Why I’m Not House Hacking (& the Strategy That Will Cover More of My Rent)

by | BiggerPockets.com

Even if you’re only an occasional reader on the BiggerPockets blog, I’m confident that you’ve at least heard the term “house hacking.” If you’re familiar with the concept, please skip ahead.

In a nutshell, housing is expensive—it’s usually the most significant portion of a budget. House hacking is a strategy to cut down on your housing expenses by purchasing a multifamily property, often a duplex, and living in one unit while renting out the other(s). By using the rent you receive from the other unit(s) to put towards some, if not all, of your mortgage, you’re essentially living “rent-free.” And by utilizing a FHA loan, you can put down as little as 3.5% to get started. Sounds perfect, right?

Don’t get me wrong. House hacking is an awesome strategy that works for a lot of people. But I’ve decided that it’s not the best option for me and my lifestyle. Here’s how I reached this conclusion.

Background

I moved to Denver, Colorado for a job here at BiggerPockets in mid-March from Des Moines, Iowa. I had approximately ~4 weeks to find a place to live in Denver, and not knowing much about the city, I decided to rent.

Current Housing Costs

  • Base Rent: $1,380 (includes pet rent and parking spot)
  • Utilities: ~$140 for water, electric, and internet. I do not have cable.
  • Total: $1,520/month

My lease is up in early 2018, and as a real estate investor, I’ve certainly been thinking about purchasing a property in Denver either as a house hack or straight investment. The problem? Property is really, really expensive right now. For example, this 2-bed/1-bath 888 sq. foot duplex recently sold for $410,000 after selling for $210,000 in 2005. Here’s a triplex that sold for $650,000 after selling for $252,200 in 2012. While it’s possible and probable that remodeling could help explain the bump in prices, it’s still really expensive, especially compared to what I’m used to investing in back in Des Moines, Iowa.

great-deal

Related: Luxury House Hacking: How to Have Your Cash Flow, Equity Appreciation—and Live for (Almost) Free, Too

House Hacking Costs

One of the considerations for purchasing a house hack is that you have to be willing to live in half of it (it’s a stipulation for a FHA loan.) When I started to look for duplexes or triplexes, I couldn’t find anything listed for less than $450,000 that met the “I’d live here” criteria. For the sake of simplicity, let’s go with a final purchase price of $425,000. (Note: Yes, I know that I could spend more time networking/scouting for a better deal, lower my living standards or be open to other neighborhoods, etc.)

  • Purchase Price: $425,000
  • Down Payment: $16,000
  • Loan Amount: $409,000
  • Interest Rate: 4.12%
  • Property Tax: 2.0%
  • PMI: 0.50%
  • Insurance: $1,000
  • Mortgage Payment: $2,985

Now, let’s assume that I rent out the other 1-bed/1-bath unit for $1,600. That leaves $1,385 left to cover the remainder of the mortgage, which is essentially what I’m paying before utilities at my apartment.

Option 2

In either scenario, I do not like having to pay $1,300+ for housing. So I thought of another option. I currently have three rental properties in Des Moines, Iowa and wondered if I might be better off just investing in another property there to offset the high cost of living in Denver. Taking a look at the inventory there, I believe I would be able to purchase a single family home (likely a 3-bed/1 or 2-bath) for ~$130,000 that would bring in $1,200/month in rent.

  • Purchase Price: $130,000
  • Down Payment: $32,500 (25% down to keep the rates lower)
  • Loan Amount: $97,500
  • Interest Rate: 4.2%
  • Property Tax: 1.5%
  • No PMI
  • Insurance: $800.00
  • Mortgage Payment: $700.00

Renting out the house for $1,200 month, I will have $500 to put towards my $1,380 rent, essentially bringing it down to $880.

Pros and Cons

I see the major con of renting being that you’re just giving your money away to someone else—I never like that feeling. Having lived in a property that I owned since 2010, going back to renting was really hard at first. But there are benefits! I like having a gym and a pool. I like not having to worry about maintenance headaches. I like not feeling tied down to a specific location. I also love the location that I’m in, and as they say in real estate, location is priceless. We’re two blocks from Coors Field, we have a grocery store across the street, and I can walk to work almost every day to save money on transportation.

Related: Meet Tim: How One Newbie Investor House Hacked a Duplex With No Prior Experience

Sure, the Des Moines market isn’t as sexy as Denver, and maybe it won’t appreciate as much. I’m losing the possibility to build equity, but I’m also being much more conservative adding a way smaller amount of debt to my balance sheet. Having a vacancy for a few months and covering a $700 mortgage payment sounds a lot safer to me than possibly having to cover ~$3,000 if both units of the duplex were vacant.

