House Hacking: Single Family vs Multi Unit - Which is better?

Question

Hello everyone,

My wife and I are new to investing, and we are considering house hacking. We have been looking at 3 and 4 units in Baltimore and DC. However, I have been thinking that it might be better to buy a home and convert the basement into a rental unit with a separate entrance, a washer/dryer, and a kitchen.

My reasons for considering this approach are as follows:

1. It is a safer way to get started and mitigate risk.  If we can't find a tenant, we will still be able to pay the mortgage. We won't be in trouble if we have no tenant or if someone stops paying.

2. If we buy a property in an A or B neighborhood, we can still gain equity. (However, from my research, Baltimore City's equity is not that strong, so it looks like more of a cashflow opportunity, but even that can be dicey in the city. From what I am hearing here on BP Baltimore can be very tricky. DC seems to offer good equity, but all the places we can afford (3-4 units) are in THE HOOD. Most of them need work, and many are going for north of $750k-$800k and up. Also, in those zip codes, even Section 8, doesn't seem to pay that well. I am thinking a good idea might be to buy in the suburbs near DC (maybe in Montgomery, Howard, or Prince George's County.)

3. I am also thinking about maintenance. If something goes wrong in a single-family property, it is easier to fix, than a 3 or 4 unit.  I even thought about buying a new build because of all the incentives builders offer and converting the basement into a rental unit. I understand that new builds don't typically have equity, but if they are in appreciating areas, that will change. Plus, the fact that everything is new and a lot of the big-ticket items are under warranty may mitigate significant expenses for costly repairs. Not to mention, new builds may be more attractive to renters.

Final thoughts: I don't mind the temporary discomfort of house hacking (though I very much would like to have my own space; my wife and I have never lived in a single-family by ourselves since we have been married.), but I do not want to live in a neighborhood that is not safe. That is priority number one for me.

Details: We have about $120k in savings, no debt, and our average credit score is 760. Can anyone share their insights or thoughts on this?

Thanks, -Al

Scott Reigns · Answer

interesting thread, I had the same question, I want to househack as well, especially with all the options that are out there with financing

Jack Seiden · Answer

I just want to point out there are obvious chat gpt responses in this thread, while I’m not gonna call anyone out by name, do better, this point of this message board is to help educate the average investor and yes I know it’s a good lead gen tool, that’s half the reason I use it so much, but you owe to the community to at least try to add some value, if you can’t or don’t feel like doing that, you really should consider if this is the right community for you.

Jack Seiden · Answer

Totally agree with everything here, buy the better asset, if that’s Baltimore buy in canton if that’s the dc area any suburb will do and if it’s D.C. proper generally west of the park plus admo plus Riggs park/Michigan park area. Honestly no investment is worth feeling unsafe and tbh it’s not even clear to me multi family in the city is a better investment, cities were booming much of the last decade so pretty much anything you bought in D.C. regardless of location made you tons of money but with the city struggling and losing population you really want to be in the area’s that are still desirable/growing, most areas where the multi family is in both Baltimore and dc are not those areas.

Joseph Ayoub · Answer

Hey, Al! Contgrats on making this decision and welcome to the investing world! In addition to the great points offered by everyone so far, one other thing to ask yourself is how long will you plan to live there and what your your exit strategy will be? IMO, if you're planning to live there 5-7 years, it would make more sense to live in a better area. If your exit strategy is to sell, think of who your target buyer may be - for example, a family with school aged kids might be more inclined to live in the suburbs in a SFH, versus selling a MFH to an investor who would look more at how the property performs. If your exit strategy is to hold the property and rent it, think of the target tenant you'll attract and if it is one you wan to deal with.

One thing to note with ADUs and basement conversions for single family homes is that if you move out, you can only rent the house as a single family home in some of the suburban areas of the DMV. Learning that from personal experience having gone through a similar journey.

Cassidy Burns · Answer

Depends on the market, but I think the best investment is the one that you can afford! If you can't afford multifamily, go single family with in-law suite.

I truly believe that the Duplex in Washington DC is going to be one of the most valuable assets in the DMV in 5-10 years.

Benjamin Sulka · Answer

Al,

You got some fantastic responses above.

Especially since you're living in the property, your wife's comfortability is the #1 priority.

Based on what I've learned, in most cases it seems to make more sense to buy multifamily. Obviously this is subject to change based on the micro market that you live in which I have no education on whatsoever. Like Vitality said, doing a renovation can involve set backs where with multifamily the units are already built.

If you're house hacking, you can take out a 5% down conventional Fannie Mae loan. I have no idea how properties are priced in your area, but 5% down on a $500,000 multifamily is $25k. After considering closing costs (let's use 5% of your loan amount as an example) and initial repairs, you'd probably have $60k of total out of pocket costs.

That would leave you with $60k in reserves.

