All Forum Posts by: Vitaliy Volpov

Great breakdown, Benjamin!

I would also add a couple other potential methods that would count as "house hacking."

1. Buying and living in an RV on the property while renting out your entire house. Several investors on Biggerpockets have done this successfully and had made it work really well financially. This wouldn't be my ideal way to do it, but it can definitely be an option for some who like that kind of lifestyle and want to maximize their returns.

2. Leasing land/space on your property. If you have a bunch of vacant land, you can "hack" it by renting it out for a variety of purposes. I have seen people rent their land for recreational activities (hunting, RV-ing, etc.) and also set up "glamping" camp grounds and make bank from short term vacation renters. Obviously, this strategy requires a mainly rural property with a significant amount of land. But, I would definitely count it in the house hacking camp. 

Other examples which fall under this second category is adding storage units on the property or leasing space to a utility company for solar panel farming or other similar uses. There are probably many more creative ways to house hack than even all of those listed in this thread. But, these are some really interesting options!

Vitaliy

Hey Shane,

As the saying goes "when life gives you lemons, you should make lemonade."  It sounds like you are trying to make the most of what is available in the Bronx.  I am personally not a fan of single family house hacks, but if that's all you got available in the area where you want to be and at the price point you can afford, then you have to go with that.  Others on this thread can give you advice on how to make that work.  My only contribution as possible food for thought for you is to ask whether you have the ability to move to a less expensive area and house hack there?  I live and invest in the Albany, NY area.  The price-to-rent ratios are WAY more reasonable here than they are in the City.  We work with a ton of NYC investors who come Upstate to invest where their money goes much futher.  With that said, for house hacking, you would obvioulsy need to physically relocate if you were to go this route (whether to Albany or any other similar area).  Would your job allow a move like that?  If not, are you able to find a comparable job in a less-expensive market?  Even so, are there are other considerations like family or significant other that prevent you from considering a move like this?  Those are the questions, I would ask.  

Hope this helps!  Happy to connect and discuss further if you would like.  Good luck!

Vitaliy

Quote from @Alana Reynolds:

Hey I wanted to follow up with your comments. We ended up buying a home with the VA and getting a roommate to house hack. The camper I am renting on airbnb. The home we live in now we plan on renting on airbnb after living here for 1 year and moving again to another house possibly. We are still putting 5k in savings every month and feel pretty comfortable. It feels like a slow rate of growth but it is working for now.

Congratulations, Alana!

Vitaliy

Quote from @Jim Cummings:

Vitaliy

Thanks for your reply. This particular situation is for a client that would like to rent out a room within their home. 

look forward to your reply.

JIM

Hey Jim,
If it is going to be a long term tenancy (e.g. more than one month), they should use a regular lease that is applicable to the state where the property is located and modify the description of the leased premises to describe the part of the property being leased (since it’s not the whole thing) and then add any specific rules/restrictions that they want to apply to this tenancy. I wouldn’t cut any corners with thoroughness or details of the lease because most housing courts will treat the tenant renting a room with the same amount of protection as one renting an entire house or apartment. 

Hope this helps. 

Vitaliy 

Hey Jim,

What do you mean by "Tenant Contract"?  Are you talking about a lease?  Also, are you thinking of a specific type of house hacking situation? (e.g. house mates, rent by room, or individual apartments in a multi-family porperty?)

Vitaliy

Hey @Reagan Huefner,

I read this post and the one you posted before it on the same subject.  

Before I give you my thoughts, just some quick context/background on me: I currently own 160 rental units. I started with a duplex which I house hacked in 2011. I then transitioned to non-owner-occupied bank financed deals and then onto BRRRR deals using private lender financing which allowed me to scale up much faster over the last 5 years. My business partner and I have done numerous rehabs, conversions, additions of units, etc. to force equity and appreciation in our properties. We have considered new construction several times, but found it much more cost effective and a better ROI to improve existing buildings instead. So, please keep all of this background in mind and take what I tell you with a grain of salt.

