Book: The House Hacking Strategy

81txtrVkw6L“The House Hacking Strategy” By Craig Curelop

  • House hacking: “To summarize, it is when you purchase a one- to four-unit property, live in one part, and rent out the others so that the rent from your tenant is fully covering your mortgage.”
  • “The most common amongst house hackers seems to be the 3.5 percent Federal Housing Administration (FHA) loan.”
  • “Forced appreciation is when you do something to the property to improve the value.”
  • “As of this writing, the IRS requires the real estate investor to spread out the cost to purchase residential real estate over 27.5 years for residential building. The fancy word for this is ‘depreciation.'”
  • “Depreciation is a non-cash expense, which means that it does not come out of your bank account like your mortgage payments, insurance, maintenance, and repairs. It only shows up when you are displaying your financial statements to your accountant and the IRS at the end of the year.”
  • “To do this, we remove the estimated value of the land and divide over 27.5 years.”
  • “However, if you continue to do 1031 exchanges or hold the property until your death, the capital gains expense gets wiped away.”
  • “This part of the tax code says that if you live in a property for two of the last five years, you are able to sell the property without any capital gains tax up to $250,000 if you are single, or up to $500,000 if you are married.”
  • “Rather than taking the W-2 you receive in January, you will also have to fill out a Schedule E (Form 1040) and remember to account for all expenses for the maximum tax savings.”
  • “To maximize your house-hacking cash flow, it is best to purchase a property that needs some work. Purchasing a property in a decent location that needs work is a great value-add opportunity.”
  • “You need to make sure that you can afford your place regardless of whether you are at zero percent or 100 percent vacancy.”
  • “To avoid late or missed payments, or having to track everyone down once a month, I highly recommend setting up a service where rent can be deducted automatically from their accounts. I use http://www.cozy.co. It’s a free service that allows you to post your lease terms on the site and link your tenants’ bank accounts; it then automatically withdraws rent each month.”
  • “This strategy works in most lower-priced markets, but it is almost impossible to find a deal where you will fully cover your mortgage in the higher-priced markets. However, you do not need to totally offset your mortgage to still reap a lot of the wealth-generating benefits of house hacking. Even offsetting your $3000 mortgage by $1000 a month is still $1,000 a month in savings.”
  • “In some cities, there is a limit on how many non-related people living in the same place.”
  • “If you are looking for luxury house hack, make sure the house has a mother-in-law suite that you can put up for a short-term rental, or that it’s zoned for an additional dwelling unit (ADU) so you can build.”
  • “Trulia has what they call a ‘crime map’ that provides police reports with the details and location of crimes in that area.”
  • “You can go to almost any listing site such as Zillow, Trulia, or Redfin, type in the desired property address, and check out what elementary, middle, and high school is in the area.”
  • “To determine the quality of each school, there is a numeric grading system. Each school (elementary, middle and high school) will have a number next to it that is typically between one and ten. The higher the number, the higher the school system.”
  • “HomeAdvisor”
  • “If you plan on purchasing a two- to four-unit property, then the lender will take 75 percent of the appraised rents for the unit(s) that you are not occupying and ad this amount to the ‘income’ portion of the equation.”
  • “If you decide to go the short-term rental route, this will be considered 1099 income and you will need at least two years of short-term rental history to count toward your income.”
  • “If you purchase a single-family residence, live in one room while renting out the others, you are collecting what is called ‘boarder’ income. Unfortunately, most lenders will not include boarder income in your debt-to-income ratio unless you are apply for a HomeReady loan offered by Fannie Mae.”
  • “PMI is a monthly premium you pay when the loan-to-value is under 80 percent.”
  • “The amount of the PMI is typically between 0.5 and 1 percent of the entire loan amount on an annual basis.”
  • “Are you a full- or part-time agent?”
  • “You are going to want someone who is a full-time agent.”
  • “How long have you been an agent for?”
  • “I do not recommend working with anyone who has been licensed for under four or five years.”
  • “What percentage of your clients are investors versus homebuyers?”
  • “However, if they have never done a deal with an investor, then this is a red flag that they will try to sell you on the brand new appliances and granite counter tops versus the unfinished basement that can be used to add two bedrooms.”
  • “Are you an investor yourself?”
  • “It would be great to find an agent who is also an investor. However, this can be a double-edge sword. If your agent is also an investor, they may be competing with you on deals. If they are an investor, be sure that you are looking for different deals.”
  • “Have you ever transacted a house hack? Ask them to tell you about it.”
  • “What’s your view of the market? What neighborhoods do you like right now?”
    Questions for contractors: “How long have you been in the business?”
  • “The more experience the contractor has, the better.”
