Long post here, bear with me please!
Hey everyone! Here's the scenario:
So let's say I recently purchased a first home at $185,000. It is a 3 bed, 2 bath in very good (move-in ready) condition with a driveway, good sized front and backyards and in a nice, up-and-coming neighborhood, just across the street from a beautiful community park. The property value is expected to increase in coming years and the area seems steadily on the rise. It is a suburb in South Jersey along the Delaware River, about 5 miles outside Philadelphia with easy highway access and available public transit to the city. The home was purchased with an FHA loan at 3.5% down and a 5k seller's assist at closing. Monthly payment looks to be about $1500 (excluding only utilities). This is very doable for me given my current financial situation, however after two friends recently expressed interest in moving in, I was thinking of "house hacking" and renting two of the rooms to them to offset some the mortgage.
Originally the purpose of purchasing this house was NOT to use it as a rental or to produce significant cashflow. The primary purpose was originally to be closer to my part-time job, where I intend to begin building a business out of and going full time over the next few years. Also, I sought to obtain a property with a good chance of gaining some equity in the coming years. But after considering the interest of my two friends, I'm thinking that a house hack might be a good call. While the home will still technically produce negative cashflow, it would give me a very cheap monthly payment on a house that is steadily gaining value.
Now, over the next year, my goal is to purchase another SHF in the area as my first official "rental" property, with the intent of positive cashflow and passive monthly income. Given my current scenario with this recently purchased house, if you were going to rent out to the two friends to offset the cost of the mortgage - would you keep things simple and do this "under the table" without all of the legal paperwork, or would you do this "officially" with all the necessary paperwork and legal forms making me the official "landlord" renting out to two tenants.
The way I see it is this.. keeping things under the table would make things simple with my two friends and obviously require less paperwork. However, when I eventually go to acquire a loan for the rental property purchase in the next year or so, wouldn't the full mortgage payment on paper count against me (debt to income ratio..?)? This would reduce my net monthly income and make it harder to obtain a good loan. On the other hand, if I were to go through all the legal steps and fill out the required paperwork to make this first home a "rental property" and myself the landlord renting to my two friends, wouldn't this would give me more of an advantage when going to obtain a loan for the next rental property as my monthly expenses would show as less and monthly income as more?
I am brand new to all of this and fully acknowledge my rookie status and near-total ignorance. So what do you guys think is the right move to make here?? Any and all feedback as to what you think the best route to take in this scenario would be greatly appreciated! Again, the goal is now to minimize the cost of this first home, and to acquire another SFH rental in the area in the next year or so with positive cashflow. I want to maximize my flexibility in terms of financing options and my potential to obtain a loan for the investment property.
What are your thoughts? Thanks in advance, this rookie appreciates the feedback!
-Ryan
