House Hacking Properties For Cash Flow

For those getting started in real estate investing (REI), and for those who also happen to want to live on the property as well, there are many options to explore: For example Buy an apartment, house, or mobile home park and live in one of the units. Unfortunately, the initial acquisition cost for bigger investments like that may prove to be prohibitive for an investor just starting out. These are three less-expensive, lower-risk options to explore: 2-4 units, granny flat/guest houses and “hacking” a SFR (single family residence). This of course assumes you are OK with playing landlord. Not everyone is. With all three of the following rental property strategies, the owner lives on the property.

2-4 Units

Duplex: the owner lives on one side and the tenant on the other. Triplex: the owner lives in one of the units, tenants reside in the other two. Fourplex: the owner lives in one of the units, tenants reside in the other three.

House Hacking

This is a REI strategy by which an investor earns rental income by renting out part of their primary residence: one or more bedrooms; “hacking” (upgrading) the garage into a decent and legal living space, etc.

Granny Flat, ADUs (Additional Dwelling Units)

Many different state and municipal jurisdictions have changed their zoning laws to help increase the density of people allowed to live in different neighborhoods. Depending on your local laws, it is now possible in many locales (and depending on the size and configuration of the SFR in question), you can literally divide the house in half with a partition wall; further, you may be able to enclose the garage and add necessary amenities to bring it up to code; further, you can perhaps place an ADU or tiny/micro home or container home on the premises, on its own separate foundation, best case scenario.

NOTE: Whether you decide to invest in 2-4 units, hacking or granny flat/ADUs, know this: Each unit usually must include the same amenities as a standard SFR: kitchen, bathroom(s), utility meter(s), a separate entrance.

Doing the Math

The good news is that all three types (2-4 unit, hacking, ADUs) of REIs provide two different, potential financial advantages: Positive cash flow income, hopefully from the get go, as well as landlord-related tax benefits in the form of deprecation, write offs, etc. over time.

Cash flow: Let’s take as an example a three-unit property (be it a triplex, hacked SFR or ADUs). If you charge each tenant $1,600 per month for rent, that would provide you with $3,200 per month in rental income ($1,600 per month X the 2 units you rent out). Added bonus: The $1600 per month you USED to pay in rent now accrues to YOUR financial benefit, not to your previous landlord. Also keep in mind that the renters need not pay your entire mortgage payment for this REI strategy to make sense. Whatever amount you collect from them means that your monthly payment is substantially reduced. In addition, the renters are helping you build equity faster than you could or would on your own.

Tax benefits: 1. Mortgage interest deduction for the mortgage interest you pay to buy and/or fix up your properties. 2. Deductions: insurance premiums, repairs, utilities (that are not paid for by the tenants). 3. Depreciation: You are allowed an annual deduction for the wear and tear your property experiences over time, spread out over 27.5 years for residential properties. Land however cannot be depreciated.

Financials

Identify the best funding for your REI property. FHA and VA government-backed loans: These loans are usually available for 2-4 unit properties. As long as you live on the property, you are probably eligible for one of these loans. There are also commercial loans available, however, the interest rates are usually higher as are the down payment requirements.

Down payment: FHA loans require only 3.5% down on 2-4 unit properties. VA = zero-down loan.

Cash flow estimate. Obviously, the higher the rents and the lower your total monthly expenses, the greater your net income from the property will be. Costs that effect cash flow include: principle & interest payments; property taxes; insurance; maintenance/repair costs.

What We Do: Quickly provide short-term, first position, private capital (WPFF) funding, to real estate wholesalers, among others.

Contact info: Tod Snodgrass, emdfunding1@gmail.com, 310-408-7015