House Hacking in Metro Area

[Sam Hatch]

Hey all,

I'm looking to purchase my first property within the next 6-9 months and was researching the possibility of house hacking it. From most of the SFH house hack examples I've seen, it's individuals getting seemingly good deals on 4-5 bd homes, or putting in a little extra rehab upfront, which allows them to have a positive net cash flow after they move out year one. I live in a metro area and would like to stay in this area, if possible, but I'm finding it hard to source any properties, even for example sake, that would allow the property to have a positive cash flow after I move out after the first year. Many 4-5 bd homes are going for 400-500k, while the rent for those are around 2.5-3k/month, leaving the mortgage + expenses to be higher than any potential rent from a single family. It seems like to make a majority of these instances work I'd have to continue to rent out room-by-room after year one, which seems like a tall task.

Wondering if anyone has had success in metro areas, and if so what you looked for when purchasing the home, and how you were able to maintain a positive cash flow after year one. Or if you're focused primarily on a positive net worth return, in which case I could see losing a few hundred dollars a month in exchange for loan repayment and appreciation worth it in your book. Thanks!

[Aj Parikh]

Hi Sam, I am a huge fan of out of state investing and Long Distance Real Estate Investing was one of the first books I read before I built my portfolio in Cleveland. One of the strategies I used was working with a couple of turnkey companies and getting started in a mid-west market. I would love to connect and help out so feel free to reach out.

[Ben Einspahr]

@Sam Hatch rent by the room house hacking is an excellent investment strategy for someone like yourself. As you can tell, getting the numbers to pencil out is not as easy as it used to be. Here are a few tips I can provide that help make rent by the room house hacking in Denver work:

-Must be 4+ bed and 3+ bath. rooms with shared bath will typically rent for 100ish less per month (must have plenty of parking)

-Look for 2,200 sqft or greater. WIth this you can typically convert 4 bed home into 5 bed for low cost

-Look for home with some form of additional kitchenette or walk out basement. 

-When marketing, do not include utilities in rent. Utilities will be billed back at flat rate per month. This way you are able to get the same per month but market for less.

Will follow up with some additional resources (websites to rent, tenant screening, etc) we have to get you headed in the right direction. Rent by the room is our jam! 

[Laura Shinkle]

@Sam Hatch here's the conundrum of all investors, whether you're buy and hold investments, BRRRR or househacking.

Interest rates have gone up and with it, your monthly budget for buying a home. In most places, the quick raise in prices over the last few years has outpaced rental rate growth. Most long term rentals don't cash flow unless you're putting at least 35% down in my area. So if you think about it, you're trying to buy something (presumably) with 5-10% down and then wanting it to cash flow as a long term rental in a year based on current rents? yeah, that won't work. 

Go back to the reason for house hacking. The reason it's so great is that the owner occupied loan options allow you to put less money down (ie buy a home faster) than if you were buying an investment. Then getting roommates reduces your biggest expense in your budget, your living expenses. 

No, it's probably not going to cash flow after year one unless interest rates plummet and you can refinance. OR, you can do what your market is telling you will work. Options: 

1. Stay in the home more than 1 year. Sounds like this is the area that you want to live in, so why not stay there? Saving in rent/mortgage will allow you to save at a much higher rate, so you can purchase a strictly investment property either in your area or out of state if you don't like the options in your area. 
2. When you move out, rent by the room. It's more work, yes, but if you'd prefer that to 'paying' for your investment a few hundred a month, then maybe it's worth the work. 
3. Make it a STR. These are known to cash flow better, but are of course more work if you manage it yourself.

Keep in mind that your ROI is guaranteed negative if you continue renting, so purchasing a home will always be the better bet in my book. And don't forget the other returns, such as tax benefits, loan paydown by your 'tenants' and appreciation.

Who knows, maybe in two years, LTR rates will go up enough to make it feasible. Maybe you can do the rent by the room for a couple years and then convert to a LTR. Trying to force a certain strategy in your market may not work, so let the market tell you what strategy WILL work. And go from there. 

Happy house hunting!

[Sam Hatch]

Quote from @Laura Shinkle:

@Sam Hatch here's the conundrum of all investors, whether you're buy and hold investments, BRRRR or househacking.

Interest rates have gone up and with it, your monthly budget for buying a home. In most places, the quick raise in prices over the last few years has outpaced rental rate growth. Most long term rentals don't cash flow unless you're putting at least 35% down in my area. So if you think about it, you're trying to buy something (presumably) with 5-10% down and then wanting it to cash flow as a long term rental in a year based on current rents? yeah, that won't work. 

