House Hacking and Paying Extra

Isaac Passmore

OP

Member since 2019 · 30 posts · 8 votes

6y

@Mike Shahi

That's the 20% needed for the down payment. Multiply those numbers by 5 to get the actual asking price.

Investor · Washington, DC · Member since 2017 · 198 posts · 323 votes

6y

@Isaac Passmore buy a condo with a low fee in an easily rentable area of DC (Shaw, Logan Circle, etc.) and if you buy a one bedroom condo you can partition off a part of the living room and live there and rent out the bedroom, if you can afford a 2 bedroom condo then you can live in one bedroom and rent out the other, or live in the living room again and rent out both real bedrooms for even more cash flow.

Starting off with a condo is a great way to dip your foot in the water and see what landlording and property ownership is all about. Then after living there a year or two, hopefully with your reduced living expenses thanks to the house (condo) hack you will have been able to save up for a down payment on a DC rowhouse or duplex. Then you repeat the process about 4 or 5 times and then you retire. With all the numbers being so big in DC you can achieve financial freedom with just a handful of properties, I am quitting my W-2 job next month because I have replaced my 6-figure W-2 income with rental income from just 5 properties. Oh and my first property was a condo in DC, and the strategy I employed to achieve financial freedom was the same as I outlined for you above.

2 Reply

Nicole Heasley Beitenman

Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes

6y

I'm going to guess there is not, or no one would ever refinance. But you'd need to read your mortgage and discuss the issue with your lender.

I've got a spinoff question for anyone else reading this--say you have a loan (car, house, whatever) with a prepayment penalty and you want to pay it off a year early. Could you pay it down so there was only a $12 balance and pay $1(+interest) a month and avoid the prepayment penalty? Or are you automatically hit with the penalty as soon as the loan balance falls below a certain threshold?

https://www.consumerfinance.gov/ask-cfpb/what-is-a-prepayment-penalty-en-1957

Payton Chung

Developer · DC & NC · Member since 2019 · 113 posts · 95 votes

6y

Conforming mortgages don't have prepayment penalties, but it's worth reading the fine print.

As for Nicole's question, it depends on the specifics of the loan. Some loans penalize prepaying the balance, some penalize the time. If you have the former, then don't bother.

Andrew Buchwach

New to Real Estate · Washington DC · Member since 2020 · 3 posts · 0 votes

6y

@Ron Gallagher Appreciate you laying out that strategy, that seems feasible. Any recommendations for areas with duplexes? They seem to be few and far between in the DC Metro. H Street/Trinidad seems to be one option.

I've also been considering buying a home in Brookland, renting out the rooms and living in the basement. Have you tried that yourself?

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Russell BrazilBusiness Member

Moderator

Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

6y

Originally posted by @Andrew Buchwach:

@Ron Gallagher Appreciate you laying out that strategy, that seems feasible. Any recommendations for areas with duplexes? They seem to be few and far between in the DC Metro. H Street/Trinidad seems to be one option.

I've also been considering buying a home in Brookland, renting out the rooms and living in the basement. Have you tried that yourself?

Roughly 200 multifamily (2-4) unit properties sell per year in the metro area...thats out of about 90,000 home sales. So yes they are rare. The locations where they primarily exist are Trinidad, Kingman Park, Deanwood, Anacostia, Brookland, Petworth, Brightwood, and then some here and there through the city.

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3 Reply

Ryan Hehman

Realtor · Washington, DC · Member since 2013 · 91 posts · 32 votes

6y

I have a number of friends and clients who have house-hacked along the Rt 1 corridor in PG County. If you are going to occupy the home yourself, you likely won't need 20% down, and I can put you in touch with a lender if you like.

Investor · Washington, DC · Member since 2017 · 198 posts · 323 votes

6y

Originally posted by @Andrew Buchwach:

@Ron Gallagher Appreciate you laying out that strategy, that seems feasible. Any recommendations for areas with duplexes? They seem to be few and far between in the DC Metro. H Street/Trinidad seems to be one option.

I've also been considering buying a home in Brookland, renting out the rooms and living in the basement. Have you tried that yourself?

Like @Russell Brazil said, duplexes are extremely rare in DC and they are usually located in neighborhoods I wouldn't want to live in (Trinidad, EOTR, etc.). I would switch your thinking from looking for that elusive unicorn duplex in a nice neighborhood which you will have to pay a premium for because it's a rare multi-family property in DC, to looking for a house with an english basement, like I think you are suggesting by buying a home in Brookland. If you buy a 1-unit, single family home with a basement unit then you are essentially buying a duplex, it's just not a legal 2-unit.

I currently live in the basement of a rowhouse in Columbia Heights and rent out all the bedrooms upstairs-- I live in almost a $1MM home (recently appraised for $960k) in a nice area, my tenants have paid every single one of my monthly PITI payments since I placed tenants upstairs the first month I owned the house, and I make $2000 a month in cash flow off the upstairs bedrooms. So I am getting paid $2000 a month to live in a nice neighborhood in a unit that I love and in 30 years my upstairs tenants will have bought me the house.

2 Reply

Arthur C.

