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House Hack Your First Home

“House hacking” is a phrase that’s rather new, but the concept has been around for a while. In a nutshell, house hacking is owning and living in your own home while also receiving rental income from the same property. It applies whether you own a single family home, a condominium unit, townhome, a multifamily property, or even a farm! Depending on market conditions, somebody using the house hacking method could buy a home with as little as 3.5% down, and live close to free, or even come out on top, when all of their expenses are paid at the end of each month.

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House Hacking Scenerios

Farmstead

The farm approach has been around, well, since farming. A farmer can own his or her own farmstead, and rent the farmland to tenant farmers, or even rent stables to nearby horse owners.

Condominiums and Single Family Homes

A condo and single family homeowner having live-in roommate(s) paying a monthly rental amount.

2-4 Unit Multifamily Property

Buying a 2-4 unit multifamily property is the method I’ll most elaborate on in this post since I think it’s the best way to utilize the house hacking method to its full potential. I use a 2-4 unit building example for a few reasons:

  1. 2-4 units properties are classified as residential real estate; whereas anything 5 units or more are classified as commercial real estate;
  2. 1-4 unit properties qualify for residential loans (5+ unit properties must receive commercial financing from a bank);
  3. if the buyer of a 2-4 property qualifies, they can put as little as 3.5% down on the purchase (5+ unit properties require much larger downpayments); and
  4. 2-4 units properties, and in particular a 2 unit property or “duplex” is, in my opinion, most available in central Ohio, where I perform the bulk of my business. I’ll use it going forward in this post.

House Hacking a Duplex the Right Way

Let me introduce you to “Andrew.” Andrew is a self-employed local attorney. He is single, has been self-employed for at least two years (tax return-speaking), and currently rents an apartment for $900 per month in Columbus. He likes his job, plans to keep it for a while. He also plans to get married someday, but the right person has yet to come along and sweep him off of his feet. However, he’s tired of paying somebody else’s mortgage in the form a monthly rental payment. He also thinks that, if he finds the right somebody, someday, they may want to buy a single family home in which to raise their family. However, he sees the local real estate market only increasing in value every year, and would like to build some equity in the form of increasing home value.

Andrew calls a friend who is a local Realtor to talk to him about the situation above and is excited to get started on buying his first home in the form of a duplex, which he plans to “house hack.” His Realtor explains that there are three facets to home buying: 1) to buy the right home, at the right price, terms, and conditions; 2) to finance the purchase with the best loan terms and conditions; and 3) to properly manage and maintain his property after purchase to ensure optimal performance and income or resale potential.

Financing Your House Hack

Andrew’s Realtor connects him with a local lender who is well-versed in Andrew’s strategy and the loans for which he would qualify. Because he’s self-employed, the lender needs the following to examine Andrew’s purchase ability:

  • Completed loan application;
  • Two years of most recent federal tax returns with all schedules signed/dated by time of application; and
  • Business tax returns for the most recent two years.

If Andrew had a standard salaried, or hourly-wage job, his lender would likely need the following documents:

  • All consecutive pay stubs for the most recent
    30 days for all borrowers
  • Documentation for any other source of income
    being used to qualify, such as pension, Social
    Security Income or disability income.
  • Checking, money market, savings, stocks,
    mutual funds, IRA, 401k statements for the
    most recent 2 consecutive months (all pages,
    even if blank)
  • If rentals exist in Schedule E, provide a
    complete breakdown of liens, taxes, insurance
    and lease agreements
  • W-2’s for the most recent 2 years

After examining Andrews application and supporting tax returns, the lender determines that Andrew could qualify for an FHA loan requiring 3.5% downpayment and a maximum purchase of $256,000 given that he has the downpayment amount of $15,000 (Andrew says he can provide, with the help of his parents who will provide a lender-allowed “gift.”).

While Andrew went through the prequalification process, he learned that in Franklin County, Ohio, where he plans to purchase his duplex, there are loan limits he must adhere to. Those limits are (for 2017):

  • One unit home (single family or condo) $326,600
  • Two unit properties $418,100
  • Three unit properties $505,400
  • Four unit properties $628,050

Andrew’s Purchase Parameters:

The Sweetener

Because Andrew plans to buy a duplex, he is able to count up to 75% of the estimated rental amount he’ll be receiving from the other side towards his “income” when qualifying. Assuming he’s able to rent the other side of his duplex for $1,200, that’s an additional $900/month he’s able to use towards qualifying. His new purchase parameters have drastically changed, and are evident below:

House Hunting

Equipped with a prequalification letter from his lender, Andrew and his Realtor start the home search for duplexes under $305,000 in a few areas of town where he sees himself enjoying life. Before having an offer accepted, he looked at eight duplexes with his Realtor, and made two (unsuccessful) offers. Andrew learned it’s a hot market, so the competition was fierce!

Accepted!

Third time’s the charm! Andrew’s third offer was accepted by the seller for $289,900 with the seller even providing a $1,500 credit towards Andrew’s closing costs!

The Deal

Andrew’s duplex is located just south of Schiller Park in the Merion Village neighborhood of Columbus.

Home Details:
  • 2 bedrooms, 1 full bathroom per side
  • Total building square foot of 1,604
  • One side rented for $1,100
  • One side (Andrew’s residence) vacant
  • Enclosed backyard (for his dog, Brutus)
  • Off-street parking
Andrew’s cost of purchase:
  • 3.5% downpayment ($10,146)
  • Inspection Cost ($400)
  • Closing Costs paid by Andrew ($4,000)
  • Seller contribution/credit towards Andrew’s closing costs +1,500
  • Amount Andrew had to contribute to deal ($13,050)
Monthly Cost of Ownership

Andrew’s monthly cost of ownership is $1,988, which is about $1,000 more expensive each month than when he was renting. However, because he’s receiving $1,100 per month in rent from the other unit, he can expect to pay about $888 per month to own his own home – less expensive than when he was renting. He could receive even more income per month if he were to rent out the bedroom in his own unit, but because he works from home, he wanted to keep the extra bedroom to be used as a guest room/home office for his real estate practice.

Managing Right

Upon closing, Andrew’s goal was to live in one side, and rent the other unit to the tenants he inherited from the purchase. Even though he wants to keep his options open, he plans on holding onto this home as a rental property for the long-term. If Andrew were to move and keep the property, he’d want to do the following:

  1. talk to a mortgage lender to see if he has enough equity in his property to remove the private mortgage insurance he’s currently paying (approximately $239/month in savings);
  2. set aside 5% of the collected monthly rent to mitigate future vacancy costs;
  3. set aside 5% of the collected monthly rent for operating/maintenance costs;
  4. set aside 5% of the collected monthly rent for capital expenses (e.g., big ticket items like furnace, A/C, and roof repairs; and
  5. Talk to his Realtor about finding a property manager, should he not wish to manage the units himself (the management fee is usually well worth it in the long-term).

Conclusion

Buying your first home is a daunting process, but if you’re equipped with the right relationships, you can explore options like Andrew did, and capitalize on the hot housing market, and stop throwing your monthly rent check at somebody else’s mortgage.

Some recommended tools and resources:

If this is something you’d like to consider, I’d be happy to chat!

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Andrew is not a real person, and the scenario above is made up, but it is based on real information and an actual duplex sold in Merion Village in 2017. The advice given above is general and applies to Ohio only. Consult with a licensed real estate agent, and licensed mortgage lender to ensure you’re being given the most current and accurate information.