  • “Do you have a contractor’s license?”
  • “Can I see your certificate of insurance?”
  • “Contractors should have both workers’ compensation and liability insurance in case something happens on the job.”
  • “Will you obtain permits and set up inspections required for the job?”
  • “How long do you expect it to take to complete this project?”
  • “What is the payment schedule?”
  • “However, the most common payment schedule is typically 50 percent up front, 25 percent halfway through, and 25 percent upon completion.”
  • “What is the best way to be in touch?”
  • “Do you clean up after your project?”
  • “How do you deal with unforeseen expenses?”
  • “You will want someone who is very open, communicative, and does not hide anything from you.”
  • “Is there a warranty for your services?”
  • “You will want the contractor to provide at least a one-year warranty for their services.”
  • “Can you please provide a list of references that I can contact?”
  • “There is this thing called private mortgage insurance (PMI). PMI is required at any point you put less than 20 percent down, and this is why many people do not think to put less than 20 percent down.”
  • “Factor it into your numbers. If you can still cash flow with PMI, then it is worth it to still do the deal.”
  • “Unfortunately, the 5 percent down option only works if you wanted to house hack a single-family residence. If you want a two- to four-unit property, then you will need to either put a minimum of 20 percent down, or pick another loan option.”
    “The Federal Housing Administration, commonly referred to as the FHA, insures a type of loan that they creatively named the FHA loan.”
  • FHA requirements:
    “* Steady employment history or worked for same employer for two or more years.
    * Must be a U.S. citizen
    * At least a 3.5 percent down payment
    * FHA Loans are only available for a primary residence
    * Borrower must obtain an appraisal from an FHA-approved appraiser
    * Front-end DTI (debt to income) need to be less than 31 percent
    * Back-end DTI needs to be less than 43 percent
    * Minimum credit score of 580 if you wish to put 3.5 percent down
    * Minimum credit score of 500 to 579 if you wish to put 10 percent down
    * Property must be livable”
  • PMI interest:
    * Loan amount less than $625,000, down payment 5% or more, PMI = 0.80%
    * Loan amount less than $625,000, down payment 5% or less, PMI = 0.85%
    * Loan amount over $625,000, down payment 5% or more, PMI = 1.00%
    * Loan amount over $625,000, down payment 5% or less, PMI = 1.05%
  • “Unfortunately, the PMI remains with the loan even as you pay off and gain more than 20 percent equity. The only way to get out of private mortgage insurance on an FHA Loan is to replace your existing FHA mortgage with a conventional mortgage.”
  • “The reason we do not suggest the FHA Loan for a single-family residence is because there are conventional loan products that offer similar benefits to the FHA Loan.”
  • 203k loan: “It is a type of FHA Loan that allows you to lump any rehab costs into the same loan that is used to purchase the property.”
  • “Your contractors will need to do a lot more paperwork, and you will need to estimate rehab costs before you close on the deal so that the lender can give you the proper loan amount. There is an area on http://www.HUD.gove that assist you in doing this, but understand that there is more work involved.”
  • “However, you are on a tight timeline and need to make sure the project is finished within six months.”
  • “The FHA and 203k Loans are best for those looking to house hack a small multifamily property.”
  • “Be careful though, properties that are more than $400,000 will be difficult to house hack in many markets.”
  • “Hard money loans are called ‘hard money’ because they are based on the hard asset and nothing more. The lender is not concerned about your income, credit score, or any of your personal finances. They only care about that you are purchasing property that has a high likelihood of appreciating in value, usually through forced appreciation (e.g. rehab, raising the rent, or decreasing expenses).”
  • “Most hard money loans have a term of three to twelve months.”
    Portfolio loans: “You need to go into a bank–local banks and credit unions work best–and ask them if they sell their loans to Fannie Mae or Freddie Mac, or do they keep the loans on their own books. If they keep them on their own books, they are portfolio lenders and they may consider lending to you.”
  • “When you do find a lender that keeps their loans on their own books, make sure you are prepared with the following information:
    * Credit score
    * Monthly debt payments
    * Monthly income (W-2) or last two years of self-employed income
    * Cash reserves (including retirement)”
  • “The problem with wholesalers is that there are no barriers to entry. You do not need a certification or schooling. All you need to do is start opening up your deal funnel likely through one of the methods we describe above. For that reason, there are lots of wholesalers out there who are newbies just trying to make an extra buck, but do not actually know what they are doing.”
  • “In hindsight, he wished that he asked for a one-year warranty on the house, which would have made the seller financially responsible when major home system components broke down in that first year.”
    Places to look for rental rate for comparable units: “My top three are liting sites (Zillow, Trulia, and HotPads), Facebook Marketplace, and Craigslist.”