Flipper/Rehabber · Washington, DC · Member since 2018 · 66 posts · 7 votes

6y

@Ron Gallagher

Ron, just out of curiosity, why wouldn’t you want to live in Trinidad? I know there has been a history of crimes over there but believe me, the neighborhood area has significantly improved the last few years. I have lived in the area since 2011. Never did I feel intimidated living in the area. I feel Trinidad has so much potential — pretty much which I called the heart of all good stuff that have been happening. Ivy City, Union Market, H Street development, and Bladensburg Road development is heating up. There has been a massive plan for the area of the Montana Avenue/New York Avenue/Bladensburg Road, which is nearby the Trinidad neighborhood. That will help bolster the value in the area in the next decade.

Investor · Washington, DC · Member since 2017 · 198 posts · 323 votes

6y

@Arthur C. I wouldn't live in Trinidad because of the history of crime there as you mentioned, and my perception is that it hasn't gotten any better. This was confirmed when I took an uber pool through Trinidad last year, I saw what looked to be prostitutes on the street corner and when two young blond girls got in my shared uber I asked them how the neighborhood was improving and they told me they were just coming from their friend's place in Trinidad and that friend had just moved to Trinidad a week before and that she was robbed the night before. Thus confirming my perception.

Also, I am still suffering from PTSD from living in Columbia Heights in 2003 when it was really ghetto (it's still pretty ghetto today if I am being honest) and I had my house broken into and robbed, crackhead hookers turned tricks in my backyard, etc. So after all that drama, I proclaimed I would never live in a "transitional neighborhood" ever again.

Andrew Buchwach

New to Real Estate · Washington DC · Member since 2020 · 3 posts · 0 votes

6y

@Russell Brazil Thank you for that information. I had always suspected as always, it's useful to have the actual statistics.

@Ron Gallagher You're living the literal dream! If you don't mind my asking, what's the full setup, how many rooms are you renting in total, and for what? Do you have a plan for when/if you move out, will you continue to rent the rooms and leave the basement unoccupied?

Investor · Washington, DC · Member since 2017 · 198 posts · 323 votes

6y

@Andrew Buchwach

I am living the dream! Life is good, and I am about to quit my W-2 job since I have replaced my W-2 income with rental income, so life is about to get even better!

Here are the details of this house hack-- I don't know how to link to my individual post but if you scroll down a little bit on this page you will see my house hacking story that includes the numbers and details you are asking about:
https://www.biggerpockets.com/forums/48/topics/678444-house-hacking-research-tell-me-your-story?page=3

My plan if I move out will be to continue to rent out all the rooms upstairs and also rent out the basement unit after I move out, and then I'll make about $4000 a month in cash flow from this property.

Chace Fraser

Realtor · Portland, OR · Member since 2017 · 357 posts · 259 votes

6y

@Isaac Passmore

The long and the short of it is you want to put as little money down as required while having enough money set aside for reserves.

If you have the ability to put more down than the minimum down payment required you may want to consider your options as to why putting the minimum down maybe your best option for scaling your investment portfolio and increasing cash flow.

If you aren’t required to, what does putting more down really get you? 3% to 5% down works great because the less money you put down, the higher your overall returns will be (not to mention the appreciation rate on the property will be the same regardless of the amount borrowed). If you increase your down payment, all you are doing is buying cash flow. It usually reduces your return on investment.

Leveraging up will give you the greatest return, and cushion to cover emergencies, even though it's not the best cash flow. If you want to help with cash flow, then prepay PMI. Typically it'll be $1,250 or so per $100k borrowed to pay it up front if you have good credit. PMI is wonky - talk with your lender.

If you only put 3.5 percent down you should have enough cash available for repairs and reserves and unforeseen expenses that always come up. At a minimum you should have $10,000 cash available after your down payment and closing costs. Then, when you're living for right around free, save up more money to invest in your next property (either another house hack or a stand-alone rental).

Another thing to consider is when you buy a house, you don't just close on the deal and stop spending money. You have moving costs, and most homeowners spend time and money bringing it up to their tastes/desires, even if its minor cosmetics or furniture.

Add to those costs the need to ensure your rental unit(s) are in rentable condition and that you will need to have funds available to bring the unit(s) up to rental condition when you have a vacancy. Your budget should be enough for the down payment, inspections, closing costs, reserves, rehab (even if it’s going to be years in the future), enough to cover costs when you don't have a tenant (potentially for MONTHS), etc. Everything you have above and beyond that can be allocated towards the next purchase.

It’s all about leverage.. Do the math.. 3.5% of $XXXk is $XXk.. 20% is $XXXk.. Is it worth it to invest the additional $XXk to pay that much less of a mortgage even though you are out of pocket every month? Can you put this $XXk to better use?

Could you have your cake and eat it too? By that I mean do minimum down with your house hack and then turn around and buy an investment property with the remaining $XXk (of course making sure you have ample funds for repairs, reserves, CAPEX, etc)?

A key principle is to invest for cash flow. As long as there is sufficient cash flow and you maintain reserve capital, leverage can be a great tool that allows for exponential growth.