Conclusion

Unless I find a killer deal, I don’t believe I’ll be investing in a multifamily unit in Denver anytime soon. Instead, I plan to invest in a market I’m more familiar with and where I already have established properties. I’ll still use the rental income gained to pay my crazy expensive rent in Denver, so I guess maybe it still could be considered “house hacking.” 🙂

House hackers and others: I’d love to hear your thoughts on this strategy!

If I’m not considering something that you would, please let me know!

About Author

Julie Kent

Julie is a software engineer, real estate investor, and book worm. She accidentally fell into real estate five years ago and currently owns three rental properties in the Des Moines, Iowa metro. She couldn't be happier working at BiggerPockets and looks forward to helping change more lives! In her free time, Julie enjoys live music, watching/playing sports, and spending time with her boyfriend and dog.

23 Comments

  1. Edward C.

    Great post. Agree it may be a better option to find additional streams of income given how much properties in certain regions have appreciated. Am in the same boat and would rather wait to swing at a fat pitch than go chasing sliders. Thanks for sharing.

  2. Adam Britt

    We are in a somewhat similar boat. The House Hack options I’ve seen in Birmingham (or nearby) are nothing close to a place my wife and I would live, doubled by the fact that we are currently caring for an older family member in our house. Our rent is astronomically high and we NEED another alternative, but I just can’t find a house hack that would be safe and effective. Thanks for your thoughts! I’m actually hoping to jump into getting my first rental property soon, and may well just go rent a spot to live so that I can afford the down payment rather than using all my savings on a house, but losing money I could invest.

  3. Luis Roa

    Hmm… let’s think about some scenarios (on paper):

    Scenario 1. Assume that house prices continue to go up in Denver and that the hypothetical property in option 1 goes up by 10% every year for the next 3 years (a total of 135K give or take). Assume that the property in Des Moines goes up by 5% (this is reasonable ratio of increases between the 2 properties, right?.. then, it will have gone up by around 20K in the same 3 years). In your examples, you have put an additional 16K down payment for the Des Moines property, which is almost equivalent to 3 years of $500 applied to your monthly rent. In this scenario: at the end of 3 years you would have paid the same amount of rent (due to the 16k offsetting the 500 rent savings from the Des Moines property) and you will be ahead by $115K. Please keep in mind that the risk of being an absentee home owner (far from your rental) and the risk of not having both sides rented in the Denver property where there is a higher monthly payment, almost offset each other. Also, please note that the $16K not spent in the purchase, can also be used as funds for any catastrophic event (no side rented for several months). In this scenario, it seems to me that purchasing in Denver wins.

    Scenario 2. Assume that the Denver house price go down by 10% each year for the next 3 years and that the house in Des Moines goes down by 5% (a nationwide recession hits us). Your property in Denver has a paper loss of $125K give or take. And your property in Des Moines a loss of 17K give or take (rough figures, didn’t calculate exact numbers and it doesn’t matter, a rough figure is OK as this is just a hypothetical example). In this case, you may face vacancy pressure in both rental markets, which one will recover faster? what is the largest draw-down funds you need have on hand to ensure you are not forced to sell at a loss? Obviously, here Des Moines wins.. hypothetically you could lose up to $110K more in Denver as compared to Des Moines.

    How can you hedge against the potential loss in scenario 2 so that you participate in the (more likely) healthy upside of scenario 1?

    It is a matter of having funds available to avoid having to sell during the bad times. You are 16K ahead already in the case of Denver. I would carefully get historical data and analyze the patterns during the worse times (how did the rental market behave? longest vacancy expected? how much lower rents had to be to attract best tenants? etc. and equate this to the additional funds to manage this potential problem (could be a line of credit against other properties, that you only use when required, could be considering using a 401K loan, etc… you just need to secure access to those funds when they are needed)

    I think the upside is high enough that it would make sense to carefully analyze the risks if scenario 2 happens, and bring them to zero with careful planning. Please note that I believe scenario 1 (increase in house prices in Denver) is more likely than a 30% correction from current prices. But, of course, any one of them (or anything in between or beyond) could happen. It is just that the market there doesn’t seem to be as out of whack as the market in San Francisco is, and house values and rents will probably 3 years from now will not be lower than they are today.

    But, at the end it is a matter of how comfortable people are w/ more or less risk.

      • Luis Roa

        Sean, one of the scenarios has appreciation going up (I think that’s more likely for the next 3 years in Denver) and the other one going down.

