House Hacking In Expensive Markets

[Mike Levene]

Hi all, I recently started an informal real estate group with some old college friends. They are all looking at strategies to use for their first deal and many of us are leaning towards a house hack to reduce the amount of capital we need upfront. The problem many of us run into is being in New England, many of the markets are high cost, high appreciation markets that we either can't get pre qualified for, or even after moving out will struggle to cash flow.

Another big constraint is that many of us have W-2 jobs in engineering that require some days in the office, and these types of higher paying jobs are primarily in major cities (most of us are in the Boston area).

Lastly, a lot of us have significant others that may be less interested in living somewhere "random" because it makes sense as an investment. If they were married, I'd think it would be more of a conversation about their future, but I can understand that if you are only with someone for 1-2 years they might not be willing to pack everything up and follow you on your real estate journey right away.

Any thoughts or ideas to help us sort through the weeds on how to go about finding a house hack with these constraints? Are there any markets outside Boston that any of you have had success with a house hack or tips to succeed in this type of market? I'm sure something similar applies to those who live in high cost cities like NYC, San Francisco, San Diego, Seattle, etc.

[Scott Trench]

I think that you have to take what the market gives you when it comes to house-hacking. 

The problem is: 

A traditionally financed low-down payment house-hack with traditional long-term rents simply won't cash flow during occupancy, or after, in many MCOL-HCOL markets in the US. 

95% leverage at even 5.7% just won't work in a lot of cases right now. Hard to produce cash flow or break even with that much debt, at that rate.

House-hackers, however enjoy certain one time (non-scalable) advantages that should be taken advantage of in the early days: 

- They can assume pre-existing debt like VA and FHA Loans (rather than take it on Subject-To which is dramatically riskier).

- They can rent by the room and self-manage to produce day 1 cash flow.

- Many of these HCOL areas also have strict limitations on AirBnB or short-term rentals... that do not apply to owner-occupants - thus allowing for extreme cashflow potential for house-hackers. If no one but owner-occupants can STR... then that should mean opportunity for owner-occupants who STR their primary residences in many jurisdictions.

- Large remodels or construction projects (Live in Flip) can be self-managed, worked on directly, and the value add, after 2 years, is largely tax free up to certain limits. 

- Many areas around the country allow for ADU Construction - house-hackers enjoy similar benefits to remodeling projects by being naturally on-site for ADU construction.

Putting it all together: 

If I were starting over and looking for a house-hack in Denver, CO today, I'd be looking for a 4 bed / 3 bath property in the $500K - $600K range in an up and coming area (like Aurora near the medical campus). I'd be looking for a property with an assumable mortgage on AssumableLoanFinder.com (Screenshot below of live deals available today for a house-hacker). I'd underwrite the property, with that low interest rate assumable mortgage, to cash flow positively from day 1 as a long-term rental, but be willing and able to use the rent by the room strategy or to rent out part of the property as a Short Term Rental to dramatically increase cash flow during my occupancy. 

The ideal property would meet the above criteria, AND would have a large yard, or ideally, a detached garage that was a suitable candidate for an ADU construction project (CO now allows ADU construction on most properties), and/or a primary structure that had lots of value-add potential.

This might give a one-time (non-scalable) boost to cash flow, offer multiple value-add options, and allow the house-hacker peace of mind, via the assumed mortgage, in long-term breakeven or positive cash flow in the event that the value-add plans end up not being executed, and/or the person has to move out, and rent by the room or STR become unavailable for some reason at a future date.