To me, given the amount of money you and your grandparents are going to invest into this new construction project, the ROI seems very thin. Every single construction project I have ever done (and we've done dozens of them now) has gone over budget. While I know that you feel strongly that you would be saving money by you GCing it and having you do some of the work, things can (and probably will) still go sideways. If the overall cost of the project ends up being $200k-$300k more than what you planned, how does that affect your numbers?

Also, you mentioned financing.  Obviously, I don't know your financial picture and the lenders you are talking to will be more apt to give you an answer on how much you may be able to borrow.  But, the immediate question I have is, since you plan to owner-occupy the property when done, are you trying to get owner-occupied type of mortgage on the property?  If so, what have the lenders you have spoken with so far said about the minimum down payment you have to bring to the table?  As you probably know, one of the biggest benefits of owner-occupied financing is the much lower down payment requirement.  It seems to me that because you are going with the new construction route, with the bulk of the down payment provided by your grandparents, you would be missing out on this key benefit of the house hacking strategy as I bet the lenders are going to require a minimum of 20% down. 

You mentioned that there is a housing shortage in the area and it sounds like there is no multi-family properties worth buying on the MLS. While this is definitely a problem, it's actually not an insurmountable one. Lack of inventory has been a feature of the current market almost everywhere in the country. It has been the same for us in upstate New York where we invest as well. Yet, we have consistently been able to find and purchase 5-6 multi-family properties every year for the last 5 years. How? We don't limit our search to the MLS.

In fact, I believe that if you're trying to buy something on the MLS right now, you've already lost. Even if you find a decently priced property, you're going to be fighting for it with numerous other investors. Winning bidding wars is not how savvy investors buy real estate.

If I were you, I would hustle like crazy to reach out to owners of existing multi-family properties that fit your criteria and see if they would be interested/willing in selling their property to you for the "right price." We have done this in all of the classic ways: driving for dollars, post cards, skip-traced phone numbers and cold calls, networking with local wholesalers, referrals and word of mouth, etc. It definitely takes a lot of effort and persistence, but the results speak for themselves. Instead of paying $100k over market on the MLS or spending $1 million on new construction, if you try (but really try!) finding a deal off-market using all of these methods, you may be very surprised by the outcome.

There are many owners out there who are older, who don't want to be landlords anymore and who don't have real estate agents to advise them as to what "market" values might be.  They may have owned their properties for the last 30 years and they may be 10 years, or more, behind on understanding what their property is worth.  They probably haven't increased their rents in a decade and the proprerties will probably need some work (e.g. upgrading kitchens, baths, and flooring), but it will be a hell of a lot easier, less risky, and less expensive than a brand new construction build. 

So, if I were you, what I would do with your grandparents $300k is to use that to buy an existing 4-unit.  If the prices (even off market) for 4-units in your area are much more than $300k and that amount by itself is not enough, what I would do is look for an opportunity to do a seller-financed purchase with the owner.  Say you find a 4-unit, talk to the owner, walk the property, and after some discussion and rapport-building he tells you he'll sell it to you for $600k.  Say that the property needs $100k in renovations but, based on your research, after remodeling and increasing the rents, it will appraise for $850k.  That's $150k in potential free equity!  What I would do is offer to pay the owner $150k as a down payment and have him seller-finance the remaining $450k.  In that type of structure, $150k of your grandparents' funds would go toward that down payment, $100k would go toward the renovations, and $50k I would keep in reserves.  

Once all of the work is completed, I would then go to one of the lenders you're talking to and refinance the property and get all of the money invested back out, pay off the seller-financed portion of the loan ($450k), pay off your grandparents' loan, plus interest and have myself a nice 4-plex that didn't require me to put any of my own money into the deal.  

Oh yeah, and in this scenario, notice how I didn't need to sell my nice duplex in Roosevelt, UT.  That property is still in my portfolio and is still generating income and building equity for me.  

