Things have changed a lot since Bigger Pockets started preaching the gospel of house hacking….
Is House Hacking just hype?
I can help YOU decide.
How to House Hack in the Bay Area
Hosted by: Strive Wealth Builders / JVM Lending
In the Bay Area, “House Hacking” is THE financially savvy way to buy your first home!
What is House Hacking? It’s buying a 2-4 unit building as your primary residence, living in one unit while renting out the others for additional income. HouseHacking can get you into a home, while others pay your mortgage!
This educational seminar offers practical House Hacking tips, tricks and tactics for financially-minded 1st-time house hackers. You get exclusive information from this top-notch team of experts in Real Estate, Tax Planning, Property Management and Mortgage Lending.
Guest Speakers:
Jay Vorhees – Founder, JVM Lending
Erich Huffaker — Founder, House Hacking East Bay / Better Homes & Gardens
Amanda Smith – Realtor, Better Homes & Gardens
Scott Isacksen – Investor, Founder of TCI Building Services
Jake Birnberg – EA, Strategic Tax Planning Services
Detra Harris – Executive Director, Strive Real Estate & Business Owner
Details:
Sunday February 24th
11:00AM – 12:30PM
3923 Grand Ave
Oakland, CA 94610
RSVP: http://erichhuffaker.com/househacking-rsvp/
Event Link: http://erichhuffaker.com/how-to-house-hack-in-the-bay-area/
Facebook : https://www.facebook.com/events/521327621694155/
:OVERVIEW: Solopreneur in both the Music industry & Real Estate seeks fellow out-of-the box thinker who is tech-savvy and reliable to support part-time with marketing, admin and other tasks.
:DETAILS:
The role will require attention to detail and ability to carry out tasks according to preset systems. The ideal person will have BOTH the ability to carry out these closed-ended tasks AND the creativity to understand the bigger picture, thinking of ways to make them better. The ideal candidate will learn to use social media as a holistic, marketing tool to generate awareness around causes. The ideal candidate will be tech-savvy enough to solve general problems, but is preferably not a programmer. Ability to drive is a must. Organization skills are imperative, as the candidate will be reporting progress back and forth.
:ACTIVITIES:
There are three buckets of activities that require support:
:MONEY:
This is a part-time position, estimated at 10-20 hours per week. Compensation will be $15-$20, according to experience and skill level.
:LOCALE:
This work will include remote work, and some one-on-one meetings.
Interested?
Follow these instructions (make sure you do all of them)
In this Bay Area market, HouseHacking is THE financially savvy way to buy your first home!
RSVP: >>>HERE<<<
What is HouseHacking? It’s buying a 2-4 unit building as your primary residence, living in one unit while renting out the others for additional income. Housing affordability is the biggest social and economic issue of our time. HouseHacking can get you into your own residence, while others help pay your mortgage! This educational seminar offers practical tips, tricks and tactics for financially-minded 1st-time homebuyers from the experts in Real Estate, Tax Planning, and Mortgage Lending.
Guest Speakers:
Erich Huffaker, Real Estate Consultant in HouseHacking
Greg Herman, Tax Accountant and Deduction Detective
Jim Valler, Mortgage Advisor and Lender Extraordinaire
Detra Harris: Real Estate Investor & Syndicator, Affordable Housing Advocate
Date:
Saturday August 25,
1-2:30PM
Location:
BHG Reliance Partners
3923 Grand Ave Oakland, CA 94610
Hosted by: Strive Wealth Builders
http://strivewealthbuilders.com/
“HouseHacking” is a hack that can be used to get into a home, even in the super-ludicrous speed Bay Area.
Househacking is purchasing a 2-4 unit building as your first home. You live in one unit, and rent out the others, allowing you to pay less mortgage each month. Here are three main advantages of HouseHacking:
1) You get to purchase an investment property, while taking advantage of the lower interest rates and lower down payment requirements enjoyed by homeowners,
2) you get additional purchasing power, and
3) you hedge risk by having rental income pay the mortgage.
This first installment here will cover best practices, so that you keep as much of your cash in your pocket as possible upon purchase, and you minimize monthly expenditures. Numbers, when used, will be stylized to illustrate the concepts with more detail to come.
Lenders charge higher interest rates on investment property than owner-occupied property. By purchasing a 2-4 unit building and owner-occuping one of the units for a period, you are classified as an owner-occupant and are given the lower interest rate.
You can also pay as little as 3.5% down for a 2-4 unit building using a Federal Housing Administration (FHA) loan. FHA loans are mortgages insured by the Federal Housing Administration. There are certain additional requirements of FHA loans and we’ll cover those later.
Lenders calculate the loan you qualify for based on debt to income ratio (DTI), the ratio of your monthly income to your monthly debts. In this example, the DTI is 43%, which is common. Let’s say your monthly income is $5,000, and you have no other recurring monthly debts. A lender can give you a mortgage for the loan amount that will result in a monthly payment of $5,000 * 43% = $2,150.
