New Construction House Hacking w- Room Rentals – thoughts?

Question

Drew Sygit · Answer

So, let me get this straight:

You're going to buy an investment property

You're taking advice from a Realtor, trusting but NOT verifying?

You don't know if it will cashflow once you move out?

QUESTIONS:

How much research into rental rates have you done on your own (NOT from agent)?

When did you inquire WHERE this agent's friend was getting their roommates from?

Who's going to handle all the advertising, showings, applications, screenings, lease signings and rent collection from these potential roommates?- If you answer, "My Realtor", you will likely fail.

Jules Aton · Answer

Like @Chris Seveney noted I also lived with roommates who I knew and liked in my younger years which was not unpleasant but the key is I knew and liked them. I'm generally not a fan of new builds for investing because I feel like this concept preys on inexperienced and skittish investors who think a new property means no maintenance or issues which is not the case. If it was a favorable deal based on excellent financing terms, solid contractor in a good school district and not with 100 other new builds in the development waiting to become competition when you sell I might consider it. Basically this product is similar to a new car. Once you drive it off the lot it is no longer new or special and likely with initial depreciation.  I would also look at existing homes with 3-4 bedrooms and see if you can't find a better deal if you want to house hack. Best wishes!

Chris Seveney · Answer

When I was growing up, this was called having roommates that pay rent, which got a marketing term called house hacking. Whether it is done on a new construction or existing property, it is the same basis. You'll need to be able to afford the property, then you have it subsidized by people paying rent.

Positives, of course, are you can save additional money to put away. The downside, as you mentioned, is you have roommates, which some people do not like having roommates. You also may have people who stop paying, people who damage it, and people who do not get along. The agent mentioned somebody did this after a year, which I am sure can be done, but if you are buying a property with a low down payment and move from one to the other, I would recommend against it if you have a very high loan-to-value, because stuff can still break on new construction. Tenants can still stop paying, and the goal in real estate is to have manageable debt and not be over-levered.

Wale Lawal · Answer

@Carson Cicenas

I have no problem with the plan itself, but I would underwrite based upon the value of the property once you leave rather than during occupancy. Be certain that the property will make sense if the market for rentals becomes tough and do not let yourself be fooled by the inducements of the builder. If the numbers pencil, then it is a good place to begin.

Good luck!

Carson Cicenas · Answer

@Drew Sygit

Thanks for the straight questions, Drew. I appreciate the pushback and that’s exactly why I posted here. I’m a new investor coming into a not forgiving market. and I’m treating this as a learning process, not a “trust the first realtor I talk to” situation while aiming to not burn myself at all. Posting on BP and getting input from experienced investors is one of the first steps in my verification process so I always invite responses that question a lot.

To answer your points directly Yes, I’m buying a property. I’m currently finishing pre approval and don’t have a specific deal in front of me yet. That’s why I said I don’t know exact cashflow numbers. I’m not at the point of running full pro formas on live listings. Once I have actual properties to analyze, I’ll be looking at each new home area with local comps and seeing how many other investors are also trying to get in (to avoid over saturated and super competitive rent cost areas). I’ve done my own independent research on room rental rates in the area, running everything through ai and just using calculator. I’m not relying only on what any agent tells me. New construction is a bit different though as I’m sure you know. Each builder and their preferred lenders can have different rate structures and products. Some longer term fixed, some with balloons or shorter terms, so I’m comparing those options separately from standard resale financing.

During my first call with the realtor, he mentioned a previous client/situation where college buddies were comfortable moving into a nicer new construction area and renting rooms. That was just context he shared and not my entire tenant strategy. I plan to source tenants through multiple channels (people from the fire service like me, Facebook groups, university networks for young professionals grad students, etc.) and will do proper screening regardless.

As far as who does the advertising etc, fair and important question. I only plan to use the realtor for the purchase side. In most cases the buyer’s agent is paid by the seller/builder anyway, so I’m not expecting them to manage anything after closing.       For the room rental operations, I’m planning to self-manage at the start (especially if I’m house hacking initially). I’ll use professional screening services, clear per room leases, house rules, and tools for rent collection and maintenance tracking. If it becomes too time intensive later, I’ll budget for a property manager who understands multi tenant room rentals. I’m also looking into Indiana landlord tenant laws specific to this setup.

I’m not under any illusion that this is simple or hands off. I’ve even found the more I research the more I realize investing well into real estate is tough and takes effort. Room rentals are more management heavy than a single family or duplex whole unit rental, and I’m factoring that in. My goal is to do the homework upfront so I don’t buy something that turns into a headache. If you (or anyone else) have experience with new construction house hacks, room by room rentals, or Indiana specific gotchas, I’m all ears. I’d rather hear the hard truths now than learn them the expensive way later. I appreciate you helping me and if you see I’m missing anything or know a better strategy I’d love to hear it! What did you do to get where you are? Again appreciate you and thank you

Jules Aton · Answer

In my experience RE is not easy peasy like some, especially those looking to make a buck off you, may suggest. It takes work, patience and a bit of financial cushion. Although I know this isn’t always possible I generally put 20% down to avoid mortgage insurance which gives you more equity in the event you want or need to sell early on. I would focus on the neighborhoods where you would be comfortable living and generally speaking the coveted school districts tend to be a great place to start when it comes to renting and resale. If you are doing this on your own and on a budget a single family property would probably be more manageable than dipping into multi-family? I feel SFH is generally easier to sell and having a good exit strategy is always foremost in my mind when I’m buying which also tends to ensure a solid neighborhood. If you are able to do a few updates the ugly but not decrepit property that the average person won’t consider might be a good buy. If not 5-10 year old homes should be almost as nice as new builds but generally less expensive.

Allan Smith · Answer

It doesn't matter if it's new construction or existing. Run the numbers. Usually the by-the-room rental income is greater than if you move out and rent it out on one lease. But it's easy to find out, just do an analysis for similar rentals in the area with same beds/baths and you'll know what it would rent for when you move out.

Drew Sygit · Answer

Awesome attitude!

I've found that sugar-coating answers doesn't work to get newbies to understand the actual challenges. So, I can be very direct and often "rough".

Be cautious with AI!

It's often flat-out wrong or misleading:(Think about what happens when a Google search can't find enough information to give you an answer - it starts stretching its search to fill the Search Results page(s) and you start getting answers that make no sense.

A couple things to think about:

If you don't ask the right questions, you won't get the right answers.

How can you ask the right questions, if you don't properly understand the problem/challenge?

These are simple to understand, often difficult to put into practice.

Carson Cicenas · Answer

@Chris Seveney

Hey Chris, I got a good laugh out of the first part. You’re right, this used to just be called having roommates that actually paid rent haha. All these marketing terms make it sound fancier than it really is. I appreciated how honest you were about the downsides too. Tenants stopping payment, damaging the place, or just not getting along. Those are exactly the things that worry me. The part I’m most curious about is when you said you’d recommend against it with a very high loan-to-value. That makes a lot of sense. If you were in my shoes first time doing this, only putting 5% down on a new build what would you actually do differently to make it safer? Would you put more money down, look for a cheaper house, or just avoid new construction altogether? I’m not scared to tell my realtor no, so I’m open to hearing any better strategies that actually work for newer investors right now. Really appreciate you taking time to reply and give advice by the way.

New Construction House Hacking w- Room Rentals – thoughts?

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