If you are getting started in house hacking or you are planning to do more this is for you.
After house hacking 4 properties and selling hundreds by now to my clients, I see a lot of people not understanding how to improve their chances of making the most out of the purchase, increasing value and buying a great property right off the bat and the most I've learned from my own mistakes of course.
Here are some of the mistakes, and how can be fixed:
1. Buying only 2 units instead of 3-4 units buildings when you are already approved for more than 2 units. Why is it a mistake? The cash flow will barely be there and it will be extremely difficult to live for free in a unit and have only one rent to pay for the mortgage payment and all the expenses. Every time rents go up the owners are increasing only 2 rents instead of 3 or 4 rents. Another plus, is that when there is a vacancy, chances are that in a larger building the rest of the rents are covering all the expenses and the owners are missing only the profit versus covering the mortgage while one out of two units are rented.
2. Buying the lowest price property they could find because they feel safer to have a low purchase price. I can see how buyers can misinterpret the lower mortgage payment as "safe". What they don't understand is the higher the price, the better the neighborhood, the higher the tenant's income, the higher chances to get the rent paid and the property better maintained. Also, very importantly, the higher the price, the more principal the tenants are paying off and the more appreciation the owner gets. And not lastly, if the buyer was low in savings and was buying property with a low nonpayment loan, he can use the leverage as 3.5% of 100K is only $3500. So a property that' 300K more expensive will demand only $10,500 more in nonpayment. For someone that has a lower income or has a hard time saving cash, just using leverage to buy a more expensive property can be the ticket to financial freedom and a big change in their income in the future if they hold onto the property for a long time and get it paid off.
3. Buying and overpaying because of only one outcome in mind when house hacking one unit for AIRBNB. You always have to have a plan B in case your city or HOA outlaws short term rentals. That particular unit has to be able to cash flow at market rent after you move out, and take in consideration the low month of AIRBNB income if you buy to rent it for short term rental income. If you are in the Midwest or somewhere with cold months, there are months at a time with little or not income. Make sure you do your homework and have at least a plan B to rent it long term in case the AIRBNB model doesn't work for you or your life changes and you can't manage it any longer.
4. Buying property that needs work or it's in okay condition without utilizing a 203K FHA loan or other renovation loans to improve the property immediately & adding laundry, AC, more bedrooms or bathrooms or just remodeling the kitchens and baths. These loans come at low interest and the buyer will do the remodeling with the bank's money, and then will be renting at top dollar immediately. Another benefit will be the fast increased property value. Many, many properties I've sold to my clients were able to be refinanced in conventional loans after only 1-2 years after taking an FHA 203K loan due to a much higher return and increase in value.
5. Not understanding tax benefits. If the buyer owns businesses and or is also a realtor and achieves "Real Estate Professional Tax Status". This is not for everyone, however a lot of my clients have a staying home spouse or they buy real estate so one spouse gets to stay home to raise kids and maintain the family RE portfolio. The moment you can use depreciation, buying a higher priced property could save the family as much as tens of thousand of dollars in income tax, especially if the other spouse is in a very high tax bracket.
6. Not analyzing the property correctly to make sure the property will have positive cash flow. Many times buyers check out Zillow or other websites, or look at the properties in the neighborhood thinking they'll get the same rents as what they see. Not understanding that in Real Estate you compare apples to apples and oranges to oranges. What does it mean? You compare the same number of bedrooms, bathrooms, condition, amenities ( washer/dryer in the unit, central AC, parking), location, etc. Make sure you have your Realtor do a comparative market analysis and that is correct.
7. Not preserving cash. As a buyer, ask every time for the seller to pay for the closing cost. It means you'll finance that 3% of purchase price, and that's better than using your own cash. It might not work every time, but still do your best to ask again and again. When buying a property buyers want to have plenty of reserves as that first year it will always take longer to remodel the units than thought, it will cost more than planned the construction cost and probably there will be more vacancies than anticipated.
8. Not planning the next house hack, or next investment in advance after this one. Most people have a short time vision. When you strategies your purchases with your team: your Realtor and your Lender, the lender will know what you need in this property to qualify for the next. This way you'll always buy something that will get you closer and faster to your new buy.
I am curious, if you've done house hacking, what do you wish you'd done differently or what do you plan to do differently from now on?
