Are parents a househack?

Question

I am currently purchasing a house and my parents are going to live with me. The mortgage will be ~$1,700 and they will be paying me $1,300 monthly. How can I leverage this situation to buy my first rental property? Reporting this $1,300 income on my taxes can help me increase my income. Also, I can show a portfolio lender that I am only paying $400 mortgage which can help me get a loan even if my DTI is off. Am I on the right path or thinking this correctly? Thank you so much in advance.

Josh Cook · Answer

Hi @Parteek G. I would have them sign a lease with you if they are okay with that which shows the rent amount and then set up another bank account to keep track of your income and expenses. This will help prove to the lender a year down the road from now that you do have rental income to offset living expenses to help you qualify for your next investment property once you have the funds or other means to pay for it.

Just curious, what is our long term plan for the house?

Vijaianand Thirunageswaram · Answer

I like your title "Parent Hacking".  You basically buying property and putting your parents there and having them pay the rent and account it as rental property. It's good start and for mortgage loan purposes, yes legal lease agreement is important and more important you need to show your deposit and first rent check deposited in your account. They will ask those proof as well. You don't have to create a separate bank account actually. Just showing monthly deposits would do.  Don't do zelle or online transfers...  I assume they are paying from their pocket for rent. If you are paying them and asking them to pay back, mortgage company can catch by asking you for bank statements for 6 months.. Try to plan and show that it's legitimate rental transaction.

Brian Nel · Answer

Your lender will require extensive financial proof and history before approving you for financing. This includes account balances as well as tax returns and pay stubs.

Although your thinking is correct “I will be making this much more  monthly” and “my net expense is not very much,” lenders won’t take your word for as it’s speculation.

I would recommend seeing what kind of pre-approval you can get for traditional financing and working from there. You do not need to have a house in mind to get a pre-approval.

Bjorik Mutize · Answer

It is a house hack in my eyes. And also aren't you buying your first rental property on this purchase?

I mean...good first step. Living cheaper than average rent costs, debt pay down, rent out your unit after a year or 2 and get more income...helping your parents!

Right path dude. Keep it going. How'd you find this place what's the story?

Parteek G. · Answer

Thank you for your response. I completely see you point, everything should be planned for.

Parteek G. · Answer

I will sign a lease because lenders don't count your monthly rent income unless you have a 1 year lease (at least that's what I was told).

Thanks for the advice on the second bank account, I will for sure do that. Will it better to pay the mortgage from my personal account where my paycheck comes in and leave the other new account untouched (where I deposit the rent)?

Long term plan for the house is to live in it for 5-7 years and put it up on rent (I will be building my portfolio in parallel). I can also see my self possibly selling it because I don't ever believe this house will have a positive cash flow with this mortgage. This will depend on the market (how much rent is going for) and my portfolio at the time.

Parteek G. · Answer

Thank you so much for the response. Someone here gave me a advice to open a second bank account. From there, I can show my banks statements. To report monthly income (the $1300 rent), I will need to get with a CPA? How do you do it?

Erik W. · Answer

@Parteek G..... sort of.  Not traditional, but pretty close.

Before the word "hack" became trendy and overused by millennials to describe everything from lowering the cost of housing to making your own kombucha at home, basically we just called this 'frugal living' or 'having a roommate'.  Frugal doesn't mean cheap: it means not paying more than you need to.  In this case, you're getting ownership of a nice home and your parents' contribution will help you pay less than you'd pay on your own.  So yes, consider your housing needs/desires "hacked".

Absolutely need to have a written lease with expectations.  You and your parents may get along great today, but if they had to move out and/or stop paying you rent for any reason whatsoever, would that turn your 'hack' in to a nightmare?  What would be the expectation?  Would you require them to move out?  Would you lower the rent?  Would you let them stay for free?  What if one of them has to move into assisted living and there's no enough money left to pay you the full rent, but you can't move anyone else in because one of them is still living there?   What if one of them develops dementia?  What if one of them dies and the surviving parent wants to remarry/have a BF/GF over and you don't like the new romantic interest but they cannot afford to get their own place?

Spell it all out up front.  That is not being nit-picky or skeptical of their willingness or ability to honor the deal: that is showing you care enough to take care of potentially troubling issues before they occur.

Any siblings?  If yes, are they aware of this deal?  I only ask because if they aren't, down the road when it's time to settle the estate there could be misinterpretations among parties that either you or mom 'n pop were doing each other favors under the table and that could lead to squabbles.  A professionally drafted Last Will & Testament would be advisable, as well as a Durable Financial Power of Attorney in case their estate would ever end up owing you rent money.

Parteek G. · Answer

Thank you for the response (my first ever on the forum haha). Yes, this can be considered my first rental property in a way. I just have a really big goal to buy my first ever rental property (with no househacking) and some minor rehab.

However, the house that I am buying breaks all investment property rules. My parents don't make a lot of income so they can't really qualify for a loan. House is 210,000 (does not meet the ~1% rule) and this is my first ever property. The only deal was my parents have to like the house. They helped me get through college, so I had to do this one solid for them and now I will be applying all the tools I learned from reading and buying one that has cash flow. Hopefully this rent income helps even if my DTI is off.

Are parents a househack?

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