House Hacking In Expensive Markets

[Mike Levene]

Hi all, I recently started an informal real estate group with some old college friends. They are all looking at strategies to use for their first deal and many of us are leaning towards a house hack to reduce the amount of capital we need upfront. The problem many of us run into is being in New England, many of the markets are high cost, high appreciation markets that we either can't get pre qualified for, or even after moving out will struggle to cash flow.

Another big constraint is that many of us have W-2 jobs in engineering that require some days in the office, and these types of higher paying jobs are primarily in major cities (most of us are in the Boston area).

Lastly, a lot of us have significant others that may be less interested in living somewhere "random" because it makes sense as an investment. If they were married, I'd think it would be more of a conversation about their future, but I can understand that if you are only with someone for 1-2 years they might not be willing to pack everything up and follow you on your real estate journey right away.

Any thoughts or ideas to help us sort through the weeds on how to go about finding a house hack with these constraints? Are there any markets outside Boston that any of you have had success with a house hack or tips to succeed in this type of market? I'm sure something similar applies to those who live in high cost cities like NYC, San Francisco, San Diego, Seattle, etc.

[Scott Trench]

I think that you have to take what the market gives you when it comes to house-hacking. 

The problem is: 

A traditionally financed low-down payment house-hack with traditional long-term rents simply won't cash flow during occupancy, or after, in many MCOL-HCOL markets in the US. 

95% leverage at even 5.7% just won't work in a lot of cases right now. Hard to produce cash flow or break even with that much debt, at that rate.

House-hackers, however enjoy certain one time (non-scalable) advantages that should be taken advantage of in the early days: 

- They can assume pre-existing debt like VA and FHA Loans (rather than take it on Subject-To which is dramatically riskier).

- They can rent by the room and self-manage to produce day 1 cash flow.

- Many of these HCOL areas also have strict limitations on AirBnB or short-term rentals... that do not apply to owner-occupants - thus allowing for extreme cashflow potential for house-hackers. If no one but owner-occupants can STR... then that should mean opportunity for owner-occupants who STR their primary residences in many jurisdictions.

- Large remodels or construction projects (Live in Flip) can be self-managed, worked on directly, and the value add, after 2 years, is largely tax free up to certain limits. 

- Many areas around the country allow for ADU Construction - house-hackers enjoy similar benefits to remodeling projects by being naturally on-site for ADU construction.

Putting it all together: 

If I were starting over and looking for a house-hack in Denver, CO today, I'd be looking for a 4 bed / 3 bath property in the $500K - $600K range in an up and coming area (like Aurora near the medical campus). I'd be looking for a property with an assumable mortgage on AssumableLoanFinder.com (Screenshot below of live deals available today for a house-hacker). I'd underwrite the property, with that low interest rate assumable mortgage, to cash flow positively from day 1 as a long-term rental, but be willing and able to use the rent by the room strategy or to rent out part of the property as a Short Term Rental to dramatically increase cash flow during my occupancy. 

The ideal property would meet the above criteria, AND would have a large yard, or ideally, a detached garage that was a suitable candidate for an ADU construction project (CO now allows ADU construction on most properties), and/or a primary structure that had lots of value-add potential.

This might give a one-time (non-scalable) boost to cash flow, offer multiple value-add options, and allow the house-hacker peace of mind, via the assumed mortgage, in long-term breakeven or positive cash flow in the event that the value-add plans end up not being executed, and/or the person has to move out, and rent by the room or STR become unavailable for some reason at a future date.

[Daniel McDonald]

@Mike Levene I am a 2x house hacker in Beverly, MA, just north of Boston, and yes, the cost is brutal, but the appreciation is worth it. Cash flow is a myth. You're investing in RE for long-term wealth, not a few hundred a month that can be wiped out with one CapEx item. Boston in particular is a strong market with great appreciation, a great tenant pool, and rents being as insane as they are it's nearly impossible not to pay less when you house hack vs. rent. It's a challenging market but I say if you can pay less then you currently are renting then it's a win. That alone can free up so many avenues for you.

