House Hacking a Single Family within Year 1 of Mortgage.

[Peter McCauley]

I’m currently looking at purchasing a 3 bedroom / 2 bathroom Single Family as a first time home buyer. I want to live in one bedroom and fill the other two bedrooms with “Tenants” / old college friends that have agreed to pay rent if I purchased the house.

I’m very green and brand new to real estate investing so I wanted to make sure this was something actually feasible. I will be taking out a mortgage, but I won’t be putting 20% down and declaring it an income property, however, it will still be my primary residence. Do you still need to put 20% down on a house hack and let the lender know?

Also in terms of collecting rent, would I need a lease agreement, and account for this during tax season. Would anything happen if I just collected the money to pay the mortgage with no real book keeping? I just don’t want to commit either lender or tax fraud in the process. 

  Also for clarification, I plan on purchasing a Single family home in the next 6 months, live there for at least a year, then move out and turn it into a rental. However, if my old college friends want to live with me and help with the mortgage I thought it to be a great house hacking scenario.

Thank you for any and all advice.

Pete

[Patrick Roberts]

This is perfectly fine. As long as you intend to live in the property as your primary residence, then a primary residence mortgage is appropriate. You wont be able to use the potential boarder income to qualify unless part of the property is an ADU, so you'll need to be able to qualify on your own income.

As far as the reporting goes, the rental income and losses will most likely be reported on your Schedule E - speak with a tax professional who has expertise in real estate. I recommend putting a lease in place - if things go sideways, you'll have to get an eviction for the boarder(s) regardless of whether or they've signed a lease. 

For your rinse and repeat househack plans, discuss this with a knowledgeable lender. Each loan product type has different rules and restrictions for using rental income to qualify for new purchase, and some can wreck your plans (such as the FHA 100-mile rule).

[Peter McCauley]

Patrick,

Thank you for the advice and feedback. I will be sure to put a lease in place and contact a tax professional who has expertise in real estate. In terms of the loan(s), I currently have a steady and competitive W2 job and very low DTI, however I'll ensure to verify the rules and regulations for rental income when shopping lenders, so I don't hit a roadblock when buying the next rental.
Again, thank you for your response. 

[Patrick Roberts]

Quote from @Peter McCauley:

Patrick,

Thank you for the advice and feedback. I will be sure to put a lease in place and contact a tax professional who has expertise in real estate. In terms of the loan(s), I currently have a steady and competitive W2 job and very low DTI, however I'll ensure to verify the rules and regulations for rental income when shopping lenders, so I don't hit a roadblock when buying the next rental.
Again, thank you for your response. 

 No problem. Sounds like you're in good shape. Give me a call if you want me to take a look at this. 

[Bill Hampton]

@Peter McCauley

You will have to record and divide your expenses using rental square feet vs. personal square feet or rental bedrooms vs. personal bedrooms.

You will also have to factor in rental days vs. personal use days.

This is very complicated. You shouldn't try to do this on your own.

I recommend finding an accountant who specializes in real estate taxation and tax planning.

You may want to consider working with your accountant remotely to expand your options.

I would also recommend looking for a accountant willing to work with you throughout the year. You want an accountant who can help you strategize and who is responsive when you want to know the consequences of the financial decisions you are making throughout the year.

There are over 20 real estate accountants on this site. Reach out to a few and see who you like.

You can also ask members of your local real estate investors association for real estate accountant recommendations.

Good luck.

[Peter McCauley]

Quote from @Bill Hampton:

@Peter McCauley

You will have to record and divide your expenses using rental square feet vs. personal square feet or rental bedrooms vs. personal bedrooms.

You will also have to factor in rental days vs. personal use days.

This is very complicated. You shouldn't try to do this on your own.

I recommend finding an accountant who specializes in real estate taxation and tax planning.

You may want to consider working with your accountant remotely to expand your options.

I would also recommend looking for a accountant willing to work with you throughout the year. You want an accountant who can help you strategize and who is responsive when you want to know the consequences of the financial decisions you are making throughout the year.

There are over 20 real estate accountants on this site. Reach out to a few and see who you like.

You can also ask members of your local real estate investors association for real estate accountant recommendations.

Good luck.

Bill thank you for the advice from the tax aspect. 

Something that I haven’t considered is that my profession as a merchant marine leads me to a schedule of 3 weeks onboard, 3 weeks off of my ship. Meaning I’m only actually living in the home for a total 6 months out of the year.

Is that something that would dictate personal use days vs rental days?

If the renters living in the home with me sign a year lease, would I have any personal days for that year?

Thanks again for your response.

Peter

[Masyn Grant Barney]

This is the best way to house hack as a single person IMO. Here in Utah, I often recommend to my single friends buying a new townhome (we have some awesome new build incentives) and renting by the room. 

For young working professionals, they like the new townhome vibe. The HOA bill comes with advantages for this population because it also usually comes with some amenities like a pool, hot tub, gym, etc. Not to mention that (at least here in UT) you can get more in rent when renting by the room than as a single lease most of the time if you have 3-4 bedrooms.

But if your preference is a single family home, I still think it works great! Seems like you are off to a great start. If the numbers work and your life situation allows, rinsing and repeating every year is a great strategy with this type of house hacking. 

[Ashish Acharya]

House hacking a single-family home with roommates is a great way to cover your mortgage while living in the property. Since it's your primary residence, you don’t need to put 20% down—many first-time homebuyer programs allow much lower down payments.

It's smart to have a formal lease agreement with your friends to keep everything clear and professional. You'll need to report the rental income at tax time, but you can also deduct related expenses, so keep good records. If everything is done correctly, you will have no taxable income.

After living there for a year, you can convert the home into a full rental property without problems. I suggest living for two years to avoid capital gains if you sell within two years of moving out.

Just make sure you’re honest with your lender and the IRS to avoid legal issues. Your plan is a solid start in real estate investing.

[Wale Lawal]

@Peter McCauley

Buying a single-family home as your primary residence might save you up to 3-5% on conventional loans. However, you must declare it as your principal residence, live there for at least a year, and disclose rental income on your tax return. To avoid tax fraud, keep accurate records of your rent and spending. After you move out, the property becomes an investment property that must meet the legal and tax requirements for owner-occupancy.

Good luck!

[Jill Weatherford]

@Peter McCauley Let me know if you need help finding that property! Would be happy to help make sure you are buying in an area where the overhead expenses wouldn't hurt after converting to an investment!