Go back to the reason for house hacking. The reason it's so great is that the owner occupied loan options allow you to put less money down (ie buy a home faster) than if you were buying an investment. Then getting roommates reduces your biggest expense in your budget, your living expenses. 

No, it's probably not going to cash flow after year one unless interest rates plummet and you can refinance. OR, you can do what your market is telling you will work. Options: 

1. Stay in the home more than 1 year. Sounds like this is the area that you want to live in, so why not stay there? Saving in rent/mortgage will allow you to save at a much higher rate, so you can purchase a strictly investment property either in your area or out of state if you don't like the options in your area. 
2. When you move out, rent by the room. It's more work, yes, but if you'd prefer that to 'paying' for your investment a few hundred a month, then maybe it's worth the work. 
3. Make it a STR. These are known to cash flow better, but are of course more work if you manage it yourself.

Keep in mind that your ROI is guaranteed negative if you continue renting, so purchasing a home will always be the better bet in my book. And don't forget the other returns, such as tax benefits, loan paydown by your 'tenants' and appreciation.

Who knows, maybe in two years, LTR rates will go up enough to make it feasible. Maybe you can do the rent by the room for a couple years and then convert to a LTR. Trying to force a certain strategy in your market may not work, so let the market tell you what strategy WILL work. And go from there. 

Happy house hunting!

 Thanks for the info!

The reason house hacking appealed to me wasn't because of the access to 5% down FHA loans, it was more of the loan paydown by tenants and the fact that I wouldn't be "wasting away" rent money every month. I'm in a fortunate position to be able to put 20%+ down on a 3-5bd home in my metro area, so given the larger down payment cashflow after I move out seems almost guaranteed if I do the rent per room strategy (based on some rough calculations). Transferring it to a LTR after a few years of rent appreciation would be ideal, but I'm fine breaking even on the cash flow aspect due to the other areas of net worth growth involved with this strategy.

Given I can put 20% down on my first property, I'm not sure if this is still a strategy you'd advise, or if it'd make sense to research other methods of real estate investing that suit someone in my situation better. Thanks!
 

[Michael Dumler]

@Sam Hatch, the above responses from Ben and Laura are flawless and is how every house hack investor needs to think given current market conditions. Needless to say, the concept of house hacking is to limit living expenses. It's always extremely frustrating hearing expectations from newer investors that their house hack deal has to cash flow from day one upon move-in. Metro Atlanta and surrounding in-town neighborhoods are some of the most high-demand markets in the nation at the moment. It's simply unrealistic to receive positive cash flow for a house hack deal in Atlanta. With that being said, what does your current living situation look like? Are you renting at the moment? Several house hack strategies that I have seen work well include, rent-by-the-room, LT/STR in-law suite, LTR/STR basement unit conversion, etc. To be upfront, house hacking a small multifamily property is extremely difficult to acquire. Most small multifamily deals are still seeing aggressive buyer sentiment from investors who can afford to pay well over asking. I don't advise competing with those types of buyers, nine times out of ten you'll be outbid.

Now, addressing your exit strategy, why do you plan to leave the property after a year? As noted by Laura, if you enjoy the area, then remain in the home. Nevertheless, if you do decide to move out after a year, you have multiple investment strategies to explore. As you mentioned, rent-by-the-room is a viable option. There are companies such as PadSplit, HomeRoom, Bungalow, and Alcove that will assist in marketing your property, screening/placing tenants, and collecting rent. You certainly assume more risk with this strategy, however, if managed properly, the cash flow can be high yield compared to traditional LTRs. Moreover, while it is entirely speculative, you can account for an average annual rent growth rate of about 3%-4%, thus increasing future rent projections if you decide to hold the property as a traditional LTR. Lastly, holding the property as an STR is a viable option as well, however, you need to ensure that the County District and the City have not implemented any new rules/regulations regarding STRs (this is the risk you'll need to weigh). At the end of the day, this all depends on the rate you can lock in and how the market will play out over the next one to two years.

As an investor-focused real estate agent who has serviced multiple house hack clients, if you have any questions regarding investment strategies or the market in general, please shoot me an email or text to connect (contact info is listed in my bio). 

[Ryan Thomson]

@Sam Hatch I wonder if your criteria may be a little unrealistic for the current market.

House hacking is tough to cashflow in year one (with current house price run-ups and interest rates) and in year 2 after you move out, for a couple reasons:

1. You are living in one of the rentable units

2. You are only putting 5% down so your loan amount is much larger and therefore your mortgage payment.

I would consider your net worth ROI. What I mean by this is considering how much your down payment returns to your net worth (appreciation, loan paydown, tax benefits, AND rent avoidance). Don't forget to include rent avoidance in your numbers! You have to live somewhere.