All the best to you!

Vitaliy Volpov · Answer

Hey @Al Seward,

My personal preference has always been for multi-family rather than single family house hacks. The exception to that for me would be a single family with a mother-in-law suite with its own entrance or an ADU at the property. A basement conversion into an apartment could work as well. But, as some others have said, a basement conversion comes with numerous challenges and obstacles (permit issue, zoning & planning approval, significant amount and cost of construction, lack of natural light).  My business partner and I have renovated numerous properties using the BRRRR strategy and one thing I can tell you with 100% certainty is that no construction project ever comes under the initial budget.  There are always unexpected issues that come up.  As a new investor, I think it's much more risky for you to buy a property which is going to need a major remodel like adding an entire unit to the existing footprint rather than just buying a property that already has multiple units there.

I don't know if you have construction experience.  If you do, maybe you could aleviate some of those concerns.  But, it's still going to involve a ton of your own time, energy, and labor.  In my opinion, it is just not the most efficient way to allocate your resources.  As others have said, definitely don't buy in a bad area or sacrifice safety just to get into a multi-family house hack.  But, at the same time, there have to be areas near you which are not dangerous and which still do have 2, 3, and 4-unit properties.

My first rental property was a duplex in a good area and a good school district.  It cost me more than other two family properties I considered in less desireable areas.  But, it was 100% the right decision looking back on it.  I was always able to find great tenants, never had any headaches with management, and the property appreciated much better compared with the other duplexes I considered.  I moved out of the unit I was occupying after about 4 years and rented it to a tenant.  I've been running it as a non-owner occupied rental for 8 years now.  Cash flow is not amazing, but I still have no headaches with this property and I don't have any plans to sell it any time soon.

Hopefully, this helps you in your decision-making.  Obviously, at the end of the day, you need to do what is right for you.  Good luck!

Vitaliy

Russell Brazil · Answer

I generally say multifamily is better, but it is highly dependent on the market.

Dustin Woodley · Answer

Hi Al,

It's great to hear about your venture into real estate investing and house hacking. Given your situation, it's worth considering the opportunities available in Alabama, especially if you're looking for more value for your investment dollars.

In Alabama, your budget of $120k could go much further compared to the Baltimore and DC areas. The real estate market here offers a wide range of properties, including the possibility to build a multi-family unit from the ground up. Moreover, Alabama is known for being more landlord-friendly, offering a supportive environment for property investors.

You mentioned the importance of safety and the desire for a comfortable living space. Alabama offers diverse neighborhoods that cater to these needs, ensuring a safe and pleasant environment for both living and renting out. Additionally, the cost of living is generally lower here, which can be a significant advantage.

Given your interest in house hacking, you might find Alabama's market particularly appealing for either purchasing existing properties or building new ones. The lower cost of construction and property prices can provide a good balance between your budget and your goals, allowing you to maximize your investment while achieving the lifestyle you desire.

Overall, Alabama presents a compelling option for your real estate journey, especially with its pro-landlord stance and affordable market. It's worth exploring what this region has to offer, especially when considering the long-term growth and sustainability of your investment.

Best of luck with your decision!

Dustin Woodley

Camelot Properties

Real Estate Broker and Licensed Residential Home Builder, Alabama

Tim Jacob · Answer

I think a from an equity standpoint the DC area is better in general.  There is usually 1 or 2 duplexes in Baltimore available in decent areas.  There might be 1 somewhere in between in Annapolis or Frederick but most likely Baltimore city.  A 3 or 4 unit is less likely.  This is especially true turnkey.  Going to DC renting the basement sounds great a few things though.  The main thing is understanding construction costs on a basement conversion like you are talking.  Though DC suburbs or proper have a higher percentage of areas that are nice not everywhere is.  Thus is especially true in PG County but can still extend into a few parts of the city or the other parts of the DMV.   There is going to be a premium for light and a lot of basements dont have it.  You can put in an egress window but thats going to cost you atleast 6 or 7k. I would not recommend that as a job to diy other than digging things up and maybe the drainage andvl retaining wall.  You dont want the house to fall down.  You would need the right style house where both units have acceptable interior egress without getting into each others hair or you are really talking about a roommate in which case you will need to drop rent and might not like the lack of privacy for you and your wife.  Creating a brand new kitchen, brand new washer/dryer or relocating one, bedroom space, walling off things, altering stairs, etc costs money.  A good thing is there is a lot more inventory to pick from but to find something that checks enough boxes I think you are still spending a bunch of money to convert a single family.  This doesn't include an adu conversion which can only be done on single family detached vs a townhouse which doesnt have acceptable parking unless you can get some sort of variance which I really wouldn't just hope for before buying.  Most affordable places will either be townhouses or not have an acceptable amount of space for that.

House Hacking: Single Family vs Multi Unit - Which is better?

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