Potential House-Hack: Looking for Advice on 1st Deal

8 Replies

Let me start by giving you some background. I just graduated and moved to the Denver, CO area about 3 months ago coming from the Kansas City area (currently living in Parker, CO). I've been getting started in real estate investing and learning as much as possible while looking for my first deal and saving up. 

I got a property sent to me from a local realtor/investor that I have the chance to house-hack for my first deal. It's a 5 bed/2 bath house in Centennial, CO for about $375,000. My plan would be to purchase it with a conventional loan using 3% down as a first-time home buyer (I've already talked to a lender and been approved for this loan) and rent out the other 4 rooms. After analyzing the deal on the calculators here, I found that I can be left with paying anywhere from 0-$200 per month for living expenses after doing this. For comparison, I'm currently paying $1,200 per month in my apartment. Obviously this savings on living would be great, especially in Colorado.

My concern is that I don't yet have quite the full down payment for this even at 3%. I can do about half and have considered looking for a loan from the bank of mom or friends to get the other half I'll need including closing costs and all. In addition, I've considered moving back to Kansas City in a year or two for cheaper real estate opportunities and being closer to family. I would most likely sell the house if I did move and would be fine breaking even appreciation wise to make the extra savings until then, although the market here has appreciated pretty steadily. 

I'm not sure if this is worth it to go through asking for this, moving into a new place, finding and managing roommates, and then potentially selling in a year or two in order to save on my expenses while I'm here, or if I should just wait. I may be getting too excited looking for my first deal and getting in the game so I thought I'd see what the BP community has to say! I would appreciate any advice you have!

You can see the numbers I used to calculate the deal below. (keep in mind cash flow is negative but is a savings from my current living expenses)

View report

*This link comes directly from our calculators, based on information input by the member who posted.

Hey @Dalton Toelkes and Welcome to Denver! congrats on getting excited and started in Real Estate. I am fairly new to this whole thing too and am in the Littleton Area myself. I think house hacking is an awesome way to get started and nice work looking at doing it. I have looked myself here in this area and have just struggled to make the numbers work well enough for my current RE Goals.  

A few things come in to mind right away from me, and I want preface by saying that I am pretty conservative when it comes to underwriting on deals. That being said, one of my criteria is that the property would need to be able to stand alone as a rental and cash flow. I personally want to know that if for some reason I needed to leave the property would not be a drain on me. 

I will also say that with the low down option, the first year or two very little of the mortgage goes to principal, and with commissions paid at sale, you wouldn't stand to gain much if your hold time is only for that short time.

BUT that is my conservatism and my thoughts that would be in alignment with my goals. If your goals are to just reduce your expenses each month then It could still be a good play. The last thing I will say is that based on my own conservatism, I want to have cash reserves in the bank just in case, so it may be worth saving up a little while longer or asking the Bank-O-Mom to put in the whole down payment and use some of the rental income to give her a return on her money each month or something like that.

Just my 2 cents. Best of luck my friend!

Hi Dalton,

Congratulations on graduating from college recently, and welcome to the Centennial State!

One thing you may want to consider, is down payment assistance.  In Colorado, CHFA (Colorado Housing & Finance Authority) provides a 4% non-repayable down payment assistance grant, or a 5% silent second mortgage to help lower your down payment.  If you can work seller concessions into the deal to cover your closing costs, you can literally purchase a home with $1,000.  I wrote the following blog post that touches on this subject in case you're interested.

How To Buy A Home in Colorado With $1,000 (Like, Seriously!)

Hi @Dalton Toelkes ,

It's always exciting to be thinking about a deal! From what I have read my thoughts are in line with @Brandon Guite . I am all about house hacking but I think you're a little to close to the edge on this one... and if things go sideways after you close you could be in serious financial pain that could last years or decades. Many people like to think they can get into real estate with very little money, and in some instances, you can. But for me buying a house hack is not one of those scenarios.

