First Time House Hacker Plan Feedback

23 Replies

Hi Bigger Pockets Community,

I am a first time aspiring house hacker who is looking for advice and for someone to poke holes in my plan before I put it into practice.

My goal is to purchase two house hacks in the next 5 years as well as minimize my housing expenses, learn the ropes of property management, and come out the other side with properties that produce at least $100 cashflow per month.

As a healthcare professional with less than 5 years experience, I qualify for a 0% down 5 year ARM at 3.75% that expires in May 2022 (when I will have more than 5 years experience). I have about $65k in liquid reserves that I can put towards a down payment.

I’m thinking my first step will be to purchase a property in a B-class neighborhood in the Milwaukee area (Wauwatosa or Shorewood to be precise) using the 0% down loan. These duplexes typically run about $350-$450k with property taxes ranging from $6-$10k. Most have been built after 1950 but there are a lot in the Shorewood area (which is the nicer of the two) that were built before 1940. All of them are typically well cared for and feature modest updates.

After 1-2 years of living in this property, I hope to purchase a second house hack with a conventional loan in either a B or C-class neighborhood with emphasis on cash flow. Then, after 1-2 years of living in that property, I hope to return to the first property so that I can refinance at 15% equity and not 25% equity.

Well, what do you think BP? Don’t hold back!

Do you have enough income to qualify for the second mortgage while the first one is still under your name? If I read that correctly you want to purchase a $400k property that cash flows $100 per month? Someone else can correct me if I'm wrong but I think for that purchase price you should be looking to cash flow significantly higher than that. $100 cash flow would be good on a $100k home... but I'm new too, so take it with a tablespoon of salt 

I think you can find duplexes at a lower price point than that for B class.  I like the plan though.  I would aim to achieve slightly greater than $100/mo cashflow from the plexes. 

Depending on the quality of the unit and number of beds and baths...I'm not sure you could cash flow in Tosa or Shorewood at that purchase price.  I would use rentometer to determine what market rents are...it may be difficult to cash flow once you don't live in the property.  There are luxury apartments renting downtown for $1800 per month...if you bought a property for $400k...roughly using the 1% rule do you feel confident you could rent each unit for 2k per month?  As previously mentioned you do not need to spend that much money on duplex and there are lower priced options.

@Bill Ward thanks for your input! As long as banks still allow loans at 43% DTI and rental income is counted at 0.75, then yes I should have the necessary income. If rents continue to rise then yes, I should be able to eclipse $100 cash flow easily. However, from what I have seen in the past 10 months of looking at properties in Wauwatosa and Shorewood, most rents have not increased as quickly as home prices, which makes it difficult to meet the 1% rule.

Yes, that sounds a little problematic to me, that you don't meet the 1% rule which should be one of the priorities for long-term buy and hold. Specifically, that you don't meet this requirement in a market like Milwaukee. I would go back to your plan and would seek a cheaper alternative to the 350K-450K price range you are looking for. Let me give you the best advice money can't buy: get the DealCheck app and enter your numbers, and if it meets your objectives, then it's a good deal. If not, move on to the next deal. Never be emotional in your decisions, you must be like Mr. Spock, always logical :)

@Emily L. Wiersema and @Alex Briones Thanks so much for the feedback! Yes, I absolutely agree that it is difficult to cash flow in Tosa or Shorewood at the moment given a purchase price of >$350k--especially with 0% down at 3.75% interest rate. This is the biggest problem I've run into! However, does the 1% rule still apply when interest rates are this low? I have seen plenty of deals (albeit outside of Tosa/Shorewood) that don't meet the 1% rule but still see a healthy cash flow--the main difference being the interest rate is between 2.9-3.2% @ 15% down.

