Opinions on a "House Hack" if rent will not fully cover expenses

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Opinions on a "House Hack" if rent will not fully cover expenses

Account Closed
Member since 2020 · 8 posts · 4 votes

Hey all!

I just moved to California (from Canada) and I am looking around for property. Property is pretty expensive here as I am sure you all know. I found a great three bedroom condo that is in exactly the location I want. It has pretty high HOA fees but it includes the water bill and some disaster insurance. There is also a gym and swimming pool included with the community. It doesn't need a whole lot of work, just some appliances and I would have to furnish the main areas.

I currently pay $750 per month on rent all-inclusive which is actually a really good deal. When I do some calculations on housing expenses and how much I could reasonably rent the additional bedrooms out for, I find that I would still be spending something like $400-$700 per month on expenses depending how things go. My logic says that I would technically be spending less for a higher quality of life given that all goes well and that I can actually rent the place out. I have only just started getting into the BP podcast and started reading Rental Property Investing by Brandon, but am wondering if there is any mention of it being a bad idea to aim for a property where this is the case. I would be looking to do other investments in property in the next 1-2 years as well.

I appreciate any and all opinions and responses. If I can clarify anything, please feel free to ask!

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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
6y

If after all expenses (factoring in property taxes and repairs), you'd be lower than your current rent, it would be a win.  Remember your tenants are also helping pay your mortgage and building equity.  If you were to move out a few years down the road, would renting your room out then make it cash flow?

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  • Dakota Burkeen
    Rental Property Investor · Branson, MO · Member since 2020 · 46 posts · 15 votes
    6y

    @Account Closed Hey Mark, when you are talking about expenses, does that include vacancy, cap ex., maintenance? I've personally never house hacked but I would look at "if I rented the whole house, will it cash flow?". I know most people shoot for $100 a month per unit, per month minimum. If it is a 3 bedroom, can you rent the whole house and cash flow $300 a month? 

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  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    6y

    If after all expenses (factoring in property taxes and repairs), you'd be lower than your current rent, it would be a win.  Remember your tenants are also helping pay your mortgage and building equity.  If you were to move out a few years down the road, would renting your room out then make it cash flow?

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  • Account Closed
    OP
    Member since 2020 · 8 posts · 4 votes
    6y

    @Dakota Burkeen I have run a pretty conservative estimate including all fees applicable to the property and how much I could reasonably rent it out for. Let's say I house hack and get my mortgage rate that I have been pre-approved for, and then I move out in a year and rent the whole place. I am coming up with $100-$150 per month cash flow, which may not be ideal.

    Thanks for the question Dakota, this has given me more to consider before jumping in. Being completely honest, this place was on the more expensive end of what I am looking for but I can't deny that it would be a great place to live and would hopefully attract some good renters, but rent would definitely have to be on the higher end which may make it harder to rent out.

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  • Account Closed
    OP
    Member since 2020 · 8 posts · 4 votes
    6y

    @Theresa Harris Thanks! I personally believe it would be since what I am paying is arguably going into the principal of the property. I wasn't sure if I was rationalizing that correctly. I believe I could rent the whole place out cash flow positive based on some conservative estimates I ran through as I mentioned to @Dakota Burkeen. I am coming up with numbers a little less than what people go for on average but I am wondering if that comes with the area. I find that the property here is more expensive than the classic examples used throughout some of the literature on the site and in the books.

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  • Dakota Burkeen
    Rental Property Investor · Branson, MO · Member since 2020 · 46 posts · 15 votes
    6y

    @Account Closed I would look at principal pay down, appreciation, tax benefits etc. as "icing on the cake" - (Brandon Turner quote?) the main thing to make sure of is the cash flow. If rents dropped $50 a month because of an economic downturn, you would suddenly find yourself going negative on cash flow on this particular property. From what I understand, California's market is already over inflated (opinion) which increases the risk of being underwater if unemployment causes an economic collapse. The upside is that if you have positive cash flow, and you're holding for the long term, being underwater doesn't affect you! Just some things to think about, I'm clearly not an expert, just my 2 cents. 

