More expensive the better?? House Hack

12 Replies

Hi guys!

So I've been thinking about this for a little bit and wanted to get some feedback from others. I want to start with a house hack here in the Philadelphia suburbs (as this is where I currently work my full time job). Specifically MontCo. Looking on the MLS (aka Zillow/realtor) I've been able to see duplexes run anywhere from 250-400k (generally). So my question is, if the math works for a good deal and the finances are in place, would you go for the more expensive deal? My thought being that appreciation (the icing on the cake, not banking on it) would be better, theoretically rents higher and therefore higher loan paydown. So if finances and the math on a property make sense and are taken care of, would you go for the more expensive property? This is assuming a low down payment for an owner occupied loan (~5% maybe even 3.5% FHA).

Now I understand there are PLENTY of other factors going into a deal such as looking at the market (crime, neighborhood class, Schools, unemployment, population growth), the tenants you get, what rent is actually going for, maintenance on the property, age of the property and much much more. I'm just asking a hypothetical dumbed down question.

My current opinion is that more expensive is better since it's more leverage starting out and the appreciation will result in more money and the loan paydown should be better. Or am I naïve? Let me know i'd love to hear your thoughts!!

I think your head is in the right place and more expensive is better (within the parameters of the variables you alluded to), for exactly the reasons stated.  Higher rents and more realized gain in equity.  

To put it another way, 2, $200k duplexes vs. 1, $400k duplex.  The cashflow math might suggest the 2 duplex option, but that is usually missing the forest for the trees.  Two sets of systems (HVAC, appliances, plumbing, etc.), 2 sets of tenants and possible tenant issues, etc.  I usually explain it in the "5, $100k condos or 1, $500k house" - and most people think the 5, $100k condo is the smarter play, but they are mistaken. 

I personally go for higher-end single-family homes that rent near the top of the market, but still at a price point where there are a lot of qualified renters.  

@Greg Weik That's an interesting perspective I haven't thought about. Having more units (that equal the price of a larger unit) does mean more things to take care of and more things that could go wrong. 

When it comes to buying property that is higher end with near top rents, are you ever worried about finding tenants? For example, in times like this where some people may have lost their jobs, their family can't afford that 2.5k rent and now need to drop below 1.5k to stay afloat. Do things like this ever happen or do you find that with higher end housing and higher rent comes high end tenants that can weather these financial times?

This is kinda my other concern with going with the more expense units.

@Nick Scullin I actually would have the opposite concern with lower rental rates.  The people in the Denver area (and, I suspect, most metro areas) who can afford $2200-$2800 tend to have more stable jobs. It is a really important part of the screening process - knowing what you're looking at when verifying income and employment. 

One of my tenants is a truck driver (pretty stable, at least before the autonomous trucks go online!), one couple works in insurance and property management (two of the most stable industries), and another is a couple with a brother where all 3 have income.  

Those are just my personal properties, but in our managed portfolio of other people's properties, the small handful of unpaid rents are from self-employed tenants and a guy who worked in construction.  

Just be careful also, in Colorado and probably other states, you can't discriminate based on the source of income.  If someone comes to us as a server in a restaurant, we can't ask for a larger security deposit even though we know their source of income is higher-risk.  Like a lot of bad legislation, this was designed to keep landlords from avoiding Section 8 tenants, but now that we've seen what a pandemic can do to certain industries, that could make finding the right tenant more difficult. 

@Greg Weik  Thanks for the insight, especially on discrimination based on source of income. I always hear about people saying 3x the monthly rent in gross income for tenants, but looking at that source is very smart, especially after what COVID-19 has shown to be stable jobs.

@Nick Scullin I would agree with what both you and Greg already said. The only reason In my mind to go with a 250K over say 400k is if you could move out next year and qualify for a say 300K next year but if you do 400K you can’t do traditional financing for a lot longer. But in general I like higher price point everything else like rent ratio and loan terms being equal or close. Total value total rent and total repair costs and quality of tenants and appreciation should all be factored.

@Zachary Beach Could you explain why I wouldn't be able to go a lot longer with traditional finances? I know you can get about 4 traditional loans. Are you saying that because my Debt to Income would be too high? So then I wouldn't qualify? Because ideally, I'd like to do a house hack this year for one year, then move out, rent out the other half, and repeat.

@Nick Scullin

It might be. In general, a good deal is a good deal. It depends on how you analyze the deal and what your goals are.

It's funny because my wife and I talked about that over the weekend. We visited a $12.5M Gulf-front property at an open house.

Do vacation rentals justify that price? Not even close. Vacation rent might cover taxes and interest on a loan (if you are lucky)...

But our conversation was this: if money was no object, I still wouldn't pay $12.5M for that property.

We could buy our own Gulf-front home, and two additional investments for a cool $4M each, and the cash-flow from two investments will make more than the 1 $12.5M...

Not a deep dive or analysis. Just brainstorming... but something to consider.

Better yet, we get to see what $12.5M property has to offer and those are the things we can copy to add value to our properties. For free.

One other issue to factor into your decision: rents usually don't increase as fast as purchase prices.

Meaning if a $100k property rents for $1k/month, it's unlikely that a $200k property in that same market will rent for $2k. Usually it will rent for less than $2k. As the prices increase, the rents further lag behind.

@Drew Sygit Ya that's a great point and something that I have noticed when practicing analysis on properties in the area. The expensive MFH usually don't pass the 1% test. Just because a Duplex goes for 400K, doesn't mean I can get 4K or more rent a month out of it!