision like that. 

They could have been a short term renter potentially..?  Maybe not, but definitely confirm. 

I haven’t but I’m going to double check that ASAP! Thanks

[Julien Jeannot]

@Palani Willingham

Sorry to hear. The only thing I'd add for the next purchase: the responsibility of due diligence is yours alone. Trust the agent, but verify. Interpreting legal docs such as the CC&Rs fall into attorney territory which an agent is not licensed. Many will perform that service, but that opens them up to liability.

Another approach is to confirm your understanding of the rules with the property management company or the HOA board. Its not fool proof, I've seen plenty of HOAs sued due to lack of understanding over their own documents.

[Palani Willingham]

Quote from @Julien Jeannot:

@Palani Willingham

Sorry to hear. The only thing I'd add for the next purchase: the responsibility of due diligence is yours alone. Trust the agent, but verify. Interpreting legal docs such as the CC&Rs fall into attorney territory which an agent is not licensed. Many will perform that service, but that opens them up to liability.

Another approach is to confirm your understanding of the rules with the property management company or the HOA board. Its not fool proof, I've seen plenty of HOAs sued due to lack of understanding over their own documents.

 Definitely a lesson learned the hard way. I’m going to look into the CC&R documents, I appreciate the response!

[Benjamin Sulka]

Palani, 

Not much that I can add on the next steps front but I do want to applaud you on something. 

You took action! That is more than a lot of people do. 

Learn from this and let it inform your future strategies and decisions. 

You got this. 

-Ben

[Palani Willingham]

Quote from @Benjamin Sulka:

Palani, 

Not much that I can add on the next steps front but I do want to applaud you on something. 

You took action! That is more than a lot of people do. 

Learn from this and let it inform your future strategies and decisions. 

You got this. 

-Ben

 Thank you for the kind words Ben!

[Michael Smythe]

Did you put your rental plan in writing to your agent?

If so, you may have the basis for a lawsuit against their brokerage.

[Carlos Ptriawan]

Quote from @Michael Smythe:

Did you put your rental plan in writing to your agent?

If so, you may have the basis for a lawsuit against their brokerage.

I don't know why people like to sue for their own misunderstanding and/or blaming the realtor.
Realtor has not much difference than us, we are the one that supposedly read all the docs when we sign them during contract.

1. I always read all HOA pages, financial report of HOA and their rules, and even after I read it, I ask the HOA manager directly hundred question during DD process. Including the ability to move the property into rental. Now that you already here, you should just call the HOA manager and ask the right question.
2. Usually there's strict provisioning how many units within HOA can be allocated for rental purpose, it could be zero, it could be 20% , it could be 100%.  I don't know.
3. The same is also applicable for STR
4. As of househacking it's the easy way. Just make sure the tenant doesn't use the parking spot that's used by neighbour/owners.
5. Beside from rentability issue, when you read the HOA/CCR docs be very mindful of future project and financial report, check every line if there's potential issue with the neighborhood or building itself.

Typically for househack you want SF with large parking space.

[Preston Dean]

Quote from @Palani Willingham:

I recently bought a condo with the intention of converting it into a rental after a year of living in it then buy another primary and repeat the process. I used a real estate agent and told them that was my plan. After moving in, I read an article on my community saying that a man was forced to evict his tenants because no renters were allowed in the community. As you could imagine, I was very upset because this meant that I couldn’t house hack my place and turn it into a rental. I felt like my real estate agent failed me because he overlooked that huge factor about the property.

This leads us to my dilemma. I’ve only lived in the place for 5 months and I don’t know if I should:

1) sell the place after a year and buy another primary

2) stay in the property for 2 years to avoid capital gains tax

Please let me know your thoughts. I’d appreciate any advice.

Thanks!!

 Sorry that happened to you.

Bite the bullet & stay 2 years and sell with no cap gains.

make sure to take in consideration your fees when selling - Probably 6-8% after all said and done. 

If you don't have a ton of equity you could just be coming out even.

If you sell now you probably will be in the hole bc of the 6-8% fees for selling 

[V.G Jason]

Diligence is all on you. Avoid HOA properties-- even if you bought it and they did allow renters. It doesn't mean they always will. Plus, you're on the hook for assessments. Not sure many even know of that.

[Palani Willingham]

Quote from @Preston Dean:

Quote from @Palani Willingham:

I recently bought a condo with the intention of converting it into a rental after a year of living in it then buy another primary and repeat the process. I used a real estate agent and told them that was my plan. After moving in, I read an article on my community saying that a man was forced to evict his tenants because no renters were allowed in the community. As you could imagine, I was very upset because this meant that I couldn’t house hack my place and turn it into a rental. I felt like my real estate agent failed me because he overlooked that huge factor about the property.

This leads us to my dilemma. I’ve only lived in the place for 5 months and I don’t know if I should:

1) sell the place after a year and buy another primary

2) stay in the property for 2 years to avoid capital gains tax

Please let me know your thoughts. I’d appreciate any advice.

Thanks!!

 Sorry that happened to you.

Bite the bullet & stay 2 years and sell with no cap gains.

make sure to take in consideration your fees when selling - Probably 6-8% after all said and done. 

If you don't have a ton of equity you could just be coming out even.

If you sell now you probably will be in the hole bc of the 6-8% fees for selling 

Thanks for the advice! Looking to do some small renovations while living here so hopefully that builds some equity

[Benjamin Sulka]

Quote from @Palani Willingham:

Quote from @Benjamin Sulka:

Palani, 

Not much that I can add on the next steps front but I do want to applaud you on something. 

You took action! That is more than a lot of people do. 

Learn from this and let it inform your future strategies and decisions. 

You got this. 

-Ben

 Thank you for the kind words Ben!

 You got it!! Keep it up. 

[Michael Robbins]

I suggest reaching out to the HOA to ask if there is a "wait list" to enter as a rental property. Sometimes the HOA only allows a percentage of the homes to as rentals. The wait list can be a year or so long so its good to sign up as soon as possible. Going forward, you have 5 calendar days from receipt of the HOA documents, to review and cancel.