You may need to lower your return or cashflow expectations so you can get into a house hack that will allow you to avoid throwing rent money away every month. You know this, but don't forget all the other ways real estate makes you money. Paying down your mortgage and owning an asset that will appreciate over the long term.

I wouldn't avoid one great investment bc you can't casfhlow and scale to the second great investment a year later. 

[Rick Albert]

I'm a 2x house hacker in Los Angeles. I'm also a case study in the BP book, "The House Hacking Strategy." Here's the reality and a game plan:

If the numbers work at 3.5% down, why wouldn't an investor putting 25% down pick it up? We have to be realistic in our expectations. The second thing is in this market, deals aren't found, they are made. Getting creative with what you see when others can't will give you that competitive edge.

Be careful who you talk to. Anyone who claims "I've been investing over the last 15 years so I know what I'm talking about" actually doesn't because they have been buying in a totally different market that those buying today.

Now that we have set expectations, let's create a game plan.

The name of the game with house hacking and future rentals is the bedroom/bathroom count. Can you convert dining rooms into additional bedrooms? Can you convert the garage into an ADU? How much funds do you have for rehab? This is option 1. Don't just fix up a house, add significant value with bedrooms and bathrooms. Plus this way if you put less than 20% down, you can get the property appraised again and hopefully get rid of your PMI. This will increase your cash flow.

The second is don't focus on the price, focus on the payments. Look for homes that have been sitting on the market and instead of a price reduction, negotiate the Seller to buy down your interest rate. Your cash flow is what's important here if you want to grow your portfolio.

The last but not least is I would focus on a 2 year plan, not one year. The market is likely going to slow down and we won't see the massive appreciation that we once had. I lived in my first house hack for 2.5 years (first 2 years I had a roommate). Then on my second house hack my wife and I lived in the smaller of the two units for two years and now we live in the main house and rent out the ADU.

I hope this helps. Be creative and stay vigilant. With everything going on, it is still a good time to buy and invest.

[Josh Bowser]

Hey Sam - my fiance and I are hacking a 3/3.5 townhome in Kennesaw. 

You're observation is pretty spot on. It is really hard to make anything cash flow right now as a LTR in metro atlanta. However, if you can house hack the same property for a few years, you can make something work when you factor in the cost of renting. 

If you are looking to house hack, I would look at buying something that you would be comfortable with living in for the next 3-5 years. In metro ATL, it is pretty reasonable to expect to collect $700-$1000 / month / bedroom (that includes utilities). If you rent 2 rooms you can subsidize home ownership by $1400-2000 / month which is a game changer. 

The ideal situation is to find something with separate units (ADU/In-law suite) in a good neighboorhood.

[Nick Schlag]

@Sam Hatch I am in the same boat as you. Thinking though that decreasing monthly housing expense is the biggest benefit (where I live in Socal, im paying $1900/ mo in rent), so figure if I could get my payment down to $1,000 or less, that is the same as finding an investment that cashflows $900/mo. I'm looking in Denver and Austin, if anyone has market specific tips for those areas!

[Jordan Moorhead]

@Nick Schlag you can definitely get it below $1000 a month here in Austin if you're creative!

[Konstantin Ginzburg]

@Sam Hatch Rather than targeting a SFH and renting out some rooms to house hack, have you considered to purchase a multifamily unit (ideally a 4-plex) and live in one of the units while renting out the remaining units in order to try to cash flow? A 4-plex or below would still count as a residential property which means obtaining financing for one is no different than financing for a SFH. This could also help you find renters more easily if you are able to find a good deal in a relatively good area of town. The amount of people looking for 1-2 bedroom apartments is larger than the pool of people looking for 4-5 bedroom houses. Statistically, the average family has 2.4 kids and this number is even smaller in large cities. This means, that a 2-3 bedroom house will be the ideal target for the average, meaning these houses will have the highest market place demand. From personal experience, I have found it harder to find tenants interest in our 4 bedroom apartment unit than I have had finding tenants for our 2 bedroom apartments or our 3 bedroom SFHs. Finding cash flowing homes has become more difficult now due to increases demand as well as a rising interest so there will be more work needed to find those properties but it is still possibly to do I believe.

[Ben Firstenberg]

Quote from @Josh Bowser:

Hey Sam - my fiance and I are hacking a 3/3.5 townhome in Kennesaw. 

You're observation is pretty spot on. It is really hard to make anything cash flow right now as a LTR in metro atlanta. However, if you can house hack the same property for a few years, you can make something work when you factor in the cost of renting. 

If you are looking to house hack, I would look at buying something that you would be comfortable with living in for the next 3-5 years. In metro ATL, it is pretty reasonable to expect to collect $700-$1000 / month / bedroom (that includes utilities). If you rent 2 rooms you can subsidize home ownership by $1400-2000 / month which is a game changer. 

