House Hacking in appreciate area VS Out of State investment for cashflow to pay rent?

[Wei Zhao]

Hi everyone,

I live on the east side of Seattle, where almost no cash flow can be found. I’m currently renting and haven’t bought my first house yet, but I’ve decided to start investing in real estate. I’m in my late 20s and not in a rush to retire, but my goal is to achieve financial independence in the next 10 years through real estate.

I’m considering two options:

Option 1: House Hacking with a Multifamily Property
I probably have to use all my cash for the down payment, and the rent income won't cover the mortgage. Besides my current rent, I still have to pay an additional $1~2000 for the mortgage, etc.

Pros:

• Better financing rates than for investment properties
• can manage it myself to save the PM fee
• having my own place without worrying about rent increases

Cons:

• May only afford a small townhome or apartment, not sure if I still want to live there after 5 year
  

Option 2: Investing in Out-of-State Multifamily Properties
I could use my cash to invest in several multifamily properties out of state and use the cash flow to cover my rent.

Pros:

• Potential to spread risk across multiple properties
  The cashflow can cover my rent, maybe have extra left

Cons:

• Additional costs for property management
• Limited potential for appreciation
• Have no experience in managing OOS property, and I am afraid it will be annoying

I’d love to hear your thoughts or any advice you might have.

Thank you!

[Nicholas L.]

@Wei Zhao

there won't be any 'cash flow' in option 2 for several years.  think about it:

-when you buy a property, you'll have a down payment, closing costs, rent-ready costs, costs to get set up with a PM, a commission to place a tenant... maybe some light repairs after the tenant moves in...

-your first few years after a purchase are typically a stabilization period, and you IN-vesting your money into the property. think about how long it will take to recoup all the costs i just mentioned.

-therefore, there won't be any net 'cash flow to cover rent' for years.

to be clear, i say this not to say "don't invest out of state." investing out of state is fine.  it's just not something that gets you 'cash flow' for, probably, 5-10 years.

on the other hand: house hacking is a great way to get started.  and the point of house hacking is not to 'cover the mortgage,' it's to help defray the cost of the mortgage.  say for example that you could rent for $2500, or you could house hack, and if you house hack, you still owe $2200 net to the mortgage after rent.  house hacking is still better.  why?  several reasons, not the least of which is that you're building equity in a property.

and house hacking doesn't mean you can't invest out of state.  they're not mutually exclusive.

food for thought - hope this helps

[Samuel Diouf]

I love house hacking because you can get into the higher priced areas and leverage your money very effectively. 

When house-hacking with 5% down, returns on cash invested could be huge when you factor in the appreciation gains. You can double your money in one year if your property appreciates only 5%.

If you are considering the OOS route, there are a few markets that have both cash-flow and appreciation you could look into. 

[Wei Zhao]

Quote from @Nicholas L.:

@Wei Zhao

there won't be any 'cash flow' in option 2 for several years.  think about it:

-when you buy a property, you'll have a down payment, closing costs, rent-ready costs, costs to get set up with a PM, a commission to place a tenant... maybe some light repairs after the tenant moves in...

-your first few years after a purchase are typically a stabilization period, and you IN-vesting your money into the property. think about how long it will take to recoup all the costs i just mentioned.

-therefore, there won't be any net 'cash flow to cover rent' for years.

to be clear, i say this not to say "don't invest out of state." investing out of state is fine.  it's just not something that gets you 'cash flow' for, probably, 5-10 years.

on the other hand: house hacking is a great way to get started.  and the point of house hacking is not to 'cover the mortgage,' it's to help defray the cost of the mortgage.  say for example that you could rent for $2500, or you could house hack, and if you house hack, you still owe $2200 net to the mortgage after rent.  house hacking is still better.  why?  several reasons, not the least of which is that you're building equity in a property.

and house hacking doesn't mean you can't invest out of state.  they're not mutually exclusive.

food for thought - hope this helps

 Thanks @Nicholas L. that's pretty helpful! appreciated it!

[Travis Biziorek]

Hey Wei,

If you can house hack, absolutely do it! Not everyone has that flexibility in life, so if you have the opportunity, grab it! I’ve never met anyone who regretted house hacking—it’s a powerful way to get started.

House hacking can help you get better financing terms, live in and manage your property directly, and start building equity right away. It sets a solid foundation for your real estate journey. Sure, the cash flow might be tight, especially in a high-cost area like Seattle, but you’re building stability and experience, which is invaluable when you’re just starting out.

To be transparent, I invest out-of-state and help others do the same, so I’m incentivized to tell you the opposite. But I genuinely believe that if you’re just getting started, house hacking is the better option. It allows you to build a stable, solid base. Once you’ve got that down and want to keep growing, you can start looking at out-of-state investments if they align with your goals.

Best of luck with whichever direction you decide to take!

—Travis

[Wei Zhao]

Thanks for your insight @Travis Biziorek! Pretty helpful!

[Eric DeNardo]

@Wei Zhao,

Consider house hacking with roommates in a SFH if you can. That will give you the most income and when you house hack and it will be cheaper than a multi-family property.

For you're first investment, choose your home market, if you can make it work. You know the good areas and better understand the rental market. Once you get one under your belt, then you can think about out of state investing later and use the equity you built with the high appreciating market you are probably in! Reach out if you have any questions, our team knows several agents who house hack in Seattle. 

[Sarah Rhee]

Quote from @Samuel Diouf:

I love house hacking because you can get into the higher priced areas and leverage your money very effectively. 

When house-hacking with 5% down, returns on cash invested could be huge when you factor in the appreciation gains. You can double your money in one year if your property appreciates only 5%.

If you are considering the OOS route, there are a few markets that have both cash-flow and appreciation you could look into. 

[Sarah Rhee]

Can you tell me where those markets are, that are both going to appreciate and cash flow? 

iM stuck with two homes with significant equity. I don’t know which way to tap into equity and where to invest in .

Quote from @Samuel Diouf:

I love house hacking because you can get into the higher priced areas and leverage your money very effectively. 

When house-hacking with 5% down, returns on cash invested could be huge when you factor in the appreciation gains. You can double your money in one year if your property appreciates only 5%.

If you are considering the OOS route, there are a few markets that have both cash-flow and appreciation you could look into. 

[Jonathan Chan]

Have you looked into lending? Owning property is amazing, don't get me wrong. I'm fortunate enough to have the portfolio I have, but the headaches and R&M associated with owning property are pretty high. If your goal is cash flow, I would look into other ways. Use the purchase of rental property to offset taxes, not for cash flow. Cash flow is used to protect your investment, not live off of.

[Samuel Diouf]

Quote from @Sarah Rhee:

Can you tell me where those markets are, that are both going to appreciate and cash flow? 

iM stuck with two homes with significant equity. I don’t know which way to tap into equity and where to invest in .

Quote from @Samuel Diouf:

I love house hacking because you can get into the higher priced areas and leverage your money very effectively. 

When house-hacking with 5% down, returns on cash invested could be huge when you factor in the appreciation gains. You can double your money in one year if your property appreciates only 5%.

If you are considering the OOS route, there are a few markets that have both cash-flow and appreciation you could look into. 

 I like Columbus, Ohio for the great mix of both.