House hacking - part 2
In part one we discussed my clients, Steve and Cheryl, who doubled their money using the house hacking technique in purchasing, managing, and living in one unit of their fourplex multi-family property.
House hacking is purchasing a two to four unit multi-family residential property, living in one of the units and renting out the others.
You too can be a house hacker if you have the passion for becoming a real estate investor and the fortitude of being a landlord.
The financial side of house hacking in Napa
If you find the right deal in the right location, you could have the tenants’ rent cover your monthly loan payments or more. However, in Napa, this could be difficult as we shall see why.
Keeping your purchase to four units or less allows you the advantage of residential home loans and includes the FHA (Federal Housing Administration) loan as well as others.
Currently, a triplex in Napa is available to purchase for approximately $875,000, appears livable but could use updating. The minimum down payment for an FHA loan would be $30,625 after you finance in the closing costs the total loan amount would be $844,375. At an interest rate of 4.875 percent and a 30 year amortization period, this gives you a monthly loan payment of $4,547.
Rolling in an estimate for mortgage insurance, taxes, and property insurance the total monthly outlay would be $6,186. The total rental income is approximately $5,000 which gives you a shortfall of roughly $1,200 month.
Living in one of the units would cost you approximately $1,400 in lost rent, which brings your total monthly outlay to $2,600. Indeed, this is not rent-free, but for purchasing a multi-family investment property and home in Napa, it is pretty good.
How to find the right property
Locating the right property can take time, persistence and patience. It is a good idea to secure the services of a broker who specializes in two to four unit residential real estate.
In many cases finding a property not currently on the market could give you an edge, but this is where persistence pays off. There is a balance between the purchase price, current and potential rental income, loan amounts, and the cost of the improvements.
Being a landlord
Being a real estate investor has many positive attributes, but being a landlord may be more of a detriment to many. A landlord of a residential property is different from that of commercial or industrial property and is not for everyone.
Living with your tenants can exasperate the issues that come with being a landlord and may affect your peace and enjoyment of your home and is something to consider before taking on a project of house hacking. Depending on the property you could be “incognito” and hire a property management company to handle all the management and remove yourself from the picture. It will take some effort to maintain your status, but it is possible.
Burt M. Polson, CCIM, is an active commercial real estate broker. Reach him at 707-254-8000, or firstname.lastname@example.org. Sign up for his email newsletter at BurtPolson.com.