The ideal situation is to find something with separate units (ADU/In-law suite) in a good neighboorhood.

Josh is spot on here. I've worked with a couple of house hack clients myself and we've found homes with in law suites to be the sweet spot. You have a little more comfort than if you were purely renting by the room but you still get decent revenue from renting the "main" unit since it's almost like renting a SFH.

When house hacking in Atlanta, I consider it a win if you're reducing your housing expense to somewhere around $500-1000 depending on comfort level, quality of home, location etc... 

[Laura Shinkle]

Quote from @Sam Hatch:

Quote from @Laura Shinkle:

@Sam Hatch here's the conundrum of all investors, whether you're buy and hold investments, BRRRR or househacking.

Interest rates have gone up and with it, your monthly budget for buying a home. In most places, the quick raise in prices over the last few years has outpaced rental rate growth. Most long term rentals don't cash flow unless you're putting at least 35% down in my area. So if you think about it, you're trying to buy something (presumably) with 5-10% down and then wanting it to cash flow as a long term rental in a year based on current rents? yeah, that won't work. 

Go back to the reason for house hacking. The reason it's so great is that the owner occupied loan options allow you to put less money down (ie buy a home faster) than if you were buying an investment. Then getting roommates reduces your biggest expense in your budget, your living expenses. 

No, it's probably not going to cash flow after year one unless interest rates plummet and you can refinance. OR, you can do what your market is telling you will work. Options: 

1. Stay in the home more than 1 year. Sounds like this is the area that you want to live in, so why not stay there? Saving in rent/mortgage will allow you to save at a much higher rate, so you can purchase a strictly investment property either in your area or out of state if you don't like the options in your area. 
2. When you move out, rent by the room. It's more work, yes, but if you'd prefer that to 'paying' for your investment a few hundred a month, then maybe it's worth the work. 
3. Make it a STR. These are known to cash flow better, but are of course more work if you manage it yourself.

Keep in mind that your ROI is guaranteed negative if you continue renting, so purchasing a home will always be the better bet in my book. And don't forget the other returns, such as tax benefits, loan paydown by your 'tenants' and appreciation.

Who knows, maybe in two years, LTR rates will go up enough to make it feasible. Maybe you can do the rent by the room for a couple years and then convert to a LTR. Trying to force a certain strategy in your market may not work, so let the market tell you what strategy WILL work. And go from there. 

Happy house hunting!

 Thanks for the info!

The reason house hacking appealed to me wasn't because of the access to 5% down FHA loans, it was more of the loan paydown by tenants and the fact that I wouldn't be "wasting away" rent money every month. I'm in a fortunate position to be able to put 20%+ down on a 3-5bd home in my metro area, so given the larger down payment cashflow after I move out seems almost guaranteed if I do the rent per room strategy (based on some rough calculations). Transferring it to a LTR after a few years of rent appreciation would be ideal, but I'm fine breaking even on the cash flow aspect due to the other areas of net worth growth involved with this strategy.

Given I can put 20% down on my first property, I'm not sure if this is still a strategy you'd advise, or if it'd make sense to research other methods of real estate investing that suit someone in my situation better. Thanks!
 

 So great clarification here. Getting right down to the point, I would still 100% recommend house hacking as a strategy, even though you're able to put more than 20% down. And I stand by that strategy for the same reason you mentioned, it eliminates part or all of your living expenses, thereby allowing you to explode your savings rate. 

If the rent by the room strategy will work to continue to cash flow, I think you've answered your own question. You could either do that to make sure you're not coming out of pocket, OR turn it into a long term rental and just be ok with contributing some money every month until rental rates come up. 

Now, once you're in this househack, that's when I would start potentially looking at other options for investing. Are you set on only investing in your area, or would another area be ok for you and get you a better ROI for investing? I think that's a great problem to have down the road, evaluate your options...but first, you're eliminating your biggest living expense, allowing you to save and invest that much faster.

That's how I'd go about it! Congrats on being in the position you're in, and good luck in your investing journey!

[Matthew Kwan]

HI Sam, happy to hear that you're hunting your first house hack! There are several ways to run and make sure you are maximizing your rental income while keeping your living expense as low as possible. Try looking into zillow/Redfin and see what your potential rents you can get near the neighborhood by filtering the bedrooms/bathrooms of the intentional property that you are planning to buy. This will allow you give a reference point on how much potential rent you can receive. (Max vacated rents - your monthly mortgage payment) = +/- net cashflow. Happy to connect and assist you in your real estate investing journey.@Albert Bui @Carlos