House Hacking During COVID-19
“How do I invest in an expensive market like LA?”
“Do you recommend buying in this COVID climate?”
I’ve been getting these two questions a lot. And usually, at the same time.
Regarding the second question, it depends. One strategy that can be highly advantageous at this time is called “house hacking.”
What is house hacking?
It’s when you purchase a property, live in part of it, and rent out the rest. A few common scenarios:
Rent out rooms in a single family home or condo.
Buy a single family home (SFH) with an accessory dwelling unit (ADU) aka “granny unit” or “in-law suite.” You live in one unit and rent out the other.
Buy a multifamily (duplex, triplex, or fourplex) and rent out the other units.
We’ll focus on the third option for this article.
What is a multifamily?
A multifamily property is a property or home with two more units.
If the property has two to four units, it is “residential” housing and allows you to use residential financing (e.g., FHA). This allows you to put down as little as 3.5%.
If the property has five or more units, it falls under “commercial” housing which requires commercial financing.
The distinction is also important when valuing the property. Any multifamily property with five or more units is valued based on the income it produces. Two to four units will be valued based on comparable sales (just like a single family) but will factor in the income (check with your lender on how it impacts the appraised value).
Why is house hacking a solid strategy during COVID-19?
Financing. As mentioned above, you can use residential financing. This means:
Low-money down. Your down payment can be as little as 3.5%! For some, that is the only way to get started in an expensive market, and for others, that means keeping more cash on hand and maintaining your liquidity for future deals/reserves.
Low interest rate. In March, the Fed lowered rates to 0%. I’ve seen borrowers with rates as low as 2.85%! If you add in private mortgage insurance (PMI), your total rate is still less than 4%. Lock that in over a 30-year period on an income-producing property in LA, and you’ve turned your mortgage into a long-term asset.
Less rent you have to collect. You are your own tenant. You still need a place to live during this pandemic. If you were able to qualify for that government-backed loan, chances are you have a secure job and the bank knows you can pay your mortgage. That’s one less tenant you have to worry about.
Ability to super screen your other tenants (and property managers). We highly encourage you to use a professional property manager. And because you’re investing locally, you can meet them face-to-face, drive around areas, and really vet who will be managing your building and the types of tenants your property will attract. Together with your manager, you’ll screen for highly qualified tenants. Even better, ask your brother or coworker to move in! (as long as you screen them like a typical tenant).
Less competition. Because of COVID, many buyers are nervous and sitting on the sidelines. Others are unable to qualify for financing because lenders are tightening lending requirements, especially on the non owner-occupied side. Before COVID, it was incredibly hard to compete with multiple offers on a property (and if it’s a good deal, you can expect several offers). Now is a great time to break into a market with huge demand, little inventory, and a diverse economy.
Please reach out for help with underwriting deals, finding a local lender, or anything else! We’re here to help you snag that first deal!
Article by Whitney Spatz
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