        The article discusses two options: put a higher down payment and purchase a lower cost house in Des Moines, or purchase a more expensive house in Denver with a lower downpayment.

        The way it was setup in the article the higher down payment and lower cost, resulted in a reduction of $500 per month in rent (but it used additional $16K at closing for down payment)

        Clearly you can use the same $16K and use $500 per month to lower your rent during 32 months, correct? (16K/500 = 32)

        So, for close to 3 years from the point of view of rent reduction, they are pretty much the same.

        The question is: would you fare better 3 years from now, with option 1 (Des Moines house) or with option 2 (Denver house)?

        Since no one has a crystal ball and can’t exactly predict the future, one has to think about different scenarios to see how one make sure to come ahead.

        If you are completely risk averse, the option 1 is the way to go, as it minimizes the potential down risk.

        But, if you can tolerate more risk, and have some additional means of eliminating the worse case scenario, by ensuring access to funds to allow you to survive any bad recession, then option 2 is much better, as it has a very possible > 100K better outcome in 3 years.

        One doesn’t create wealth without taking some (calculated) risks…

    • Jeremy Drolet

      Counting on additional appreciation in a market already at a historic all-time high is called speculation, not investment. Investment is based on sound financials (protection of capital WITH a promise of return), not wishful thinking that government backed FHA loans will continue to push prices skyward. I can’t find any sound reason to justify paying a premium to be in a “hot market” just because others are willing to do so. What do the numbers look like without the appreciation factor??

      • That’s why I recommended using multiple scenarios, to better understand the situation (scenario where appreciation happens, scenarios where there is a downturn) and deciding what the best path to generate wealth is.

        But, let’s calculate it “without the appreciation factor” as you say:

        1) using a mortgage calculator (such as the one at https://www.zillow.com/mortgage-calculator/) one can see that with the values in the article for the house in Denver, one would have paid it down to $386,285 and would have an equity of $38,715 if the house would not have appreciated at all.
        2) Similarly, for the house in Des Moines, the house would have been paid down to $92,156 and the equity would be worth $37,844 (numbers are similar in terms of equity due to the higher down payment)
        3) in the case of the Denver house, one has paid out of pocket as follows:
        16K down payment, monthly payments of $1385*36=$49,866 for a total of $65,860… subtracting the equity, the net worth is then -$27,145.00
        4) in the case of the Des Moines house, one has paid out of pocket as follows:
        32,500 down payment, monthly payments of $880*36=$31,680 for a total of $64,180 … subtracting the equity, the net worth is then -26,336.00

        So,
        the difference “without the appreciation” is around $800.00

        However:

        if there is some appreciation, the scenario is different and heavily better in Denver.

        If there is depreciation, the scenario is different and heavily better in Des Moines

        Since the name of the game in investing is to end up with more money over a period of time, by minimizing risk, under all possible scenarios, and since one knows that over time, Real Estate tends to go up and recover, even from heavy depreciation, then

        the real way to accumulate wealth is to go with scenario 1, if and only if, one can survive the potential depreciation scenario, but ensuring that one has enough funds to weather that storm.

        I welcome other analysis, so that I can learn more, but this is what the numbers say to me.

  4. Ruth Lyons

    Great article. Thanks for sharing. Exploring all options, understanding the numbers and considering personal short term and long term goals is so important to real estate investing success. Congrats on your job at BiggerPockets too!

  5. Brandon Hall

    Good article Julie!

    I’m not sure if you have thought about this, but on the house hack option, it didn’t seem like you factored in principal payments. In your example, they amount to roughly $580/mo. Sure, it’s not tangible, but it’s equity that you CAN utilize. So really, your net “out of pocket” is roughly $800 on the house hack option.

    On your rental property scenario, it seems you are using gross rents without factoring in any expenses to justify the strategy of picking up properties. I’d just caution you that what you make in gross rents never actually makes it back to your pocket 🙂

    I’ve tried both of your methods. When I lived in DC, I picked up a 3-unit out of state in a cheaper location. It was a great buy, but the rents never actually offset my DC rent because I didn’t pull the cash out. I didn’t want my investment properties to allow me to justify a higher standard of living. I think it’s a dangerous trap to fall into.

  6. Robert Lapp

    Thanks for sharing, and it is a viable strategy. The only key difference i see is the “out of pocket” cost between the two scenarios, whereas one gets you in for $16K and the other requires almost 2x as much. Is there a possible scenario where you could FHA in Denver, at or near similar costs, then use that remaining money (available cash being the net difference between the two scenarios) and invest in a cheaper area for cash flow? That way you get the benefit of owning in denver and reducing your housing overhead. Either way I guess i was just trying to make both scenarios where cash out of pocket was equal.

