Buying 2nd Home, House Hacking With a Family

10 Replies

I'm thinking of buying a 2nd home where we could rent out the basement of the new home as well as renting our current home. I'm really trying to make this about the numbers and not about "getting a new pretty home" but that's hard not to think about too.

Here's the plan:

1 - Buy a 6 bdrm house.  Live in 4, rent out a 2 bdrm with kitchen & separate entrance.

2 - Rent out our current 4 bdrm home.

We're looking anywhere in Salt Lake County, Utah.  As long as the house fits what we need we'll look at it.  We would have to pull about $50K of equity out of our current home to make this work.  The new house payment would be around $1500 with $700 in rent.  The old house payment would become $860 with $1300 in rent.  I know these are rough numbers but does anyone see anything wrong with this plan?  Or do you have a better plan for someone just starting out in real estate?

Thanks everyone!!

Be mindful of the zoning of the new place with the apt. For example, in Orem you can rent a legal an accessory apartment only when the other residence is owner occupied - both units cannot be rented unless zoned as apartment.

Some cities don't care about it, others do. 

Are you going to move to the new home? Have you thought about leaving the equity alone and just doing a 5% down conventional loan? While your payment will be higher you can leave equity alone!

@Elizabeth Colegrove leaving the equity alone would be fantastic.  That would save me about $3,000 in closing costs from refinancing my current home.  it would bump the total payments up by $120 because of mortgage insurance but that may not be too bad of a deal.  I don't have 5% saved up which was part of the reason to refi my current home but I might have enough in toys.  Time to sell some toys....   :)

@Blair Poelman Thanks!  I will make some phone calls to the city before I make an offer.  I do plan on renting the mother-in-law apartment as an owner occupant.  is that what you mean?

Other than that does it sound like a decent plan?  I want to get started but also want to make sure I'm not setting myself up with a bad deal.

@Travis Fisher I have a couple of thoughts to add. If you are going to take equity in the near future, take it while you are an owner occupant for about a point lower rate. Either way, I would recommend having some reserves. If you don't have 5% saved for a down payment, it sounds like you probably don't have reserves. Just make sure you won't get sunk if you are working with thin margins and a major repair is needed.
I have had the same questions lately. Taking the equity just for reserves after the purchase may be worth it if you are certain you won't spend them. You will need reserves again in the future if you are looking for more conventional type deals And you will already have some of them in place left from this time. I would still try to make the money for the down payment from selling toys and savings if I were you. Then you are setting yourself up for house number three sooner - if you plan to grow beyond these two.
Just a few thoughts I had. Let us know what you decide and good luck with whatever you choose!

@Travis Fisher


Just curious. Why would you want a basement rental unit instead of going with a traditional side-by-side duplex option? The reason I ask is because IMHO basement apartments limit the scope of potential renters. There are some renters that won't even consider a basement unit just because it's "in the basement"; not matter how nice it is. I'm not saying it's a bad idea, I'm just saying that your pool of potentials goes down.

I would suggest looking around the east side of Salt Lake.

This "Judgement map of Salt Lake" is eerily accurate:

http://utahpolicy.com/index.php/features/today-at-utah-policy/2814-check-out-this-hilarious-map-of-salt-lake-city

I haven't found that an accessory unit adds value to a property.  On resale, most families would rather have more living space than an extra kitchen.  And, depending on the municipal occupancy laws, you may be limiting your resale buyer pool.

As @Blair Poelman mentioned, occupancy laws happen at the city level and some are more relaxed than others.  In many towns, it doesn't matter if you live there or not.  You are restricted to total occupancy of unrelated people or a related family of any-size.  This is why these are called mother-in-laws--because if the tenant is related it's allowable.

Enforcement of occupancy is almost exclusively neighbor complaint driven.  So if you're in a neighborhood where this happens a lot or the property has been operating for a long time without incident, you are generally ok.  Parking issues are the number one source of scrutiny.

I recommend to clients looking at this play to include kitchen removal at some point (selling costs) in their analysis.  It might look like this: owner occupy with tenant for 5 years, move out and rent as duplex (illegally) 5 years, remove accessory unit, sell.  If this works with your goals, it can be a good play.

But don't count on getting anything extra for a second kitchen in an illegal duplex in a nice single family neighborhood.

Originally posted by @Alexander Merritt :

@Travis Fisher

Just curious. Why would you want a basement rental unit instead of going with a traditional side-by-side duplex option? The reason I ask is because IMHO basement apartments limit the scope of potential renters. There are some renters that won't even consider a basement unit just because it's "in the basement"; not matter how nice it is. I'm not saying it's a bad idea, I'm just saying that your pool of potentials goes down.

 I actually like your idea better Alexander but so far I've only found one in the past year that would fit our family.  It was a 3-Plex where one of the units had 4 bedrooms.  Maybe I haven't looked hard enough yet.  I'll take another look and see what I can find.  Plus who wouldn't want a 3-plex over a home with a MIL.  I appreciate the suggestion!

Hey there, Travis, I wasn't in your shoes long ago! You've probably already figured out that there's going to be a lot of learning to be done now that you've gotten bit by the REI bug! :)

I have to start by not assuming, so, my first question is, have you sat down with a loan officer to discuss your financing options yet? You may find out a number of surprising things right away when you open the dialog (I know I did! :)

Others have already mentioned this, but renting out a basement as a separate dwelling unit is not allowable (depending on the city) unless zoned appropriately (been-there-done-that and almost got myself in serious financial trouble!) You can rent out rooms though, if you're up for that.

When it comes to purchasing an appropriately zoned apartment complex, you'll find that the minimum down on it is going to about 15% through a traditional lending institution, so keep that in mind.

If you're thinking about trying to include your current home as rental income during the loan application, most banks will require a two year rental track record before allowing it to be considered income. Some banks may consider it income if you can walk in with a signed agreement, down payment evidence, etc. indicating that it will be rented out when you move.... or however that's going to work.

Best of luck to you!

Thanks for the input Jonathon!  I wouldn't mind hearing your story and what you decided to do instead of renting out a basement.  That first step seems to be the hardest and I'm trying to find the easiest way to get out there and start. Maybe easiest isn't best though.

Qualifying for a loan is under way.  I should know what my options are on Wednesday.  My lender told me that if I leave at least 30% in my current home I shouldn't have to show the two year rental record.  I've never heard of that before but if so that would be helpful. 

Right now I have a lot of work fixing decisions that I made before I decided to get serious about investing.  Who knew that junk and toys could hold you back like this?  Even if they're paid for.

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