Author Topic: Making up the difference via house hacking in a VHCOL area?  (Read 629 times)

englishteacheralex

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TL;DR: Is it a really bad idea to take on a mortgage that you couldn't afford in the long term unless you were able to successfully house-hack?


Details (sort of a case study):

1. MFJ: Me (wife) age 40, Him (husband) 38; combined income ~$180k/year. Two kids, ages 5 and 3.
2. No debt except $286k on a mortgage for a condo worth ~$400k
3. We have about $45k in cash at the moment, but that is divided into several sinking funds. Our e-fund is at $30k.
4. Our current monthly expenses including charity, mortgage/HOA fees, and daycare/tuition average ~$9.5k. Monthly take home is about to be ~$11k.
5. We have $200k in retirement and $20k in a 529 for the kids. No interest in retiring early. We save 15% of our income in retirement accounts.

A lot of things have recently shifted for us financially; got rid of a big student loan, got a promotion, got a big discount for moving from daycare to discounted private school where I'm a teacher. We're starting to think about making a housing move to get out of our cramped condo. But we're on Oahu and any 3/2 SFH in a neighborhood without an ungodly commute is going to be ~$750k-$800k.

Adding $150k or so to that price often can get you a home with some kind of extra unit to rent. When we look at our budget, we think we would be comfortable with $3400/month for a mortgage. Buuuut if we went up to around a $4500/month mortgage we could potentially get a tenant to pay $2k/month or more of that mortgage. This is all hypothetical based on typical numbers of properties we look at.

We have the savings and the frugality skills to survive a couple of months without a tenant, or having to do normal maintenance/repairs/upkeep. But I'm concerned it might just be too risky and I'm overlooking all the things that could go wrong. This is a pretty solid rental market, btw. Depending on the neighborhood, there are several pools of good tenants.






SndcxxJ

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Re: Making up the difference via house hacking in a VHCOL area?
« Reply #1 on: July 19, 2020, 02:07:02 PM »
I would be comfortable with this choice if you consider a few things
1. Do you have some sort of safety net?  Maybe a parent with resources in case something goes very wrong.
2.  How long are comparable vacancies in your area?  Here in the Bay area when I put a unit to market showing a finished unit for two weeks would be a long vacancy.  Oftentimes I can find a quality tenant in less than a week.
3. How handy are you guys?  I do all work myself but find I still put about 1% of the cost of the property back into the property each year (above and beyond mortgage, insurance, utilities, property taxes, etc.).  We are talking water heaters, roofs, painting, flooring, etc.  The expenses often come in clumps, but it sounds like you guys can save money for when those times hit.  As a rule of thumb for myself I set aside about 20% of the rents I collect with the expectation that it will be needed for future vacancies, loss of rents, general maintenance.

If you can factor in those items above and the numbers still work out then it is definitely an option to consider.
« Last Edit: July 19, 2020, 02:10:34 PM by SndcxxJ »

Villanelle

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Re: Making up the difference via house hacking in a VHCOL area?
« Reply #2 on: July 19, 2020, 02:23:33 PM »
I would be looking at this like buying a $150k rental property.  (Based on the fact that you said it will be about $150k more than what you'd otherwise spend.)  That $150k will supposedly bring in $2k in rent, which more than meets the 1% criteria.  It's not exactly the same as is it were a stand-alone property, but it seems close enough to me.  That assumes your numbers, especially the presumed rent, are correct and that it is in a good location where finding good renters would be fairly easy (meaning probably low vacancy). 

You also need to make sure you would qualify for the larger number since lenders don't always want to take rent into account. 

Freedomin5

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Re: Making up the difference via house hacking in a VHCOL area?
« Reply #3 on: July 19, 2020, 04:47:53 PM »
Itís not the same as a stand-alone property at all. If for whatever reason you couldnít get the unit rented out, you could lose the entire house and end up homeless. In a stand-alone property, you could at least keep your own house. In your situation, it sounds doable, as long as your income is high enough that you could make the mortgage payments even in the absence of a tenant, though it may mean cutting out all the fluff in your budget.

