HouseHack vs BRRRR for first time.

[Alex Pepe]

Hi Guys,

I've spoken with an investor friendly realtor here in my area about helping me find a house hack come July when my lease ends. I currently am paying 1200/month in rent. He says I should expect to still pay around 700/month HH'ing a 4BR house. If I used FHA on around a 350K home, Id be looking at 25-30k out of pocket, to save around 6k/year.

My question:

I'm not sure there is enough margin on 6k/year to justify a HH. Maintenance/repairs could easily erase that 6k and go beyond. If I could get closer to 0-300/month in mortgage payment, then perhaps a HH has more merit to it. Otherwise I'm of the mind to save 6-12 months longer and go into a BRRRR for my first deal.

Very curious to see what other more experienced minds think.  I appreciate the time to respond to my thoughts.

[Katherine Serrell]

You have to consider the other benefits to househacking besides saving money on rent. In this example, you would be saving much more than 6k/year when you factor in the tax deductions you can take for househacking, appreciation of the home, principal pay down, as well as the learning experience of finding, buying, and presumably managing the property. Renting is literally throwing thousands of dollars down the drain and Not getting a reduction in living expenses, tax benefits, principal pay down, appreciation, and experience. 

If you want to increase the bottom line and your city, neighborhood, etc allows for it, you can househack by the room on Airbnb, Furnished Finder, etc with short term or mid term rentals to significantly increase your cashflow if you want to cashflow or at the least eliminate your living expenses. I am in a pricey market (Raleigh) and have managed to do this on 3 houses I have househacked over the past 3 years using USDA, FHA, and conventional loans. If you buy right, you can make it work.

BRRR's are tricky in this market (especially when just starting out) with rising costs of labor and materials coupled with housing prices falling...can be extremely risky if you dont have any experience, a solid background in a related field, team, etc and as a result funding can be much harder to secure. Not saying it cant be done but you dont want your first deal to be a bad deal or even an "okay" deal that is so much headache that it completely kills your motivation to do the next one.

[Eliott Elias]

Shift your mindset, you are paying 6k a year to own a property. If you want a rental I suggest you rent and have the house fully leased out. 

[Pat Lulewicz]

I'm a former CPA and now only play one on BP, but....Alex the other thing to consider is which of your personal life expenses can become business expenses if you let others live in your home. Toilet paper, paper towels, sponges, soap. If you have a housekeeper or cleaner, it's for the business. Pressure washing the house is for the benefit of your tenants. Your tenants generally need certain furnishings like TVs and coffee tables for their enjoyment of your living room, right?

Am I understanding currently that before any maint/capex, you're saying you're saving (e.i. making more money) $6k/yr on a $30k investment, so a 20% CoC return with some of the worst interest rates we've seen in decades? Other than an STR, I'd challenge you to find another investment vehicle/real estate investment that provides that, PLUS a roof over your head.

Add that to the macro points from @Katherine Serrell and you're talking about some serious dollars a year of direct benefits to your net worth.

[Marcus Auerbach]

Quote from @Alex Pepe:

Hi Guys,

I've spoken with an investor friendly realtor here in my area about helping me find a house hack come July when my lease ends. I currently am paying 1200/month in rent. He says I should expect to still pay around 700/month HH'ing a 4BR house. If I used FHA on around a 350K home, Id be looking at 25-30k out of pocket, to save around 6k/year.

My question:

I'm not sure there is enough margin on 6k/year to justify a HH. Maintenance/repairs could easily erase that 6k and go beyond. If I could get closer to 0-300/month in mortgage payment, then perhaps a HH has more merit to it. Otherwise I'm of the mind to save 6-12 months longer and go into a BRRRR for my first deal.

Very curious to see what other more experienced minds think.  I appreciate the time to respond to my thoughts.

Here is the flaw in your logic. The down payment is not gone, it is part of your net worth. It just moved from being a liquid asset to a hard asset. HH is a financial no brainer. Financially speaking the WORST house hack in town will still beat renting or buying a single family home.

Also, you will gain net worth by paying down your mortgage balance every month, so that's like a forced savings account. Over time you will benefit from appreciation (or should I say inflation) and you also gain tax write offs.

What do you think why your landlord is going through all the trouble of renting to you? Because ownership makes a lot of financial sense. 

[John Warren]

@Alex Pepe the problem with a lot of house hacking information is that it promotes the 1st year benefit which is historically not where you see the real gain in owning real estate. Real estate has always been a get rich slow game, and with the focus on COC returns year 1 a lot of that long term thinking is lost.

With that being said, there are plenty of reasons not to house hack. Are you thinking of moving out of area in the near future? Might you have a change in life circumstances? House hacking is the BEST strategy for a few folks who are typically younger and who would have lived in an apartment anyways for a few years. 

This is the tough decision I have worked through so many times with clients here in the Chicago market.  Some clients ultimately decide to just buy a house or a townhouse to start off with since for them it doesn't end up making sense, while others do great with a house hack. 

[Victor So]

Quote from @Alex Pepe:

Hi Guys,

I've spoken with an investor friendly realtor here in my area about helping me find a house hack come July when my lease ends. I currently am paying 1200/month in rent. He says I should expect to still pay around 700/month HH'ing a 4BR house. If I used FHA on around a 350K home, Id be looking at 25-30k out of pocket, to save around 6k/year.

My question:

I'm not sure there is enough margin on 6k/year to justify a HH. Maintenance/repairs could easily erase that 6k and go beyond. If I could get closer to 0-300/month in mortgage payment, then perhaps a HH has more merit to it. Otherwise I'm of the mind to save 6-12 months longer and go into a BRRRR for my first deal.

Very curious to see what other more experienced minds think.  I appreciate the time to respond to my thoughts.

 Hey @Alex Pepe looks like you got a lot of good advice on this thread already so I don’t have much to add. But I’m not sure how you got 25-30K if you were to buy a 350K with a fha loan. Fha requires 3.5% which is $12,250 on a 350K house. Closing costs will not be more than double your down payment. Also, if you can find ways to get the seller to cover your closing costs (which is what I usually do), then you’d only be bringing $12K to the closing table which isn’t bad considering you’d be saving $6K per year. 

[Crystal Smith]

Quote from @Alex Pepe:

Hi Guys,

I've spoken with an investor friendly realtor here in my area about helping me find a house hack come July when my lease ends. I currently am paying 1200/month in rent. He says I should expect to still pay around 700/month HH'ing a 4BR house. If I used FHA on around a 350K home, Id be looking at 25-30k out of pocket, to save around 6k/year.

My question:

I'm not sure there is enough margin on 6k/year to justify a HH. Maintenance/repairs could easily erase that 6k and go beyond. If I could get closer to 0-300/month in mortgage payment, then perhaps a HH has more merit to it. Otherwise I'm of the mind to save 6-12 months longer and go into a BRRRR for my first deal.

Very curious to see what other more experienced minds think.  I appreciate the time to respond to my thoughts.

My first reaction is that your math is most likely wrong when it comes to saving $6K per year.  You've not taken into consideration all of the tax benefits associated with owning versus renting or the benefits of your home now becoming a business asset if you're able to rent out units and/or rooms. There are things one can write off as a homeowner and/or business owner that you cannot write off as a renter. 

Regarding BRRRR, nothing wrong with the strategy, but one has to consider that you'll be paying rent and paying for the home that you're renovating. Unless of course, you intend to pay cash for the home.

My recommendation is not to throw out either strategy. You should get approved for the FHA loan (including the FHA 203K) and simultaneously look for properties that you can Hack as well as look for properties that support the BRRR strategy. If you throw out a strategy you may miss out on an opportunity.