Buy, House Hack, Rehab/Rent, Sell (after 2 years), Repeat
I am a new investor and always adjusting my strategy as I learn more. I realized a problem with the house hack model is the difficulty to pull out your capital after a renovation like you can with the BRRR method. I kind of combined the House Hack, BRRR, and Live in Flip strategy here. I'm curious what people think or if anyone has done the same.
My goal is to build a portfolio of buy and hold rental properties. The plan was to get a 5% down loan, house hack for a year, move out and buy another. I bought my first duplex about a year ago in Salem, MA (north of Boston). This property has a lot of value add opportunity by adding bed rooms and square footage. Based on my expected ARV, the 5% equity will be about 20% or $100k after the renovations. The problem is, being young and planning on continuing to househack my way through a few more properties using the low down payment programs for owner-occupants, that equity doesn't do me any good sitting in this property, and I can't refinance any cash out because all the improvements only brought it to the minimum 20%. I detail the plan more below:
Buy: I bought a duplex under market value with considerable value add, but is good enough to rent out the nicer unit and live in/rehab the other unit.
House Hack: Take advantage of the low downpayment, owner-occupied loan
Rent: I am renting out the bottom unit to offset my rent. I have also had friends rent the other bedroom in my apartment at a rate under market (since I would be doing a lot of work on it and they are friends). This minimizes the carry costs significantly. I paid $700 on the $3,250 mortgage payment.
Rehab: Unit 1 (first floor) - bought as a 1000sf 1BR 1BA, will move in for the 2nd year once their lease is up and make it a 3BR 1BA. Unit 2 (second/third floor) - bought as a 1000sf 2BR 1BA (900sf unfinished 3rd floor), will improve layout of 2nd floor and add 2BR and 1BA and living space to the 2rd floor. This will be a 1,900sf 4BR 2BA apartment.
Sell: These renovations will increase the value significantly, and since I lived in the property for two years I will not be taxed on the gains.
Repeat: Take the profits and reinvest as a 5% downpayment on another value add property. In this case I would have about $100k in capital to reinvest.
Pros:
- - Will be able to scale quickly since my capital will not be tied up in my first property. I will be able to buy in better areas and will have a higher renovation budget for property #2.
- - I will save about $24,000 in rent over two years
- - The longer time frame allows for more DIY, saving money on contractors
- - Tax savings
Cons:
- - Have to wait two years before getting another property
- - High leverage (which I am comfortable with in a house I live in at this point in my life)
What do you think?
- Devon
Most Popular Reply
HI @Devon Moore! You make some good points here and you definitely need to consider whether a house-hack is for you. That said, I want to differentiate something here. A house hack is a play PRIMARILY based on low money going into a deal, reduced cost of housing along the way. For that reason, your 5% down into the deal turns into something like a 20%-150% cash on cash return each year when you move out.
A BRRRRR, or flip, or any such type of investment is one in which you are relying on updates and "added value" to . . . .add value. The strength and utility of these investment approaches lies primarily in increasing your ARV or resale value.
You seem to be holding a house hack to the goal of a flip or BRRRR . . . but they're two different beasts. If you would be putting a lot of cash into a house-hack and wanting to get it out in a few years, then that's fine and doable, but you'll likely want to NOT use a 5% down or 3.5% down loan to do that.
TLDR version - house hacking and value-add investing are mainly different. House hacking plays in low down payment/reduced house costs as a primary investment lever. Value add plays usually benefit from a different loan product.