Dicey

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Re: Making up the difference via house hacking in a VHCOL area?
« Reply #4 on: July 20, 2020, 04:04:55 AM »
I just stumbled across an HGTV show called "Aloha Builds". Have you seen it? In one episode, they convert part of a house into an Ohana, which made me think of you. I'm not sure if the show is still active, but might be worth digging up and watching.

I keep hearing how badly this pandemic is effecting Hawaii. Can't help but wonder if it will put downward pressure on home prices. I'd kind of be tempted to wait. Even if prices don't drop dramatically, there could be more inventory to choose from.

englishteacheralex

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Re: Making up the difference via house hacking in a VHCOL area?
« Reply #5 on: July 20, 2020, 10:49:17 AM »
I would be comfortable with this choice if you consider a few things
1. Do you have some sort of safety net?  Maybe a parent with resources in case something goes very wrong.
2.  How long are comparable vacancies in your area?  Here in the Bay area when I put a unit to market showing a finished unit for two weeks would be a long vacancy.  Oftentimes I can find a quality tenant in less than a week.
3. How handy are you guys?  I do all work myself but find I still put about 1% of the cost of the property back into the property each year (above and beyond mortgage, insurance, utilities, property taxes, etc.).  We are talking water heaters, roofs, painting, flooring, etc.  The expenses often come in clumps, but it sounds like you guys can save money for when those times hit.  As a rule of thumb for myself I set aside about 20% of the rents I collect with the expectation that it will be needed for future vacancies, loss of rents, general maintenance.

If you can factor in those items above and the numbers still work out then it is definitely an option to consider.

A safety net...not really. Not one that I'd be comfortable falling into. I haven't asked my parents for money since I graduated from college. I've spent my life trying to avoid something like that at all cost. The question posed here makes me wonder if this idea is really too much of a risk, with the numbers we're talking about.

I would be looking at this like buying a $150k rental property.  (Based on the fact that you said it will be about $150k more than what you'd otherwise spend.)  That $150k will supposedly bring in $2k in rent, which more than meets the 1% criteria.  It's not exactly the same as is it were a stand-alone property, but it seems close enough to me.  That assumes your numbers, especially the presumed rent, are correct and that it is in a good location where finding good renters would be fairly easy (meaning probably low vacancy). 

You also need to make sure you would qualify for the larger number since lenders don't always want to take rent into account. 



I appreciate the other comment that pointed out that looking at it this way fails to consider the possibility of foreclosure on your primary residence. I think we'd qualify for a pretty substantial loan, since we have good credit and good income. We're actually starting the process with a broker at the moment.

I like this way of looking at it because it makes it seem like not a big deal to take out a bigger mortgage, though!

Our friends who have tenants (all of our friends who own houses out here do some form of house-hacking because the mortgages are so massive) rarely have vacancies and never for longer than a few weeks. I used to live in someone's house hack and she never had any trouble filling vacancies. There's a housing shortage and it's a desirable place to live...at least for now! Tourism crapped the bed, so that may change. The military never leaves, though.

I just stumbled across an HGTV show called "Aloha Builds". Have you seen it? In one episode, they convert part of a house into an Ohana, which made me think of you. I'm not sure if the show is still active, but might be worth digging up and watching.

I keep hearing how badly this pandemic is effecting Hawaii. Can't help but wonder if it will put downward pressure on home prices. I'd kind of be tempted to wait. Even if prices don't drop dramatically, there could be more inventory to choose from.

YES! We saw that show a couple of times. We liked it. Yeah, if this were solely my decision I'd just be doing nothing right now. I'm all about waiting at least a year to even talk to a real estate agent. But Mr. ETA is so gung-ho...I keep telling him slow down, slow down, we need to save more money for the move and the down payment. And the market may be changing rapidly. It's hard not having a crystal ball.