You need cash for your earnest money deposit and inspections at least. In Oregon, the typical EMD is 1 percent and the costs for inspections is usually around $500-$1,000. So if you were here I'd recommend having at least $4,750 just to get started. Yes, there are programs here too that will grant people money for the downpayment but that money usually comes back to you at closing. You need that cash up front. While you could use credit cards and/or a line of credit to pay for the inspections, paying for those could affect your debt to income ratio enough that you would no longer qualify for the house.

The next part to keep in mind is how are you going to get renters, how quickly will you rent out all the rooms, and will you be able to stay afloat if you cannot find all the renters you need for a few months? And if they sign leases that means when you sell the house the new owners will inherit the tenants. And if that's the case you will then be selling the property as a rental and your pool of buyers shrinks. 

Lastly, and my biggest concern, is reserves. What if your water heater goes out and you have to replace it... and you haven't rented any of the rooms out? Do you have the funds to cover it? This is a recipe for credit card debt. Reserves are your safety cushion. People calculate the amount they want/need in a couple ways including 1) having X number of months (ie 6 months) of liquid cash at the ready that is only for emergencies or 2) a lump sum. I believe @Scott Trench   started out his house hacking career with $20,000 in reserves (that after the down payment and closing costs) then every property he added he put an additional $10,000 in his reserve funds which he put in before making the next purchase (if my memory serves me). 

Here's my final take; if you had enough cash for the EMD, inspections, and reserves I'd say go for it (even though a year is a very short time to own a property). However, whether you're going to move to KC or not, if you don't have enough cash I'd pass on this deal and instead take aggressive action to save money. Find a side hustle (Uber/Lyft is a great way to make extra money), move in with a friend or someone to really drive your housing costs down, whatever you need to do. That way you can build a solid foundation of cash and be ready to weather the storms when they come. The Bigger Pockets Money Podcast is an amazing place to start and get ideas and inspiration (if you don't already listen to it!). Take your time, don't rush into a deal that you may regret later, and be in this game for the long haul.

Good luck!

@Dalton Toelkes Since most people use house hacking as a way to build a rental portfolio, then I would make sure holding onto for 7 years make sense. Either you living there or moving out and renting it out.  If you're considering selling it in a year or two, I wouldn't really think about it. A lot can happen in the market! 

Play it safe - have a long-term buy and hold perspective and have plenty of reserves for issues that will pop up. 

@Brandon Guite Thanks for the advice! I agree, I like to be conservative looking at the numbers just to be sure it keeps you covered. This area can make it pretty tough to do that so I may just need to look harder at it.

@Seth Wilcock Thank you! Those options from CHFA are really interesting, I haven't heard that from any lenders I've talked with here. Whether I pursue this deal or another one that's something I'll definitely look at.

@Chace Fraser Right now I have about $5,000 I could comfortably put towards the up-front costs your mentioning and then have steady income from my job right now. The house has a new roof, flooring, and heating and cooling so most big ticket items are covered. I agree though about having reserves for the unexpected which is why I'm hesitant on this and wanted to get some advice. I may just be rushing this process a little. It's definitely more exciting getting into a deal than saving up!

@Chris Lopez Thanks for the advice! Ideally that's what I'd like to do so maybe I need to reconsider the deal. I think that's sound advice to play it safe and be prepared for the unexpected.

@Dalton Toelkes a couple of things come to mind. First, banks don't allow down payment to be in the form of a loan. If you can show it as being a "gift" from family, that would be acceptable. The other big concern that I would have is having reserves. Things go wrong with houses and their are repairs that need to be made. Make sure that you have some reserves to address the things that might come up. Good luck with it!

@Mike D'Arrigo Thanks for your input. A "gift" is more what I had in mind than an official loan here. I agree about reserves and feel uncertain stretching myself so thin. From the advice of you and others, I think I may be better off waiting to jump in and can find a similar deal when the time is right!