[Mike Levene]

Thanks @Scott Trench this makes a lot of sense. We have talked about things such as rent by the room and acknowledge that the operating model will likely be very different while living in the property vs. when we move out.

I think the point you made about assumable loans is very helpful to get into a property you might not otherwise be able to afford. Of course "hoping" rates will come down is not a sound strategy so finding a way to assume a loan that already took advantage of low rates is a great option.

If you were starting over and targeted a large SFH, would you try to maintain the property in a way that would still attract regular homebuyers (not investors) if you needed to sell? I suspect maximizing the investment might make it slightly less desirable as a owner or at least the renovations might have lower ROI if sold to a homeowner. For example, an ADU is nice for a rental, but not every home buyer wants to pay a premium for an ADU on their property.

[Mike Levene]

Quote from @Daniel McDonald:

@Mike Levene I am a 2x house hacker in Beverly, MA, just north of Boston, and yes, the cost is brutal, but the appreciation is worth it. Cash flow is a myth. You're investing in RE for long-term wealth, not a few hundred a month that can be wiped out with one CapEx item. Boston in particular is a strong market with great appreciation, a great tenant pool, and rents being as insane as they are it's nearly impossible not to pay less when you house hack vs. rent. It's a challenging market but I say if you can pay less then you currently are renting then it's a win. That alone can free up so many avenues for you.

 Thanks for the local input, this aligns with what we are seeing. I agree, its easy to say oh I want cash flow, but ultimately, most of the gains are made with appreciation and principal paydown over long periods of time. 

We certainly have found some deals that would reduce our living expenses compared to renting. In the short term this is great, but after moving out of the property, these units would be ~ -$500/month in cash flow. I'm all for an appreciation play, but this seems like the reality of the current rates and the market in this area.

Just curious, how did you find your househacks?

[Daniel McDonald]

Quote from @Mike Levene:

Quote from @Daniel McDonald:

@Mike Levene I am a 2x house hacker in Beverly, MA, just north of Boston, and yes, the cost is brutal, but the appreciation is worth it. Cash flow is a myth. You're investing in RE for long-term wealth, not a few hundred a month that can be wiped out with one CapEx item. Boston in particular is a strong market with great appreciation, a great tenant pool, and rents being as insane as they are it's nearly impossible not to pay less when you house hack vs. rent. It's a challenging market but I say if you can pay less then you currently are renting then it's a win. That alone can free up so many avenues for you.

 Thanks for the local input, this aligns with what we are seeing. I agree, its easy to say oh I want cash flow, but ultimately, most of the gains are made with appreciation and principal paydown over long periods of time. 

We certainly have found some deals that would reduce our living expenses compared to renting. In the short term this is great, but after moving out of the property, these units would be ~ -$500/month in cash flow. I'm all for an appreciation play, but this seems like the reality of the current rates and the market in this area.

Just curious, how did you find your househacks?

 Yes, I definitely see a lot of situations that break even or go negative. I wouldn't go negative unless i was so confident I could take on that amount like maybe 50-100$ a month. Because if you think about it if it appreciates 400k over 15 years that's a long way off of eating 9k in cash flow. And that's a very simple example but you get the point. 

I didn't do anything crazy. I worked with a solid agent who understood house hacking in general. He did it himself in Quincy. Both mine were off the MLS. The biggest key was understanding that It was more important to get on base then it is to hit a home run. Especially for the first one.

[Scott Trench]

Quote from @Mike Levene:

Thanks @Scott Trench this makes a lot of sense. We have talked about things such as rent by the room and acknowledge that the operating model will likely be very different while living in the property vs. when we move out.

I think the point you made about assumable loans is very helpful to get into a property you might not otherwise be able to afford. Of course "hoping" rates will come down is not a sound strategy so finding a way to assume a loan that already took advantage of low rates is a great option.

If you were starting over and targeted a large SFH, would you try to maintain the property in a way that would still attract regular homebuyers (not investors) if you needed to sell? I suspect maximizing the investment might make it slightly less desirable as an owner or at least the renovations might have lower ROI if sold to a homeowner. For example, an ADU is nice for a rental, but not every home buyer wants to pay a premium for an ADU on their property.