I know this scenario may sound like wishful thinking to you, but, believe me, this is 100% possible and my business partner and I have done this exact thing dozens of times now.  There are obviously a lot of details that I'm glossing over: (a) what to say to the off-market sellers to get them to work with you? (b) what if the seller has an existing mortgage? (c) what should the terms of the seller-financing look like? (d) what should the terms look like between you and your grandparents; should they be equity partners or straight lenders with a 2nd position lien in the property? (e) what will the terms of the refi loan be? (it might depend on whether you choose to owner occupy the property after rehab or not), etc.  But, all of these questions have answers to them if you put forth the effort to find the answers.  

Before the nay-sayers in the comments say that my business partner and I are just lucky to be in a market that allows us to pursue this strategy or that we're somehow speacial and that others can't do what we do, I would challenge you to try it.  What's the worst that can happen?  You will lose a few weeks or couple of months of time and maybe a couple of thousand of dollars that you spend on marketing and skip-tracing services?  It doesn't sound like you're ready to start the new construction project yet anyway, since you still have to sell your Roosevelt duplex first.  That alone will take a few months, right?  So, why not try what I'm suggesting in the meantime?  

Anyway, you obviously should do what you feel is best and I can be completely off-base.  I do not know anything about the Bear Lake market or any other market in UT for that matter.  And, maybe you would rather put your time and energy toward doing what you know and already feel comfortable with.  I can totally understand and respect that.  

If you want to chat any further about my suggestions, feel free to DM me.  Whatevery you end up doing, I do wish you the best of luck and hope it works out!     

Vitaliy

Quote from @Benjamin Sulka:

Andrea,

You can definitely do this! You just can't have two owner-occupant loans at once. 

Either turn the Charlotte home into a rental or sell it if possible. Since you've lived there for at least 2 of the last 5 years you won't have to pay capital gains (assuming that the property appreciated) if you sell. See what turning it into a rental looks like first. 

Also, have you considered refinancing out of FHA to get rid of your PMI? This is only applicable if you're at a certain LTV though.

If you want to invest in Cincinnati, get as familiar as you can with that market as you can. Talk to agents in that area, lenders, and look at properties that fit your criteria. 

You got this! 

Hey @Andrea Evans,

I'm going to disagree with Ben's reply on this. While it's true that you can't have two FHA loans at the same time (with some very limited exceptions), you can definitely get a new owner occupied 5% down loan, while keeping your existing FHA loan. The key fact in your scenario is that you satisfied the FHA loan's 1-year occupancy requirement. So, your options now are wide open. Yes, you can sell or refinance, but you don't have to. You can simply keep the property (and the FHA loan) and rent it out.

As others have pointed out, you probably will need to provide some justification for why you are moving to satisfy the lender’s underwriters. One reason might be because you want to be closer to a family member. Is there a reason you specifically want to buy in Cincinnati? Do you know the city well? What connections do you have there that could provide a compelling reason to move there?

Also, it’s worth “shopping around” and talking to a bunch of different lenders. Some will question your motives and intentions much less than others. I would make a list of lenders here on Biggerpockets and also google some lender options in Cincinnati and get on the phone. Finding a local bank might be a great option. But, you may also find a national mortgage broker who can find the right fit for you as well.

The bottom line is that I believe your plan is very doable. It just requires some extra effort and planning on your part.

Vitaliy

Hey @Mike Silva,

As I'm sure others will tell you in response to your post: house hacking isn't supposed to be about cash flow (this is a common theme in the forums).  I mostly agree with them.  I think that the only way you can possibly cash flow a duplex, while owner-occupying it, is if it is in a highly desired tourist area and you will rent the other unit as a short term rental and can get ridiculously high nightly rates.  However, 99.99% of the time, that's just not going to happen.

I'll admit I don't know the NH market, but I can't imagine that, at $600k+ purchase price, there are many duplexes that will cash flow even after you move out and rent out the unit you were occupying.  

