How to evaluate income property for house hacking

Question

Hi all,

I wanted to get some clarification on what rules you are using to evaluate a house hack. My goal is to buy a multi-unit property I can live in rent free. What metrics are you using? I have heard some people use the 1% rule and others the 50% rule which is a bit more aggressive.  Any feedback on this would be awesome.

Anthony Thompson · Answer

@Christopher Lynch I evaluate a house hack the same way I evaluate any other rental property, because the intention is that some day, ideally in only a couple of years, I will move out and repeat it, so the first property will end up as a pure rental anyway.

So I need to make sure it stands on its own in that regard, and I figure market rent for “my” unit in my analysis even if I’ll be living in it myself for a couple of years.

As far as “rules”, I have used the “50% rule” a lot, especially when doing an initial pre-screen of multiple properties to determine which are worth spending more time on, going to the next level of detail, maybe going to loook at the property, etc.

I only do so because it seems to have a basis in reality often enough to be useful in my (our) market right now,  both for my own properties and some other local investors I compare notes with periodically. But any metric should be re-examined every so often to make sure it’s still useful, reasonably accurate, etc.

For the next level I’ll actually break out the various expense categories, paying special attention to things like property taxes (some areas like Providence have much higher rates for landlords, and again that’s what I need to plan for, even with a house hack, unless I want to be stuck in that property!), insurance (varies widely by zip code and even from one agency to another), property or area specific items like sewer (projected to increase substantially in some areas) and water (some towns have special projects/assessments coming up), specific deferred maintenance / capital items that may require funds within the first few years, etc.

For me, something I like the first time home buyer program are nice extras to boost an actual realized return, but I don’t factor it into my analysis because the property will have to stand on its own as a pure rental someday, and also because it’s pretty difficult to predict the future 5 years out. You could have any number of personal or financial issues come up (e.g., family, romantic partner, employment) that make it so you end up moving out long before 5 years elapse.

I also like to analyze each property as a business on its own, because that’s what it is, and especially will be once you move out and it’s a pure rental. So I want to compare it to other potential properties “apples to apples”, without looking at any special financing. And then only once I choose one on that basis will I look at possible favorable financing as an “extra” I may or may not be able to fully enjoy depending on how circumstances pan out.

Christopher Lynch · Answer

Let me add that Rhode Island now offers 0% down for first time buyers along with $7,500 in down payment assistance that you do not have to pay back if you occupy the property 5 years or more. I will be using this program. ( Hopefully this helps with cash on cash return questions).