  • “NWROI = (cash flow and rent savings + loan paydown + appreciation) / initial investment”
  • “The first tier, and most beneficial, is the positive cash flow house hack. In this scenario, you are living in part of your property and renting out the remaining parts. The rent from your units is 100 percent covering your mortgage, reserves, and you still have some left over.”
  • “The second tier would be a break-even house hack. In this scenario, the rent from your tenants/roommates will cover your mortgage payment completely, but you will still ned to dole out maybe $100 to $300 per month for utilities and reserves.”
  • “The third tier (the least lucrative), though still helpful, is what I call the false-positive house hack. In this situation, the rent you receive will not cover the full mortgage but is helpful, and it will cover the mortgage when you move out.”
  • “In total, closing costs will typically be 2 to 5 percent of the purchase price of the property.”
  • “Be sure to ask the inspector if they are okay with you shadowing them and asking questions.”
  • “As you are going through the property with the inspector, I recommend that you take notes of the things you are going to fix, and the things that you are going to want the seller to fix. For anything that’s less than $1,000, put it on your list and for anything over, put it on the seller’s list to fix.”
  • “When the appraiser comes in and tells them that it is lower than expected, the lender is at a higher risk. There are two easy ways to solve this problem. The first, and most advantageous for you, the buyer, is to ask the seller to come down to the appraised value. They likely will be willing to do this if it is the difference between closing and not closing a deal. In the event that they are not willing to come down to the appraised value, you can pay the difference by increasing your down payment. any reasonable lender will accept either method so long as their risk profile has not changed.”
  • “In the case when you are seeking longer-term tenants, you willnto have to worry too much about fair housing laws if you are occupying the same dwelling as the prospective tenant.”
  • “I’m sorry, I do not accept prepaid rent of any kind. You are more than welcome to proceed with the application. If you meet all of my criteria, we can move forward and get you into the property as soon as possible.”
  • “I usually like for someone to move in one to three weeks after they have been approved.”
  • “I’m sorry, but this is a pet-free home.”
  • “I’m sorry, I do need to have the security deposit paid in full, up front. Do you have family or friends that could lend you money? Or perhaps a deposit being returned to you from a previous rental?”
  • “Never take the rental off the market until you have an approved application and a security deposit in hand.”
  • “How long do you plan on living here?”
  • “How many evictions have you had?”
  • “How many felonies do you have?”
  • “Have you ever broken a lease?”
  • “Do you smoke?”
  • “How did you hear about this?”
  • “When processing an application, there are four main things you are going to want to confirm:
    1. Verify income
    2. Order a background check
    3. Order a credit check
    4. Get references of previous landlords”
  • “The best way to verify whether their income is sufficient and stable is to call their place of employment.”
  • “The questions you will want to cover with the employer include:
    * Position title?
    * Rate of pay (if possible)?
    * Average hours per week?
    * How long have they been with the company?
    * How long do you expect them to be hired?
    * Any additional thoughts?”
  • “One that I recommend is called http://www.RentPrep.com. RentPrep has three services, which include basic, pro, and platinum ranging from $20 to $40. The pro package usually suffices which includes:
    * Scoial security verification
    * Address history
    * Eviction history
    * Bankruptcy search
    * Judgement and lien search
    * U.S. criminal search
    * U.S. sex offender search
    * Global Homeland Security search”
  • “If you decide to have the tenant do the application themselves, then I would recommend http://www.Cozy.co (as I have mentioned).”
  • Questions for previous landlords:
    “* What was the monthly rent?
    * How long did the tenant stay? Did they carry out the terms of the lease?
    * Did the renter always pay on time?
    * Did you find that the tenant had frequent guests?
    * Did you ever have to give the tenant any legal notices (late rent, noise, unauthorized occupants, or notice to vacate)?
    * Were there any pets?
    * Did the tenant maintain the home and keep in good condition?
    * Did the tenant give proper notice before vacating?
    * How much of the deposit did you give back? If they did not give back the entire deposit, ask about the repairs needed.
    * Would you rent to this tenant again?”
  • “Are yo curious as to how your prospective tenant will care for your place? Driving by their current residence should give you a good idea.”
    “However, not all tenants are responsible for lawn maintenance–sometimes the landlord takes care of that. It would be beneficial to ask the current landlord who is in charge of taking care of the yard.”
  • “If you run into a situation where the date the tenant wants to move in is not in your desired date range (i.e., too soon or too long), then it is not too late to decline the tenant. This is why you need to figure all of this stuff out before signing the lease.”
  • Software: QuickBooks, FreshBooks, Xero
  • See: local Real Estate Investors Association (REIA)

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