SFH Short term rental - Long term house hacking. Make sense?

Question

I'm considering moving and buying into the Bellevue / Redmond/ Kirkland area. Ideally  I'm looking for a 4 bed/3ba arrangment.  I expect the property to be my primary residence but I'm strongly inclined towards one that has some kind of ADU/MIL unit. In the short term(max of 6 months), I'm hoping to rent it out until I can actually make the move there. Here are my questions

- The upper end of my budget is 900 - 950k. Is that a reasonable price point?

- In the short term , can I expect to be cash flow positive? If yes, would that be different if I had to rent it as a single unit?

- As an out of state investor on a visa, I will likely need a property manager to handle the property when its rented out. How much should I expect to pay for that?

- if my cash flow ends up negative, can the difference be claimed as a tax deduction?

Apologies if my questions seem all over the place but I wasnt sure where else I'd be able to ask them.

Happy to edit/ add more information if necessary. Thanks!

Michael Haas · Answer

Price point is reasonable. If you're doing a 20% down owner-occupant loan I'd expect you to be cash flow nuetral as a single unit rental, and with two units rented seperately (your MIL/ADU scenario) you should be seeing positive cash flow. The East-Side is definitely not a crazy-high cash flow area though, so you'll need to set your expectations a bit lower than South Seattle, and a ton lower than the investors on this site form Georgia, Ohio, Texas, etc.Just a heads up - Bellevue and a few other east-side cities started cracking down hard on un-permited MIL's and ADU's last year, I know a few investors that have gotten busted. Make sure any additional dwelling units are permitted unless you're getting a significant discount/deal on it.

Where are you moving to Seattle from?

Michael Haas · Answer

@Vic Veeramani - I'm not an expert on the permit process, but as I understand it you're correct. Its not enough just to meet the criterion for an ADU though, as you also have to submit plans and receive permits for those additions/alterations.

Simply putting a wet bar in would be seen by the city as just having roommates, and although you would need to get a permit for running new water/electrical to the wet bar (like you need a permit for most alterations) those permits are over the counter and require a simple inspection, usually without plans needing to be submitted or any kind of approval period.

I don't have all the city-by-city regulations in front of me, but most will have all or some of the three "Poison Pill" regulations that slow ADU development. Those are:

1. Off street parking requirements

2. Owner Occupancy Requirements

3. Minimum and maximum size requirements

Michael Haas · Answer

Nice @Vic Veeramani - we've been Seattle/Tacoma for almost a decade, but are originally from the Cupertino/San Jose area.

Usually a dwelling unit (like a MIL or ADU) become a dwelling unit in the city's eyes because it has a kitchen, specifically a stove.  Its the stove the city cracks down on, as you can work around this by installing a wet bar which can include a sink and fridge,does not include a stove, built-in microwave, dishwasher, a garbage disposal, or a gas line.

With the second kitchen your house would act more like a duplex with two units rather than a house with roommates, in practice the pwnership experience is pretty different when you have a separate entrance and separate dwelling units.

Basit Siddiqi · Answer

@Vic VeeramaniCash-flow does not get reported on the tax return.Taxable rental income/(loss) gets reported on the return.There is a difference between the twoDepreciation is a deduction for tax purposes that is not factored in for cash-flow purposesPrincipal payments on a mortgage payment are payments for cash-flow purposes but is not a deduction for tax purposes.With that said, there are complex rules for being able to utilize rental losses to offset your other income.The answer will be "it depends"

Adrian Chu · Answer

ADUs are not too common in the Eastside. They are more common in Seattle.

Also many cities that have ADUs prohibit you from renting out both units.

As far as I know, Seattle and Tacoma are the only two cities in the area that let you rent out both.

Kevi Lynn · Answer

>Also many cities that have ADUs prohibit you from renting out both units.

that sounds strange. Does this mean SFH with ADU's can never be rented out unless you keep the ADU out of rental ?

Basit Siddiqi · Answer

@Vic VeeramaniBeing able to utilize passive losses depends on your income level and your level of participation.You are eligible to use some passive losses from rental activities if you show active participation and your modified adjusted gross income is below $150,000

Vic V. · Answer

@Michael Haas nice to e-meet you! We're in the same area and I'm wondering whether it makes sense for us to go down the house hacking route given there are complications.

I also did some digging and looked at the City of Bellevue's site and found the following relevant text

• Owner occupancy. An owner of the property must occupy either the primary residence or the ADU.
• Number of occupants. The combined number of occupants in the primary residence and the ADU may not exceed the number allowed by the definition of “family,” Land Use Code (LUC) 20.50.020
• Size of ADU. The ADU must contain at least 300 square feet, and no more than 800 square feet, excluding garage area. If the ADU is located on a single floor, the Development Services Director may allow an increase so that floor area may be efficiently used, provided all other standards for ADUs are met.
• Size in relation to house. The area of the ADU may not exceed 40% of the combined area of the ADU and primary residence. Garage space is not included in this calculation.
• Existing single-family dwellings. ADUs are only allowed in existing single-family dwellings that received their final inspection approval at three years prior.
• Parking. The ADU must have at least one off-street parking space in addition to any parking required for the primary residence.

Now, does this mean that it'd be ok to have a stove IF an ADU met the above criterion? And based on your post, it sounds like without the stove the additional tenants would just be seen as roommates, in which case, I wouldn't need to worry about meeting the ADU guidelines set forth by the city?

Also, do you know if this rule also exists in other cities on the Eastside like Redmond/Bothell etc?

@Basit Siddiqi, thank you for responding to my question - While it sounds like I'll need to meet with a CPA to get more details about my specific case, can you share a few examples of rental losses that might be able to offset other income? Thanks again!

Dave Skow · Answer

Vic ...thanks .....I would  contact a  CPA /  accountant with your  question on how a rental loss  can affect you and  be reported .........regarding a lender - there are  many in the area , including the firm I work for ... working with a lender that can  offer a program to a  visa  holder is the key ...

Vic V. · Answer

Thanks for the posts y'all

@Dave Skow - Do you have any recommendations for a lender? Also, your comment regarding the tax deduction seems to contradict @Edward Seid's post where he claims it can be used as a deduction. Could either of you clarify?

@Michael Haas from California. Given that both units cant be rented out per Bellevue rules(@Adrian Chu said), what qualifies as a ADU? Are they considered the same as a MIL unit? How different is that from having roommates?

Edward, what do you mean by STM?

SFH Short term rental -> Long term house hacking. Make sense?

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