This would be case by case and property dependent. I think the ultimate situation for what I described above (not the plan, but a possible outcome) could look like this:

Rent main house by the rooms while constructing ADU. When ADU is complete, rent it or move in and remodel main house.

After a few years, I think it is highly likely (again wouldn’t count on it, but would leave the possibility open) that CO allows and encourages those who build ADUs to subdivide their properties so that more people can own their homes.

sell the ADU and main house separately, benefit from enormous upside. Until that happens, enjoy major cash flow.

[Mike Levene]

Quote from @Daniel McDonald:

Quote from @Mike Levene:

Quote from @Daniel McDonald:

@Mike Levene I am a 2x house hacker in Beverly, MA, just north of Boston, and yes, the cost is brutal, but the appreciation is worth it. Cash flow is a myth. You're investing in RE for long-term wealth, not a few hundred a month that can be wiped out with one CapEx item. Boston in particular is a strong market with great appreciation, a great tenant pool, and rents being as insane as they are it's nearly impossible not to pay less when you house hack vs. rent. It's a challenging market but I say if you can pay less then you currently are renting then it's a win. That alone can free up so many avenues for you.

 Thanks for the local input, this aligns with what we are seeing. I agree, its easy to say oh I want cash flow, but ultimately, most of the gains are made with appreciation and principal paydown over long periods of time. 

We certainly have found some deals that would reduce our living expenses compared to renting. In the short term this is great, but after moving out of the property, these units would be ~ -$500/month in cash flow. I'm all for an appreciation play, but this seems like the reality of the current rates and the market in this area.

Just curious, how did you find your househacks?

 Yes, I definitely see a lot of situations that break even or go negative. I wouldn't go negative unless i was so confident I could take on that amount like maybe 50-100$ a month. Because if you think about it if it appreciates 400k over 15 years that's a long way off of eating 9k in cash flow. And that's a very simple example but you get the point. 

I didn't do anything crazy. I worked with a solid agent who understood house hacking in general. He did it himself in Quincy. Both mine were off the MLS. The biggest key was understanding that It was more important to get on base then it is to hit a home run. Especially for the first one.

 Couldn't agree more, our focus is to get our first hit to get the experience and learn from doing and then start saving up for the next one. Thanks for the insights.

[V.G Jason]

Quote from @Mike Levene:

Hi all, I recently started an informal real estate group with some old college friends. They are all looking at strategies to use for their first deal and many of us are leaning towards a house hack to reduce the amount of capital we need upfront. The problem many of us run into is being in New England, many of the markets are high cost, high appreciation markets that we either can't get pre qualified for, or even after moving out will struggle to cash flow.

Another big constraint is that many of us have W-2 jobs in engineering that require some days in the office, and these types of higher paying jobs are primarily in major cities (most of us are in the Boston area).

Lastly, a lot of us have significant others that may be less interested in living somewhere "random" because it makes sense as an investment. If they were married, I'd think it would be more of a conversation about their future, but I can understand that if you are only with someone for 1-2 years they might not be willing to pack everything up and follow you on your real estate journey right away.

Any thoughts or ideas to help us sort through the weeds on how to go about finding a house hack with these constraints? Are there any markets outside Boston that any of you have had success with a house hack or tips to succeed in this type of market? I'm sure something similar applies to those who live in high cost cities like NYC, San Francisco, San Diego, Seattle, etc.

 You're heading the right direction. I would add to definitely look at buying distressed and seeing if you can fix it up. That market is primo, and you will regret not getting into it as pragmatically as you can. Other comments on this thread are great, as someone who can speak from experience(even in this local) don't let a girlfriend dictate how you invest, ever. Stand on who you are, and this direction is excellent. We need to encourage more of this behavior(sensible investing)

[Daisy Hawkins]

Have you considered purchasing a property that has an assumable loan? this could very well be another option to save money in interest etc. 

[Basit Siddiqi]

The great thing about living in a high cost of living area is that your salary / wages are hopefully also very high.

If you are a new college grad, I would focus the next 1-3 years on increasing your salary as much as possible(gain new skills, new certifications, change employers, etc).

