Is it smart to buy a house hack that we couldn't afford without the rental income?

Question

I looked at a house today that would easily be subdivided into a 2/3 bedroom home and a 1 bedroom apartment. But we could not personally afford the mortgage on this place without a renter. Do I keep investigating or skip it? Is there a general rule about how much of the mortgage you should be able to pay yourself?

Thanks!

Jake Andronico · Answer

@Beth Anderson

Congrats on looking for a house hack!! I've done it twice in Reno, NV and it's changed my life.

I would not advise doing that if you're unable to afford it on your own unless you fully understand the risk.

If stuff hits the fan and you can't afford it, that's when you become a motivated seller.

That being said there is always going to be risk, so if you're able to better understand rental demand, price point, etc., that can be very helpful.

Best of luck to you!

Jerrod Rosen · Answer

Thanks for this Brian, I was just looking at a deal that this would work perfect for and now I'll look into it!

Brian Sardinskas · Answer

@Beth Anderson,

You can use a FHA 203k loan to wrap renovations into the loan. I used this loan to buy my house hack and redo the roof. Also, you only have to put down 3.5% of the purchase price + renovation costs. For example, if the house is $100k and the renovations are $10k, your down payment would be 3.5% of $110k (plus closing fees of course). The FHA 203k loan is a great option!

As far as logistics go, once you go under contract for the house, you will have a contractor estimate the work for you. Then, once you close on the property, the bank pays the contractor half up front and then the other half once the work is done and inspected. If you have any other questions or need clarifications, don’t hesitate to reach out!**Please confirm this information with your lender, I used this loan a couple years ago, I am not sure if things have changed**

Beth Anderson · Answer

Thank you, Anthony! We have decided to keep looking. I'll keep my eye on it though, in case the seller comes down a lot in price. We have a 4 year old daughter, so some of our creative options are limited in order to keep her safe.

Beth Anderson · Answer

Thank you, Noah. What you talked about is certainly my perspective as well. I don't feel very confident in my numbers, but I'm pretty sure it would cash flow after we moved out. Especially if I did it as an STR. But in order for it to work, the seller would need to come down by about 20% of his current asking price. Or more. My realtor is checking with the seller's realtor, but she's not hopeful that he would do that. I can't blame him. He's asking a fair market price.

Bruce Woodruff · Answer

It's a gamble doing this, but a great way to start... but imagine your renter bailing on you after a few months - can you afford to carry the place for a month or two?

I'm a gambler so I would go for it, but what is your risk tolerance? Of course, if you have low risk tolerance then this is the wrong business to be in anyways.... :-)

Wale Lawal · Answer

@Beth Anderson

When considering house hacking a property, it is important to carefully evaluate its financial viability and make sure that you can comfortably manage the mortgage payments without depending solely on rental income. Take into account aspects such as affordability, cash flow, savings, market trends, and long-term goals. Ideally, you should aim to be able to cover 70-80% of the mortgage with your personal income, allowing for a cushion in case of vacancies or unforeseen costs. It is also advisable to set aside reserves to handle mortgage payments and expenses for both units.It's important to think about the demand for units to ensure a steady rental income. You should also consider whether the property has the potential for value appreciation or renovations that could boost your rental earnings. If your current property doesn't meet these criteria, it might be wise to keep looking for one that better suits your financial situation and goals. For personalized advice, don't hesitate to reach out to a financial advisor or a real estate expert.Good luck!

Anthony Swain · Answer

Hey Beth,

Fellow house hacker here. Congrats on making the decision to house hack. It can definitely be an invaluable learning experience and wealth building tool.

I'd say, not being able to afford the mortgage without rent and no reserves is probably a risky proposition. If you ultimately decide to do it, then I'd make sure the property will rented out easily and build reserves quickly after that.

You can also consider even more creative house hacking strategies like others have mentioned i.e. renting out a spare bedroom of your unit.

Keep us posted on how it turns out. Please feel free to reach out. I'd be happy to help :)

Noah Bacon · Answer

I'm sure you and your agent have done your due diligence on the STR regulations in your market, but I would encourage you to analyze the deal as a long term rental and verify the numbers make sense. You never know how fast regulations can change, and if you have multiple exit strategies you mitigate a lot of unexpected risk.

I am excited for you and hope that you are able to get the asking price down to fit your analysis!

Noah Bacon · Answer

I am not a lender, but I would not expect you to qualify for a mortgage on a SFH that you would not be able to afford. Even with future income to offset the mortgage, I would not expect a lender to underwrite a SFH as an income producing property like they would for a multifamily property. I would not advise you to pursue a house hack that you cannot afford without a tenant, due to the nature that it will certainly take time and mistakes for your first rental to stabilize. I wouldn't skip it entirely until you've done all of your due diligence; you can seek additional loan options or even a parter on the deal if the carrying costs are too high. Of course your numbers will need to work if you are going to seek partners!I wouldn't get too hung up on a specific number or rule about how much of the mortgage you are responsible for after your rental income WHILE LIVING IN THE PROPERTY. What I would really concentrate on is analyzing the deal as a traditional long term rental without you living in the property in 1-2 years. A few things to think about:Does it cash flow? If not, how much of a loss are you taking? Will it cash flow in year 2-3, or will I need to sell after I move out?Offsetting any part of your mortgage is going to be a huge benefit while you live in the property, hence why I am less focused on a certain rule or number. You need to make sure the next 25+ after you move out of the property make sense as a rental and where I would shift some of the focus!For reference, I have moved out of 2 house hacks, turned them into LTRs, and one cash flows while the other doesn't just ever so slightly :)

Is it smart to buy a house hack that we couldn't afford without the rental income?

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