Does house hacking in a high(er) cost of living area make sense?

Question

My fiancé and I are moving from a pretty LCOL city in the midwest to a (relatively) HCOL city in Colorado. I've wanted to do a house hack for my first jump into real estate for quite some time now. The multi-family market in the city I'm moving to has been very slim for the past 6-12 months. Finally, an interesting property has popped up but I don't know if it would make sense in the long term.

Some numbers:

(I know I said HCOL and this may not appear to be that, but coming from the midwest, this was a significant jump)

The avg fixer-upper single-family home is going to run us ~325k and with around $40,000 down and a 6.9% interest rate we're looking at something like $2,400 a month PITI

Now the duplex I mentioned would go for about 100k more and with the same down payment and interest rate we'd pay something like $3,200 a month. This is in a good area downtown and I was surprised to see that rents are only about $1,300 a month.

So from a pure monthly payment standpoint: (duplex) 3,200 - 1,300 = 1,900 > 2,400 (single family)

As you can probably see, this property isn't cash-flowing, let alone breaking even. At this interest rate and with current rents it won't cash-flow for many years. That wouldn't be a problem if we were planning on staying for the next 10 years but eventually, my fiancé and I would like to buy our own private house.

One upside is that appreciation is quite strong in the market I'm looking at, however, I don't know if I would want to rely on that. My hope with house hacking was always that I would be able to buy a multi-family property, live in it for a few years, and then move to my own home while hanging on to and renting the multi-family. Would it be stupid to move out of a house hack that's cash-flow negative? Should I pursue other markets or strategies?

Would greatly appreciate any advice as I'm not really sure what to do

Bill Schrimpf · Answer

Worst case scenario, you have your mortgage payment significantly subsidized for a while and sell when your ready.  You will like tax time too.  Depreciation is cool.

Best case scenario, rates drop, property appreciate, you refi.  Rents tend to go up over time too.  I don't know your market, but that's been the headline here in Reno.

Make sure you're working with a realtor that has their own investments in the town you moving to, preferably has their property management license too.

I guess the absolute worst case scenario is you hate being a landlord.  It can be a drag if the property needs lots of work and has a tenant.

Ben Rhodin · Answer

Hey @Caleb Graham! Not sure what exact city here in Colorado you are looking at, but welcome to the neighborhood! You've already got some great advice here. At the end of the day House Hacking isn't necessarily about cash flow. Those days are gone since rates aren't at 3% anymore... and they will never come back. House hacking is about subsidizing your housing payment and eliminating or lowering that monthly burden which is your biggest expense. It also provides you with all the great tax benefits and appreciation. This is where I have a lot of House Hackers go wrong, as they are just focused on the cashflow aspect. Sure, you don't want the property to be negative after you move out, but likely with rent growth, and a possible refi, you should be fine for that. and even if it is slightly negative your appreciation, and loan paydown are probably still outperforming that.

Have you looked into other rental strategies for the property? Would be helpful what city you are looking at, but you could see if STR, MTR, or rent by the room are viable options to increase that rental amount.

Russell Brazil · Answer

Reducing housing costs by househacking always make sense.

Jake Andronico · Answer

@Caleb Graham

Congrats on taking the next step to house hack!! I've done it twice in Reno, NV and it's changed my life.

If you're going in expecting to break even or cash flow, you're likely going to have an extremely difficult time.

Comparing it to what you're currently paying in rent is a much better comparison IMO.

With interest rates this high, really the only logical answer from a numbers perspective is "put more down".

OR, if you're able to assume a low interest rate FHA or VA mortgage (but you need to have the difference in price vs the loan balance), that's an option too.

The more uncomfortable you're willing to be house hacking the better the deal will be.

A 5 bedroom home with 4 roommates can be very powerful. It is temporary, and will not last forever.

But, that may not make sense for you guys. Whatever you decide, I wish you both the best of luck!!

Peter Dorinsky · Answer

Bill has a good take on this^That's the beauty of house-hacking, it's a viable option in any market. But like you said, in a HCOL market it is going to be more of an appreciation/equity play. But I will say that it wouldn't make sense to move out into a SFH if you're going to be cash-flow negative, you don't want to be paying for someone else to live in your property. I don't know which city you're thinking about buying in, but if it is a growing and appreciating market it's worth keeping in mind that home-values/rents will most likely go up over time. I would just caution you both not to make any decisions assuming that home-values/rents/interest-rates will be where you need them to be whenever you're ready to move.

Stephen DeThample · Answer

House hacking always makes sense.  It will reduce your out of pocket expense so you can save more to invest.  It does not need to cash flow to be beneficial.  Even if you are saving part of the expected HCOL, it will help long term.

Conner Olsen · Answer

MTR/STR are great options to increase cash flow. We are doing that with a lot of our clients where the rents are not higher than the mortgage payment.

Ko Kashiwagi · Answer

Hi Caleb,

Is the rent of $1,300 a month per unit or combined? If it's per unit, it would likely make sense even if it's cash flow negative for a period of time. If the rent you will pay (if you don't house-hack) is higher than the negative profit per month, it generally isn't a bad play to house-hack. Home-run house hacks where you can stay cash flow positive while occupying is rather rare nowadays.

Caleb Graham · Answer

I suppose I'm more worried about when we outgrow the multi fam and decide to move. If it's cash-flow negative is it going to be a burden on our finances? Doesn't seem worth it to buy and sell after a few years but I also don't know if it would be worth it to hang on to..

Teri Feeney Styers · Answer

@Caleb Graham I am a broker in Grand Junction who specializes in investment properties. Perhaps you are already working with a Realtor here - if not, reach out. You are on the right track... What I find here is that if you are starting with a fresh mortgage at today's rates it is difficult to cash flow. I am always offering up properties to my investor group that are "almost" multi. I show them how to add some value for higher income, or partition off, or finish, or split off some land, etc. in order to bring in more dollars or reduce debt. It can still be done here.

Does house hacking in a high(er) cost of living area make sense?

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