Buy, House Hack, Rehab/Rent, Sell (after 2 years), Repeat

Multi-Family and Apartment Investing
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Buy, House Hack, Rehab/Rent, Sell (after 2 years), Repeat

Devon Moore
Boston, MA · Member since 2017 · 44 posts · 23 votes

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:

        1. - 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.  
        2. - I will save about $24,000 in rent over two years
        3. - The longer time frame allows for more DIY, saving money on contractors
        4. - 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

        2Reply
        37 views

        Most Popular Reply

        Will FraserPro Member
        Real Estate Broker · Salt Lake City & Oklahoma City · Member since 2018 · 3k+ posts · 2k+ votes
        6y

        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.

        4Reply
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        • Will FraserPro Member
          Real Estate Broker · Salt Lake City & Oklahoma City · Member since 2018 · 3k+ posts · 2k+ votes
          6y

          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.

          4Reply
        • Todd Dexheimer
          Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
          6y

          It's very slow if that is your only strategy, but a great way to get started. After you accumulate cash flow and net worth, there are faster ways to go about it. 

          The biggest mistake that I see is people buying a duplex doing the work and then it won't cash flow when they move out. Make sure you have good solid cash flow!

          1Reply
        • Matt Nico
          Member since 2019 · 448 posts · 306 votes
          6y
          Originally posted by @Devon Moore:

          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:

                1. - 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.  
                2. - I will save about $24,000 in rent over two years
                3. - The longer time frame allows for more DIY, saving money on contractors
                4. - 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

                Devon,

                I think your strategy has a flaw: If you want to build a portfolio of rentals, buying them, fixing them up, and selling them does not accomplish your goal. If all you are after is that payment at the end, why not just flip properties?

                If I were you, I would buy the deal with the 5% conventional. Move in and fix it up. When your year is up, move to the next. Once you repeat this process 3-4 times, your cash flow from the previous properties should be able to fuel your future purchases.

                I know this to be true because I am doing the same thing. For the past 3 years, I bought 1 property per year, house hacked it while I fixed it up, and moved on. Now these 3 properties have gone up in equity over $70,000 on average. 1 of them increased $110,000. Not only do I have great cash flow coming in, but I am able to get HELOC's on 2 of them and use this money to buy investment property.

                Good luck,

                -Matt

                1Reply
              • Devon Moore
                OP
                Boston, MA · Member since 2017 · 44 posts · 23 votes
                6y

                @Todd Dexheimer  @Matt Nico- Thanks for the replies. It looks like you both had similar reactions. This process is slow. One thing I didn't mention is the Boston area is an expensive market, so I wouldn't likely be able to buy another property after one year anyway. So waiting another year isn't too big of a deal, would allow me to sell and get all the gains tax free, and upgrade from a duplex to a fourplex.  

                And yes, I think I would only do this once or twice, or add other investment strategies to build a portfolio along the way once I have the capital. 

                0Reply
              • Todd Dexheimer
                Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
                6y
                Originally posted by @Devon Moore:

                @Todd Dexheimer  @Matt Nico- Thanks for the replies. It looks like you both had similar reactions. This process is slow. One thing I didn't mention is the Boston area is an expensive market, so I wouldn't likely be able to buy another property after one year anyway. So waiting another year isn't too big of a deal, would allow me to sell and get all the gains tax free, and upgrade from a duplex to a fourplex.  

                And yes, I think I would only do this once or twice, or add other investment strategies to build a portfolio along the way once I have the capital. 

                You have to hold for 2 years if you want to avoid taxes and only do 2 sales every 5 years

                1Reply
              • Nicole Heasley Beitenman
                Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes
                6y

                Isn't this similar to Mindy Jensen's strategy? Can anyone close to the higher ups confirm?

                0Reply
              • Evan Polaski
                Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
                6y

                @Devon Moore there are a couple tweaks I would look at. With a BRRRR, you don't necessarily, need to pull all of your cash out. Ideally you do, yes, but if you need $30k to buy another can save $10k in a year and refi to get $20k out, you still have yourself another property, even without a full cash out.

                Additionally, with a BRRRR, you need to be very cognizant of cash flow. In most hot markets, finding deals that will still cash flow after a larger refi is challenging, if you account for real reserves, management fees, leasing commissions, etc.

                Lastly, I am not sure how you plan to get your gains from a sale tax free.  Holding 1-2 years will push you into long term capital gains, but that is 15% tax burden, not tax free.  And, generally you cannot 1031 a primary residence, granted this being a duplex, I am not sure if/how these rules apply.

                0Reply
              • Mindy JensenPro Member
                BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
                6y

                Doing this with a SFR would work, but with a duplex, you only realize capital gains benefits on the portion of the property that is your primary residence. So half of the duplex. It's still a great way to generate cash, but like someone else mentioned, if you're looking to build up a stable of rentals, selling doesn't accomplish that.

                [email protected]Podcast Guest on Show #261
                BiggerPockets
                1Reply
              • Devon Moore
                OP
                Boston, MA · Member since 2017 · 44 posts · 23 votes
                6y

                @Mindy Jensen Great, thank you for the clarification on this. I actually checked in with my CPA and since I also rent out rooms in my unit, I would receive very little benefit from this strategy. In addition, the depreciation recapture allocated to the other unit over the two years would increase the tax burden slightly.

                Thanks for all the information and opinions everybody!

                0Reply
              • Mason Kimball
                Accountant · Philadelphia, PA · Member since 2020 · 34 posts · 16 votes
                6y

                I came to say the same thing many others are saying.

                IRC 121 only applies to the part of the house hack that you inhabit as your primary residence for at least 2 of the last 5 years at the date of sale. 

                The only way you can totally defer or exclude gains is to 1031 exchange to defer the investment portion and use homeowners exclusion for the remainder of the gains (up to $250,000 of gains for single, HoH, or MFS / $500,000 for MFJ taxpayers). 

                Commonly people will you a sqft allocation between investment portion and primary residence.

                1Reply
              • Jon McCarron
                Real Estate Agent · Salem, MA · Member since 2014 · 114 posts · 78 votes
                6y

                @Devon Moore Hi Devon,

                I am currently doing a house hack with a 2-family in Beverly. Bought 2 years ago, Did rehab and value add. 

                In general, 2 family buildings are tough to cash flow in our area.  I have a 3 family in Salem, where the numbers work much better.

                As for a strategy, I think it has been said, but could you get a Heloc on your current property and use that money towards your next purchase.  For me personally, My girlfriend and I are currently working on that process now. We are going to keep our 2 family, and house hack again, this time a 3 or 4 family, and put 5-10% down. That way all expenses should be covered. I believe this will turbo charge savings, and goals of building a rental portfolio. Could that strategy work for you? Or something similar?

                To bring it back, I don't thinking selling your properties at this early stage with the strategy of buy and hold will help your growth.

                Also, another reason for buy and hold. We had a bank appraisal on the Beverly 2 family. It appraised for 140k over what we paid for it in 2018 (I don't have my rehab numbers in front of me, but we didn't spend close to that spread). The Salem 3-family was appraised a couple years ago for a refinance. Bought for $340k, appraised at $565k. Very light rehab. Sometimes it okay to sit on a property for a while.

                Hope that helps with the perspective!

                0Reply
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