But yes, from the numbers I've crunched, margins are much, much thinner in Tosa and Shorewood. I see a lot of duplexes in Tosa that are selling for >$325k that are only currently rented for $950! The max I've seen on MLS was for an updated 3 unit 1.5 baths is in Tosa is $1550. The one in particular that I'm referring to just went under contract and is at 1932 Parkview Court in Tosa. It is a 3/3 with 1.5/1.5 bath that Rent-O-Meter priced at average/median rent at $1800/1600 respectively. That particular home cost $400k with $8100 property tax and thus a PITI payment of approximately $2700 at 0% down and 3.75% interest rate. It also had a brand new roof and 10 year old mechanicals (AC, furnace, and water heaters)--therefore Capex was relatively low (approx $230/month by my calculation). If both units were being rented at $1550 that would put gross income at $3100 and expenses at $3000 (PITI + Capex + Vacancy) with a cashflow of $100/month.

To me, there are a lot of benefits outside of the hard numbers when investing in a place like this. Such as (theoretically) better tenants, less maintenance, less risk of crime, better schools (which theoretically lead to longer staying tenants) and an easier time finding tenants and being selective about who I place in the property. I see a lot of properties in C and D-class neighborhoods where the numbers look amazing but then you have to deal with more deferred maintenance, higher risk of crime, and (theoretically) poorer quality of tenant.

Anyway, I really appreciate the discussion and continued feedback! 

@Noah Bernhardt  You may want to consider looking off market so you can get a better deal. For example, target folks with free and clear duplexes that have owned it for over 25 years. Absentee owners as well. See what their plans for the property are.

 Find a duplex with a unit that needs to be fixed up a bit. Purchase it as is, or work out seller financing. They save on realtor fees/repairs/staging. You occupy the fixer unit, rent out the nicer side. Spend the year fixing your unit and get it rent ready. 

It defiintely comes down to preference and risk tolerance, but I would use 1% regardless of interest rates. The property you're referencing is pretty big at 3/1.5 and that location is absolutely amazing so higher rents make a bit more sense. I agree with the particular updates you mentioned and #'s that would be a great deal...it is more than just the #'s like you said. It honestly sounds a little like a unicorn haha! Personally I wouldn't touch the C and D neighborhoods in Milwaukee...the numbers don't mean much there because of all the other factors you mentioned. The biggest consideration is making sure all things #'s, location, etc all make sense AFTER you move out...that can be the trap with house hacking.

@Emily L. Wiersema yes absolutely agree about having the numbers make sense post moving out as well as avoiding the c and d class neighborhoods of Milwaukee. Still very tough to find those 1% rule deals on MLS! Haha!

I think that @Anthony Caruso is right that I might have better luck looking off market. @Anthony Caruso, how does one go about finding people who own their homes free and clear? I’ve heard of direct mail marketing campaigns as well driving for dollars. What is a good first step for a newbie like me who relies on bank financing do to find those off market deals?

Thanks for the great ideas everybody!

Originally posted by @Noah Bernhardt :


how does one go about finding people who own their homes free and clear? I’ve heard of direct mail marketing campaigns as well driving for dollars. What is a good first step for a newbie like me who relies on bank financing do to find those off market deals?

 It's pretty simple....you build a list of everyone who has what you want to buy, where you want to buy it, plus the ability to sell at a discount (meaning they have enough equity to sell below market).

You can add to the list by driving for dollars as well, but ideally your list would already include these as well as excluding the ones without requisite equity. Then, you mail to them and start as many conversations as you can. It will generally take more than one round until you find the right one, but considering the potential return, it's a fairly small price to pay.

This method has "worked" for time out of mind with an added advantage that it plants seeds....Some of the folks I've spoken to had never considered selling their house previously and so would never have made it to other lead capture methods . My letter plants a seed, other letters water....Marketing is a lot more like farming than using a vending machine. 

@Jerry Puckett thanks for the tips! So, in my case, that would look like going to my target neighborhoods and writing a letter to specific duplexes that I would like to buy? Or do I knock on doors? I’m assuming that most of these properties are not owner occupied, so then would I ask for their landlords information and get in touch with them directly? Am I on the right track with this? Sounds like a lot of work but also a great opportunity to sharpen my interpersonal/sales skills!

