Factoring potential STR income into budget for house hack?

Question

Hi all - I hope to start my REI journey with a house hack in Nashville (live in basement/smaller space with separate entrance, Airbnb primary living space). I've been told that it will be difficult to find a property in a good location and with the budget that I can afford without rental income. Would it be wise or unwise to factor income from the STR into my budget therefore affording me a higher purchase price?

I understand this is a personal risk decision and I'd love to hear pros/cons/things to consider from the Bigger Pockets community. Thank you!

David Goodman · Answer

I think it's really smart to get advice. I'd be happy to connect you directly to my client's at different price points who've made the jump into a primary with hope of doing owner occupied airbnb. Sending you a dm :)

They are all doing well (in various locations) because they have educated themselves in the space and are treating it like a business. My personal risk assessment that I suggest to my clients would look at a worst case scenario of long term rent (12 month lease), furnished medium (30 days or more), and for short term. A short term basement or garage apartment can absolutely pay a $3200 mortgage. That same apartment will fetch you about $1k/month as a long term rental (utilities included).

So in short - The worst case is you rent the space long term. I don't think you run the risk of not being able to fill that vacancy because rental demand for a $1k apartment is very high with very low inventory for that rental price point.

Hope that helps!

Laura W. · Answer

Thanks for the insights @Nicholas L. I've had mixed guidance on the topic so I appreciate your perspective. My lender approved the higher mortgage already. STR rules and regulations changing is definitely a risk factor. I think in that case I'd have to change to a MTR or LTR. Primary reason for wanting to do STR is because I'm interested in gaining hands-on experience with this strategy so I can apply it towards longer-term goals in more traditional vacation markets.

Jay Thomas · Answer

Considering Airbnb Income, the good stuff is that it can give you More Buying Power, so you can buy a nicer place in a good spot. Covering Costs is also a plus as the rent from Airbnb can help pay your mortgage and even give you extra cash. However, there are some not-so-good sides too. It's Unpredictable because you might not always have renters, depending on when tourists come and any rules in the area. Running an Airbnb also means lots of Work since you have to find guests, clean up after them, and be ready for new ones all the time. Plus, it could be Tricky with the money, as some banks might not want to give you a loan if they're not sure you can make enough money from Airbnb.Be Careful when figuring out how much money you might make, and it's safer to guess on the low side. Also, keep some extra cash on hand in case you don't have renters for a while or need to fix something. In Nashville's Market, there's Tough Competition, with lots of people trying to buy houses, so you need to be quick to grab a good deal. Instead of Airbnb, you could think about Regular Renting, as it's more steady money. Just remember to Check the Rules, as Nashville has specific regulations for short-term rentals like Airbnb, and it's important to understand them before you commit.

Luka Milicevic · Answer

I think only you can answer that question when it comes to risk because your level of risk tolerance is yours alone.

In terms of logistics - a 450k budget is going to be difficult if you're looking in city limits unless you are okay with being in certain areas, homes that need work, etc. I have received several off market duplexes in the last few weeks predominantly in north Nashville around the 350k range but they all needed some level of renovation.

Alternatively, you could look outside of city limits - approx 30 min drive or so.

I will say 550-600 is what I would consider the sweet spot for what you're looking for. Something with a separate living quarters and in a decent area of town.

Laura W. · Answer

Thanks for the reply @Luka Milicevic. I'm looking to house hack in Nashville. I've been approved for $700K without factoring in rental income and I don't need more than that. I can comfortably afford $450K without the income from an STR or LTR so that is my current budget. I'm wondering how risky/wise it would be to increase my budget to $550ish knowing that I'll be earning rental income to help cover the mortgage.

Luka Milicevic · Answer

In every STR that I have done, the lender has always factored in income as a long term rental. They can't pull STR data or STR estimates. I had a lender recently try REALLY hard to do so and couldn't. Even if you are actively operating as an STR the lender will look to tax returns for income, so if it has been less than a year they will still go on LTR income.

You need to factor in that your lender is going to underwrite any loan based on LTR income only.

Where are you currently looking? What is your budget? What you're describing is very possible. I've done it many times over in the same market.

Nicholas L. · Answer

@Laura Winegardner

i think it will probably be difficult to find a lender that would take into account 'potential' STR income... but even if they did, yes, i think that would be risky.  what if the laws changed and that impaired your ability to get income you needed to pay your mortgage?

why not just start with a more traditional LTR house hack?

Factoring potential STR income into budget for house hack?

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