    Thanks again!

  7. Danny Stiller

    In the Scenario 2 above you are collecting $1200 rent with a 700 mortgage payment. Are you saying the $700 includes the monthly mortgage payment, insurance and property taxes?

    Also, even if the $700 is all the above pieces (Mortg, ins, tax), do you have money saved back to take care of any repairs/maintenance? Is that a common practice for landlords to have money saved back like self insuring? OR do you use money from your JOB income at BP to pay for maintenance/vacancies, etc?

  8. The thing you ignore is equity. Say both properties go up 50% in 5 years, that’s a difference of about $150K that you have made in Colorado versus Iowa. Also you are neglecting the amount of principal you are paying which is over twice as much in Colorado.

  9. Scott Hibbert

    Julie I have recently been considering a similar question except I will be moving from Boulder, CO to the Bay Area. Expensive to more expensive housing. I own my house in Boulder and will be renting it out for about $750 above my $2250 mortgage, insurance, taxes. I haven’t run the full rental calculator on it to include capex, etc but that’s not the point.
    There have been plenty of good responses above with details about the various options and I think one more thing to consider is how much your rent in Denver could increase per year vs your Iowa rental income increase per year. I would expect the rent you pay in Denver to increase much quick that your rental income in Iowa which will increase your costs of living every year.
    For me I am wondering if I should put some of my extra cash to work in an area like Ohio, or Iowa to create rental cash flow instead of using it as a down payment in the Bay Area and just rent for a few years.
    But at the same time I personally like knowing how much my monthly housing costs will be with my 30 year mortgage and not leaving it up to a landlord to decide.
    In a month when I move to the Bay Area I will rent to get a lay of the land and an idea of the neighborhoods I want to live in and then hope to buy a 4plex to have better control over my monthly housing expenses year after year and hopefully reduce them by raising rent on the other 3 units while my mortgage remains the same.
    Just something to consider and how much value do you put on the maintenance free benefits of renting. I think the answer depends on personal priorities and goals.

    • The problem is, how many Georgia investors become millionaires?

      Nearly every landlord in the Bay Area and LA is a millionaire and most many times over.

      Yes, the price of admission is high, but you get what you pay for.

  10. Julie,
    I understand you’re trying to make an argument of scenario A vs B and enjoy the discussion, but why are you limiting yourself to small multis when a single family can work just as well in a major city? At least in DC ( where I am), you can rent out per room at almost the same amount as a 1 bed/1 bath in a more traditional duplex/tri/quad scenario. Also, a 4 bed SFH is usually going to be much cheaper than a quad, so your numbers make more sense. Just something to consider living in a major city where a perceived disadvantage could really be your “unique advantage!”

  11. Bill Regan

    Thanks for the article Julie.
    Have you considered the strategy recently outlined by Ben Leybovich in his new book and series of blog posts?
    If you turn the other unit of your duplex, or find a SF with a garden apartment, into a short term rental you can easily double your monthly rental amount thereby offsetting the high cost of Denver real estate. Then you have exposure to the upside potential of appreciation there.

    • Scott R.

      I get the appreciation upside but the duplex in option 1 would never cash flow without doing short-term rentals. So how would one move on from there into the next property if one wanted to repeat with another MF? Try cash-out in 1-2 years?

  12. Takeo Kingi

    Interesting article especially on the housing market in those two locations. One thing I did notice was when you referred to “house hacking” you strictly referred to multi family properties and maybe I’ve always misunderstood the term but doesn’t house hacking also apply to single family residents. I consider myself to be a house hacker. I own a 3 bedroom 2 back 1,220 sq ft home. I rent out both extra bedrooms and those tenants/ roommates share a bathroom and each pay rent. After all I don’t know a whole 3 bedroom house to myself. If you were married with kids the scenario would be different but it sounded like you’re single. My house hacking (when both rooms are rented) pays almost my full mortgage payment and works great. My rent is fair and the living conditions are great for us all. I do believe you can have better house hacking success in single family homes if it doesn’t make sense to purchase a multifamily home. Just my two cents!

  13. Frankie Woods

    Great article! I like the idea of including the principal payments in your calculation. You also have to consider the tax savings from owning a primary vs rental. Like you, I would never get on appreciation, but if you can house hack to li e at the same level as your renting, I would go for the better market.

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