@Jerry Puckett “my letter plants a seed, the other letters water…marketing is like farming not a vending machine” love this mindset! Definitely has me looking at buying through a whole new lens! Thanks again for the feedback!

Originally posted by @Noah Bernhardt :

@Jerry Puckett thanks for the tips! So, in my case, that would look like going to my target neighborhoods and writing a letter to specific duplexes that I would like to buy? Or do I knock on doors? I’m assuming that most of these properties are not owner occupied, so then would I ask for their landlords information and get in touch with them directly? Am I on the right track with this? Sounds like a lot of work but also a great opportunity to sharpen my interpersonal/sales skills!

Oh Goodness no....too much work! You go to a dataprovider (ListSource, Melissa Data or the like) and create a list starting with your target areas, then what you're wanting to buy, any criteria very important to you (year build, beds, baths, etc), and finally, use an equity filter, or LTV (I use both) to weed out those without requisite equity. Buy and download the list. It will come with the property address, Owner's name, Owner's mailing address....everything you need.

Then start mailing to them...and don't stop till you've gotten your property. 

I have an appreciation for those with the door knocking skill set which I do not possess. Your list is likely to contain dozens or hundreds of prospects; mine has thousands.  Not enough doorknocking time in a year to cover that and besides, as you say, you aren't talking to the owner and you DON"T want to spook the tenants. That's a really bad way to begin a conversation with a potential seller.

Hope that helps. 

The interest rate seems high but it's been a minute since I had a client use a healthcare loan.  I would shop around to see if you can get a better rate.

Otherwise the plan overall makes sense.  I'm not familiar with those neighborhoods since I'm in LA so that is for someone else to address.

Good luck!

@Jerry Puckett Wow! This is invaluable information and a very intriguing strategy! Thank you so much for sharing! My only curiosity is if it will still be effective even if I am using bank financing? In my very minimal knowledge on the subject, it seems like the primary incentive for a property owner to sell their house this way is because it is usually a cash deal which reduces realtor and various other fees. When you find a deal like this, do you still use a realtor and a bank as a lender? Or do you just find an attorney who can draft the paperwork and close the deal on your own using cash? 

My only other current constraint is time. I am very eager to stop renting and purchase my first home and this seems like it could possibly take months to years to come into fruition. Perhaps I begin the process now, find my first duplex through the MLS, then when I'm ready for house #2 the seeds will be ready for harvesting? What has been your experience in average time from first letter to close?

For me, it was about 2.5 years between my first house hack to my second.  However, for my second house hack it required my fiancé (now wife) to hop on the loan.  Had I waited until the following year I probably could have qualified on my own.  I also could have bought something sooner if I had decided to go the condo route (my first one was a condo and I'm in LA so prices are much higher).

Originally posted by @Noah Bernhardt :

@Jerry Puckett My only curiosity is if it will still be effective even if I am using bank financing? When you find a deal like this, do you still use a realtor and a bank as a lender? Or do you just find an attorney who can draft the paperwork and close the deal on your own using cash? 

Perhaps I begin the process now, find my first duplex through the MLS, then when I'm ready for house #2 the seeds will be ready for harvesting? What has been your experience in average time from first letter to close?

Noah, the letter sparks a conversation. As I talk to the seller we discuss all the options and there is a no one size fits all. If the seller wants to sell to you, there is no reason you cannot use bank financing if the deal warrants it. I write my own contracts and do  not need an Agent to represent me in a transaction where I am buying what I want with the price and terms I negotiated on my own.

And why not both? I scour the market listings (MLS) every single day and still conduct my own marketing...it doesn't matter to me where it comes from. And I stop neither process when I find something I like. If you keep a full pipeline, you'll have the next one lined up when you're ready rather than starting over from scratch. So on and so on. I think that's the last "R" in BRRRR....."repeat"

@Noah Berhnardt I have a similar plan, in hopes of purchasing a duplex likely in Wauwatosa this winter. I've found quite a few on the MLS for under $300K (mostly 2b/1ba) that would cash flow $100 - $200 / mo (once we move out). However, they need some work most likely because I doubt they would be on the market otherwise.