Kierun

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Re: Making up the difference via house hacking in a VHCOL area?
« Reply #6 on: July 22, 2020, 05:07:47 PM »
Depending on the size of the ADU, $2k sounds about right for your desired area and vacancy rate should be pretty low. Unsure about pandemic putting downward pressure on prices, even during the 2008 crash properties in this price range didn't really budge, it was the multi-million dollar properties that crapped the bed. Personally, I think you could afford it in the long term, the mortgage remains fixed but rent raises and income raises should allow the mortgage to be more affordable in the long term.

Villanelle

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Re: Making up the difference via house hacking in a VHCOL area?
« Reply #7 on: July 22, 2020, 05:50:42 PM »
I would be comfortable with this choice if you consider a few things
1. Do you have some sort of safety net?  Maybe a parent with resources in case something goes very wrong.
2.  How long are comparable vacancies in your area?  Here in the Bay area when I put a unit to market showing a finished unit for two weeks would be a long vacancy.  Oftentimes I can find a quality tenant in less than a week.
3. How handy are you guys?  I do all work myself but find I still put about 1% of the cost of the property back into the property each year (above and beyond mortgage, insurance, utilities, property taxes, etc.).  We are talking water heaters, roofs, painting, flooring, etc.  The expenses often come in clumps, but it sounds like you guys can save money for when those times hit.  As a rule of thumb for myself I set aside about 20% of the rents I collect with the expectation that it will be needed for future vacancies, loss of rents, general maintenance.

If you can factor in those items above and the numbers still work out then it is definitely an option to consider.

A safety net...not really. Not one that I'd be comfortable falling into. I haven't asked my parents for money since I graduated from college. I've spent my life trying to avoid something like that at all cost. The question posed here makes me wonder if this idea is really too much of a risk, with the numbers we're talking about.

I would be looking at this like buying a $150k rental property.  (Based on the fact that you said it will be about $150k more than what you'd otherwise spend.)  That $150k will supposedly bring in $2k in rent, which more than meets the 1% criteria.  It's not exactly the same as is it were a stand-alone property, but it seems close enough to me.  That assumes your numbers, especially the presumed rent, are correct and that it is in a good location where finding good renters would be fairly easy (meaning probably low vacancy). 

You also need to make sure you would qualify for the larger number since lenders don't always want to take rent into account. 



I appreciate the other comment that pointed out that looking at it this way fails to consider the possibility of foreclosure on your primary residence. I think we'd qualify for a pretty substantial loan, since we have good credit and good income. We're actually starting the process with a broker at the moment.

I like this way of looking at it because it makes it seem like not a big deal to take out a bigger mortgage, though!

Our friends who have tenants (all of our friends who own houses out here do some form of house-hacking because the mortgages are so massive) rarely have vacancies and never for longer than a few weeks. I used to live in someone's house hack and she never had any trouble filling vacancies. There's a housing shortage and it's a desirable place to live...at least for now! Tourism crapped the bed, so that may change. The military never leaves, though.

I just stumbled across an HGTV show called "Aloha Builds". Have you seen it? In one episode, they convert part of a house into an Ohana, which made me think of you. I'm not sure if the show is still active, but might be worth digging up and watching.

I keep hearing how badly this pandemic is effecting Hawaii. Can't help but wonder if it will put downward pressure on home prices. I'd kind of be tempted to wait. Even if prices don't drop dramatically, there could be more inventory to choose from.

YES! We saw that show a couple of times. We liked it. Yeah, if this were solely my decision I'd just be doing nothing right now. I'm all about waiting at least a year to even talk to a real estate agent. But Mr. ETA is so gung-ho...I keep telling him slow down, slow down, we need to save more money for the move and the down payment. And the market may be changing rapidly. It's hard not having a crystal ball.

If you can't afford to carry the property without a renter, I don't think I'd do it.  That doesn't need to mean "comfortably afford", but if my budget was such that I couldn't trim all the fat and be okay, it would be a non-starter for me.