As I'm sure you've seen Brandon Turner, David Greene, and others on Biggerpockets explain, when it comes to accurately estimating cash flow of any rental property, there are two types of expenses: fixed and variable. The fixed expenses are the ones that are the easiest for new investors to figure out and wrap their heads around. Those are the taxes, insurance, landlord-paid utilities, and mortgage. Most new investors (and most non-investor real estate agents) add those costs up, subtract them from the gross rents and call that "cash flow."  

But, when they do that, they either intentionally or unintentionally omit the variable costs. These are the costs of owning a rental property that are very real, but that are much harder to quantify.  They include vacancy, maintenance, repairs, and capital expenditures (if you plan to outsource management in the future, they should also include management expense).  

Estimates for each of these costs will vary based on a variety of market-specific and property-specific factors.  But, most seasoned investors use some reasonable estimates for each using percentages of gross rent.  For example, I think the following ranges are realistic in my area for C+ to B+ neighborhoods and properties:

Vacancy: 3-5%

Maintenance & Repairs: 10%-20%

CapEx: 10%-20%

So, on the lower end, you're looking at something like 23% of gross rents going toward these costs and on the higher end you may be at 45%. If you add in management cost, that's another 10%-13%. If you add these estimates to the fixed expenses, you'll see that it is pretty hard for a smaller multifamily like a duplex to cash flow at all. The rent-to-price ratio needs to be much better than most MLS deals have these days.

So, coming back to your original question, I think that cash flow should be very low on the list for why one would buy a house hack.  The reasons, in my opinion, should be in this order:

1. You're looking to offset the cost of living for yourself and your family which will allow you to save and reinvest more of your money rather than spending it on your own housing.

2. You like the location and amenities the property offers.

3. You believe that the property has a very good chance of appreciation.

4. Hand-in-hand with number 3, you get to leverage favorable financing terms by putting a very small amount of money down (compared to non-owner occupied financing) which in turn makes your investment pretty small, but potential return on that investment very large by percentage. E.g.: you buy a property for $600k and put just $21k down (3.5%). The property appreciates by 5% every year for the next 10 years that you own it. In year 1, your equity growth is $30k, but you only spent $21k (plus closing costs), which likely means close to a 100% ROI just from equity. And that's just year one! It keeps compounding every year and continuously growing your wealth.

5. Tenants help to pay down the mortgage. More equity building and additional contributions to ROI.

6. Tax advantages.  You may be able to claim losses against your W2 income as a result of depreciation deductions that you can claim.  If and when it comes time to sell, you may also benefit from the IRS Section 121 exclusion which allows you to not pay any capital gains (up to certain limits) at the time of sale if you lived in the property for two of the last five years. (Talk to your CPA!).  

7. You get to build experience, track record, and credibility as a real estate investor and a landlord, which you can then use as a stepping stone for future real estate investments.

8. Your property might cash flow if you decide to keep it after you move out.  As I said, this one is very hard to do with a duplex for which you pay a premium.  In my case, I paid $235k in 2011 for my first duplex that I house hacked.  I moved out of it after 4 years and I still own it today.  It has appreciated well.  I have no headaches from it because it is in a good area and has very good tenants.  But, my cash flow is maybe $100-$200/mo at most.  Not really much to get excited about, but that's not the reason I bought it!

Hope this helps!  Feel free to DM me if you have any follow-up questions about house hacking or anything else real estate investing.  I love talking about this stuff!

Vitaliy

Nice @Brandon Jones! Congratulations!

This is almost exactly how I got started in real estate 13 years ago.  Bought a duplex for $235k.  Did cosmetic updates and raised the rents from $750/mo to $1,220 and $1,095 (discounted for upkeep on the property). I put 10% down on mine.

What's your next move?  Are you planning to house hack again?  Pursuing a different strategy?

Vitaliy

For sure! Good luck!

Vitaliy