House Hacking Case Study -- Denver, CO

[Craig Curelop]

Hello everyone! I know times are tough right now and the worst part of it all is the uncertainty and the lack of control we have dealing with this coronavirus. The only thing we can do is prepare ourselves for the worst and hope for the best. With that being said, house hacking can and has put anyone in a much better decision by having other people pay their mortgage while work has either slowed down or completely stopped. 

I wanted to share with you a case study of one of my friends and clients, @Daniel ONeill. The property, the numbers, and what he is doing now. 

The Property: 

• - A 5 bed, 3 bath single family home in Centennial, CO 
• - 3,310 total square feet
• - Unfinished Basement
  
• - Built in 1979
• - Fully Updated and Turnkey (excluding unfinished basement) 
• - 4 bedrooms upstairs, one downstairs

Strategy: 

• - Rent out the top 4 rooms immediately 
  
• - Convert the house into a 6 bed, 4 bath by adding bedroom and a bathroom to the basement
• - Rent out the 5 nicest rooms while he occupies the least desirable room. 

The Numbers:

• - Purchase Price: $430,000 with $5,000 in seller concessions (listed at $440,000)
  
• - Down Payment: $21,500
• - Rehab Costs: $24,000
• - Total Initial Investment: [Rehab + Downpayment]

• Rent: $4,400 -- this INCLUDES the rent he pays himself AND the added bedroom downstairs 
• Mortgage Payment: $2,450
• Rent Above Mortgage: $1,950 
• Less Reserves: $500 -- Reserves include Capital Expenditures, Maintenance, and Vacancy. 
• Monthly Cash Flow: $1,450

• Annual Cash Flow: $17,400
• Total Investment: $45,500
• Cash on Cash Return: 38.2% 

• Estimated Appreciation: $480,000
• Loan Paydown: $10,000

• Total Net Worth Return on Investment (NWROI):
• Annual Cash Flow: $17,400 
• + Appreciation: $50,000
• + Loan Paydown: $10,000
• Total Net Worth Gain: $77,400
• / Initial Payment: 45,500
• NWROI: 170% 

Commentary: 

This deal is a great one! Any property you can convert into a 6 bed, 4 bath will likely cash flow you a lot. The idea here was the more beds and baths we can get for our money, the more profitable it will be. 6 months later and in the midst of the mysterious Coronavirus, Danny sits in a good position with significant reserves, a cash flowing property that pays him if his work does not, and also realizing quite a bit of appreciation and tax advantages (not mentioned in the above). 

What Do You Think? 

In hindsight would you have done this deal had you been in Danny's shoes? 

[Daniel ONeill]

I would do it :) 

[Sean Krause]

Craig,

I am not sure if this question has been asked before, but I have been unable to find any information on it. In regards to debt-to-income ratio, how does having a previous mortgage affect that? I am 23 yrs old, live in Colorado Springs and closing on my first house hack right now, 5 bed 3 baths with a mortgage payment of $1800 per month. It should be cash flowing around $800 after renting it out by the room and living in it. I would like to do this every year and a half or two years, but I am afraid that my debt to income will skyrocket. I currently make around $6500 per month in the military with no other debt other than a $250 car payment that I have ($5200 payoff). How do you tackle the challenge of qualifying for mortgages when your previous mortgage increases your debt to income ratio?

Any response would be greatly appreciated :)

[Cory Fink]

Hey Sean,

VA and Fannie/Freddie do it a little bit differently, but for all of them, If you occupy the property (like in a house hack situation) you can use the income only to offset the PITI, so if it cashflows with you occupying it then your impact to DTI is 0.

If you do not occupy it then you will take 75% of your gross monthly rent then subtract your PITI and that is the income/debt they will apply to your DTI.

Typically you will need 1 year tax return for conventional and 2 years for VA for a non owner occupied property.
 

[Sean Krause]

Cory,

Is that for single family properties as well? I will be occupying one of the rooms in the property but my understanding is that the income from the "rent by the room" strategy can not be counted towards income within the property. But lets say that you are including single family in your reply, then hypothetically, I could use the income from other other four rooms ($2400) to offset the PITI and decrease the debt cost of house to $0.
The thought process I am going through now has to relate to qualifying for another mortgage for a property in 1 to 2 years while also having the debt each month from my current property.

I hope all of that makes sense as I am still learning all of the lingo of REI and mortgage lending.

Thanks!
Sean

Originally posted by @Cory Fink:

Hey Sean,

VA and Fannie/Freddie do it a little bit differently, but for all of them, If you occupy the property (like in a house hack situation) you can use the income only to offset the PITI, so if it cashflows with you occupying it then your impact to DTI is 0.

If you do not occupy it then you will take 75% of your gross monthly rent then subtract your PITI and that is the income/debt they will apply to your DTI.

Typically you will need 1 year tax return for conventional and 2 years for VA for a non owner occupied property.
 

[Cory Fink]

@Sean Krause

It might depend from lender to lender and what underwriting overlays they have right now. But the main reason I answered this was because we had a very similar situation in underwriting where the income from room rents were used and that file was approved Friday. If you report your income on your taxes for 2 years you should be able to use it to offset your PITI.

Hope this helps!

[Sean Krause]

@Cory Fink

Okay thank you very much for the information. So it’s looking as though I’ll have to do it every two years. Which still begs the question of how did Craig do it every year rather than having to wait to consistently report it on his taxes

[Kenneth Hynes]

What is the utility breakdown for the tenants ?  Looks like the guys getting rooms are paying about $700-800 per room.  Is that a;l inclusive or do they someone share utilities ?