Once you make more money, you can easily get in a position to buy a property on a more frequent basis.

Best of luck!

[Benjamin Carver]

I always planned on a duplex house hack $250k range and it would cover my mortgage. How the times changed. And on top of prices doubling and rates doubling I left Texas for the less affordable North Carolina (Raleigh area). Couldn't find a duplex that made sense and the ones that did were still half a mil and scooped up *like that*. So instead of living in regret of not buying sooner or waiting for things to magically be better, I figured out how to make it work still. Turned a single family house that was poorly marketed but in a great area of my city, listed mid-winter where there's less competition, into a duplex for all intensive purposes and used airbnb to rent out rooms. Covers most of the mortgage and will cashflow once we move out. 

It took patience, being willing to rehab a house, and airbnb but we have our our own space and are doing great with only 2 bedrooms to rent out too. Ready for the next one!

Best part is 1-2 years a refinance will make our numbers look even better and we are seeing our home increase in value because of both the forced appreciation via rehab and being in a growing market.

If not married, I would have chose area first based on rentability. Probably go for a 3 bedroom with an office or dining I could convert into a 4th bedroom and shared common areas, would have covered everything with airbnb and still covered most with long term. House hacking still definitely works, just got to get a little more creative, maybe be willing to do some work (go find the worst house in the best neighborhood kind of thing).

[Koren Lavi]

@Daniel McDonald is right IMHO. Cash flow is just the cherry on top of the sundae. Appreciation is what builds wealth. 

The market you’re looking into might be high cost and hard to break into, but unfortunately that is not going to get any easier over time.  

[Ed Laders Jr.]

When I got started with real estate 9 years ago, I was living and working in and around Boston. I was trying to get started, had all the information but needed to pull the trigger to get in the game. I got my first FHA 3.5% down 4-unit building in Tilton, NH (An hour and a half north of Boston). I had to go that far away due to the insane cost of real estate in Boston, so I fully understand the predicament. I had to live in the property due to the FHA occupancy rules, so I had about an hour and 15 minute commute to work every day.

I settled on Tilton (small town in central NH) because the property was right and it cash flowed very well, and was quite cheap (at the time... 240k), I could get the loan to get into the building and own 4 units. There was also a loan grant available from the state of NH for first time home buyers for 3% down payment assistance. That left me with a 0.5% down payment. By the time I got to the closing table, instead of me bringing a check, they gave me a check.

Fast forward to today, it has more than doubled from appreciation and cash flows a ton, and I was able to get a great property manager in there to handle EVERYTHING. All of this from an investment of next to nothing.

Take what you will from this post, if anything. What I'm trying to say is that going up to 1.5-2 hours outside of even the biggest cities, there are pockets of affordable towns/cities with at least positive cash flow (although its never been harder to find than right now, I've been waiting for 3 years for the market to make sense before buying again). Also, making some sacrifices can more than make up for lack of capital or experience when getting started. Living in bumfck NH started a chain reaction that enabled me to retire modestly at 28, just 3 years later. Never making a large salary.

Like you said, its incredibly important to make these big sacrifices before having a serious relationship and/or marriage and kids, because most times the significant other won't be on board to live so far away from everything. It wasn't fun living an hour and a half from work and play, but absolutely worth it.

If one is starting with relatively low living expenses, cash flow can be extremely powerful towards reaching financial freedom. If one has high living expenses, cash flow doesn't mean much and I definitely understand going for appreciation first.

[Mike Levene]

Quote from @Ed Laders Jr.:

When I got started with real estate 9 years ago, I was living and working in and around Boston. I was trying to get started, had all the information but needed to pull the trigger to get in the game. I got my first FHA 3.5% down 4-unit building in Tilton, NH (An hour and a half north of Boston). I had to go that far away due to the insane cost of real estate in Boston, so I fully understand the predicament. I had to live in the property due to the FHA occupancy rules, so I had about an hour and 15 minute commute to work every day.

I settled on Tilton (small town in central NH) because the property was right and it cash flowed very well, and was quite cheap (at the time... 240k), I could get the loan to get into the building and own 4 units. There was also a loan grant available from the state of NH for first time home buyers for 3% down payment assistance. That left me with a 0.5% down payment. By the time I got to the closing table, instead of me bringing a check, they gave me a check.