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  • Account Closed
    OP
    Member since 2020 · 8 posts · 4 votes
    6y

    @Dakota Burkeen Thank you for the advice! I agree, and there is currently low volume since the banks are standstill on foreclosures and loans can be deferred. I am factoring all of this into my decision making. I am going to continue to look around and think about this. The main reason I like the house is that it meets a lot of quality of life criteria and I could see myself there long term as a home base while renting out the additional bedrooms. Ideally I would be able to invest in other properties in the near term but I am also concerned about tying up all my available capital and loan potential in the house too.

    Thanks for the discussion. It's nice to bounce ideas off of others.

    1Reply
  • Dakota Burkeen
    Rental Property Investor · Branson, MO · Member since 2020 · 46 posts · 15 votes
    6y

    @Account Closed Absolutley if you're ever in Missouri, shoot me a message. I enjoy talking to like minded people. Good luck in your real estate journey!

    0Reply
  • Christian Beyer
    Rental Property Investor · Phoenixville, PA · Member since 2015 · 119 posts · 61 votes
    6y

    @Mark Boukhaled

    Hey Mark- my experience with this would say that you should look 3-5 years down the road and see what the situation looks like.

    I purchased a duplex as a house hack for my first home in 2014 and the second unit was rented for $650 when my mortgage was $1,650. Obviously wasn’t making any money there. Fast forward 5 years I renovated my unit, rented it for $1,325, moved into the other one, renovated it, rented it for $1,200, and moved out. Last year I refinanced into a 15 year mortgage for a monthly payment of $1,950 while bringing in $2,525. Not great on cash flow currently, but it is building equity faster while I am not relying on the cash flow since I still have a job.

    Don’t downplay that quality of life point you made- if you’re unhappy there’s no point anyway. Keep the long play in mind and good luck!

    Christian

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  • Jon McCarron
    Real Estate Agent · Salem, MA · Member since 2014 · 114 posts · 78 votes
    6y

    Hi @Account Closed 

    For a house hack to work in my opinion, it either needs to make you make at the end of the month, or drastically reduce your living expenses. For example, if you had a rent payment of $1,000 a month, then you bought a house hack and had to come out of pocket only $100 a month, I consider that a win. Note: I tend to look at straight mortgage payment vs rent payment with that.  

    However, be disciplined with your new savings! I have read some other comments about other expenses such as cap ex, maintenance, vacancy, etc., and all are important. The money you are saving should go into the property to cover these expenses, until you have a solid cushion. So the above example: you are saving $900 a month. The whole $900 should stay with the property in a separate bank account. Build up your reserves. You may have to determine what is a good amount. Once you have reached a comfortable reserve number, then you could put those savings to other uses.

    Your example of a rent payment of $750 to a "house hack payment" of $400-$700 doesn't quite make sense to me personally. 

    Other things to consider: Would there be a chance for value add? If you moved out of the unit, do the numbers work as a traditional rental? Could you do a small multifamily to house hack vs a condo? 

    I love house hacking as a strategy. Doing one now with a 2 family in Beverly, MA with my girlfriend. We bring money to the table every month, but it is a serious reduction in what our old rent payments were. Had value add opportunities. Increased equity by around $130k according to a recent appraisal. We are refinancing to eliminate PMI and reduce interest rate. Obtaining a HELOC to increase our investments. And, when we move out, our unit will make it a pretty decent rental.

    I hope this insight helps!

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  • Account Closed
    OP
    Member since 2020 · 8 posts · 4 votes
    6y

    @Christian Beyer wow that's a great outcome! Thank you for the advice. I will keep this in mind for the decision I make on this property and properties in the future. It's good to know there is some flexibility in the strategy to make it work in the end.

    1Reply
  • Account Closed
    OP
    Member since 2020 · 8 posts · 4 votes
    6y

    @Jon McCarron The insight is very helpful. Thanks for the reply! I agree that the monthly payment out of pocket would still be higher than I would like. It is definitely not the ideal which is why I am still on the fence. I have to gauge a few other things and am looking to get paperwork from the HOA there first to ensure that there aren't any restrictions to renting out the additional bedrooms or if there is a minimum owner occupancy time.

    1Reply
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