Fast forward to today, it has more than doubled from appreciation and cash flows a ton, and I was able to get a great property manager in there to handle EVERYTHING. All of this from an investment of next to nothing.

Take what you will from this post, if anything. What I'm trying to say is that going up to 1.5-2 hours outside of even the biggest cities, there are pockets of affordable towns/cities with at least positive cash flow (although its never been harder to find than right now, I've been waiting for 3 years for the market to make sense before buying again). Also, making some sacrifices can more than make up for lack of capital or experience when getting started. Living in bumfck NH started a chain reaction that enabled me to retire modestly at 28, just 3 years later. Never making a large salary.

Like you said, its incredibly important to make these big sacrifices before having a serious relationship and/or marriage and kids, because most times the significant other won't be on board to live so far away from everything. It wasn't fun living an hour and a half from work and play, but absolutely worth it.

If one is starting with relatively low living expenses, cash flow can be extremely powerful towards reaching financial freedom. If one has high living expenses, cash flow doesn't mean much and I definitely understand going for appreciation first.

 This is the reality, and a much needed perspective. I'm glad to hear your first property worked out and turned out to be such a success. I think this is the reality for those who are not willing to completely relocate. Sacrifice something such as a longer commute for the opportunity to dramatically change the future. For example, in your case, 3 years later you didn't need to worry about that commute anymore.

[Joe Rodriguez]

@Mike Levene First note, I agree with others saying cash flow is a bonus, though it depends on what stage of investing you're in. I first house hacked in Malden when I bought a 2 family. This was 2015 so although it didn't cash flow, the other unit offset my mortgage by quite a bit. I quickly figured out duplexes aren't the greatest for cash flow so I sold it a few years later and started investing in RI. I grew up in RI and my dad is a carpenter in the area (was as my parents recently moved to FL) but that got me into that market with some local presence as I stayed in the Boston area. (4) properties and 14 units later, I still find myself investing in RI as the price point is about half of Boston but the cash flow is similar. I'm a construction management consultant (so similar to engineering) and investor/agent in the Boston area so I get the need to want/need to stay local. I would say target a 4 unit property as that will give you the best opportunity for cash flow (or close to it) and that's the highest unit count you can go with for an owner occupied loan. Fortunately, with Fannie Mae, it doesn't need to abide by the 75% rule that FHA has. Hope that helps!

[Drew Sygit]

@Mike Levene do any of you own your homes currently?

If not, how much are you all "throwing away" on rent when those funds could be applied to ownership?

Too many new investors think that real estate is all about the cashflow.

It's NOT! 

It's a balance of cashflow and wealth accumulation.

One of the goals is to have tenants pay as much of your cost-of-ownership as possible (loans, taxes, insurance, etc.)

In high-cost areas, any Class A or B property you buy will usually negative cashflow for the first 3-5 years, until rents rise enough to cover the negative cashflow + rising taxes & insurance.

Investing OOS increases your risks because you may not know the market and you can't check on everything/everyone all the time.

If you move forward with your buddies, HIGHLY recommend creating a solid Partnership Agreement!

[Cody Anderson]

Love the way you and your friends are thinking about this, Mike. Kudos to you all for taking the time to address the main considerations (timelines, finances, relationships/family planning, etc) before getting too far down the path. 

The model you should go with will ultimately depend on what the group is optimizing for (cashflow, appreciation, tax optimizations, diversification, and maybe even a little bit of social value doing something fun, potentially lucrative, and unique w friends).  

If the trust is there, and you are optimizing for costs and tax benefits, I think the move would be to go with a tenants in common ownership model. Again, depends on how you're planning to use the property (exclusively investment, blended occupancy/rental, or full-time occupancy) - if investment only an LLC would be the move.

All of these factors/considerations impact each other to some extent and its impossible to know whats possible until everyone in the group is clear on what they need/want this to look like.

Either it sounds like you're on the right path with the line of questioning. 

Happy to be a resource to you and your crew at any point