Now, let’s say that you purchase a property with three units (Triplex) and you plan to make one unit your home. This brings up the crux of the househack: 75% of the income from the two units that you don’t live in can be added to your monthly income of $5000. Let’s say each unit earns $1,500. From the lenders perspective, your income has magically jumped from $5,000 a month to (2*$1,500*75% = $2,250 + $5,000 = $7,250). Although before you could borrow up to a loan amount resulting in a $2,150 payment, now you can borrow a loan amount that results in a monthly payment of $7,250 * 43% = $3,117.50. The table below illustrates the impacts to your loan amounts from a duplex, triplex and fourplex (assumptions at end):
Your monthly salary | Number of units | What lenders will loan based on your salary | The rental income lenders can use | Income from salary and rent together | What lender will loan you* | |
---|---|---|---|---|---|---|
*This is not the purchase price; It’s the purchase price minus your down payment | ||||||
Single Family | $5000 | 1 | $2150 | 0 | $2150 | $424,326 |
Duplex | $5000 | 2 | $2150 | $1125 | $3275 | $646,358 |
Triplex | $5000 | 3 | $2150 | $2250 | $4400 | $868,389 |
Fourplex | $5000 | 4 | $2150 | $3375 | $5525 | $1,090,420 |
Yes, the market is red hot right now. Will it be this hot in 2-3 years? Most would say probably not. According to the third-quarter 2017 Zillow Home Price Expectations Survey released in August, there’s a 52 percent chance the next recession will start by the end of 2019. If you feel like waiting for a better time to buy, I applaud your patience; it’s an understated virtue in this culture! If you are buying now, then HouseHacking is the most economically sound way of doing it. Why?
The rental income provides a hedge against risk. If you were to simply purchase a single family home now, and the value were to decrease, then you would be underwater, paying a mortgage on a price that evaporated into thin air. The housing market, and rental market are certainly linked but not the same. Were you to purchase a multi-family, then both the housing market, and the rental market would have to completely tank before your experiment in HouseHacking would be jeopardized. This prospect is not unthinkable, but it certainly would take something deeper than just the next down cycle.
Final Thoughts
HouseHacking makes the most sense when the option you are evaluating against is renting. So for example, HouseHacking makes economic sense when you can get into a scenario where your bottom line HouseHacking is lower than your bottom line renting (assuming you have the cash for a down payment). And, although becoming a landlord and property owner may not be suitable for everyone, there is much to gain for those that are willing to try.
Numerical Example Assumptions:
Interest Rate 4.50%
Debt to Income Ratio 43%
Loan Term 30 years
Rent per Unit $1,500
Househacking Analysis
3236 Market Street, Oakland CA
Note: all figures are non-binding estimates
Check out the latest HouseHacking analysis of this triplex in West Oakland that’s been sitting on the market for 40+days!
The post below estimates both your down payment, and what your money out of pocket expense would be, after subtracting rent from mortgage under two situations: 1) 3.5% down (FHA), and 2) 20% down (conventional).
Single Family Home (for comparison only) |
Triplex, FHA (3.5%) |
Triplex, 20% down |
||
Purchase Price |
$750,000 |
$750,000 |
$750,000 |
|
Total Down |
$36,000 |
$36,250 |
$160,000 |
|
PITI |
$3,858 |
$4,988 |
$3,858 |
|
Estimated Monthly Payment |
AVG Rent |
|||
RentoMeter suggests following average rent: |
$1,500 |
$3,488.29 |
$2,357.89 |
|
$2,000 |
$2,988.29 |
$1,857.89 |
||
$2,500 |
$2,488.29 |
$1,357.89 |
||
Note: All figures are non-binding estimates meant to target properties for additional follow-up |
In this article, we’ll explore at a high-level what exactly it means to invest in mortgage notes.
We are familiar with a traditional mortgage in which a lender–often a bank or large financial institution–issues a promissory note in which the borrower promises in writing to pay a sum of money to the other upon an agreed schedule. In exchange the lender issues the money that purchases the property, which acts as security for the loan. In the event of default, the lender may take possession of the property. Essentially, when you invest in mortgage notes, you play the role of the lender.
To go any further, we must first explain one common scenario in which mortgage note investing is possible: seller-financing. Although not the only scenario, understanding the seller-financing context provides a necessary foundation for the notion of investing in mortgage notes. Let’s imagine that a buyer wants to purchase a property, yet prefers to not use institutional financing. It could be that their income history is inconsistent, their faith in corporate institutions is minimal, or it could be a variety of other reasons. The buyer may in fact, obtain financing for the purchase of the home from the seller instead of an institution. The seller now takes on the additional role of the lender. The interest rate, down payment and amortization schedule are all among the variables that can be negotiated between the buyer (borrower) and seller (lender). The terms of these loans are not subject to the same constraints of institutional lenders, therefore in many cases there is additional flexibility in how these variables are arranged according to the wants and needs of each party. Of course, in the same manner as a bank or any holder of a promissory note, the seller may foreclose on the property in the event of borrower default. For an excellent run-down on the pros and cons of seller financing, I’d recommend this Investopedia article: investopedia:
One element normally worked into the seller-financing arrangement is a “balloon payment”. The idea is that the loan is amortized over a 20 or 30 year period, however a balloon payment is due at a shorter interval, say 5 years. Why have a balloon payment? Lenders prefer these arrangements because they provide the flexibility to either exit early, or hold onto the income stream. The five-year period also gives the buyer (borrower) the opportunity to build equity in the property, improve their financial situation, and work towards refinancing the property with a conventional lender. Note that terms of these loans are not subject to the same constraints of institutional lenders, therefore
Here is the kicker: One can invest in these types of private mortgage notes by repurchasing the loan made by the seller/lender to the borrower/purchaser. So, for example, the seller/lender extends seller financing to the buyer/borrower, then turns around and resells the note to an investor on an open exchange. What is the advantage of reselling the note? The seller now can get the cash for the entire note from the investor, while the investor now earns the income stream paid by the borrower. Many mortgage notes that one finds are the result of seller financing in this scenario.
What does the purchase of this mortgage note entail to the investor? Am I the homeowner now? No. The borrower still stays on title. The only thing that has changed is who collects the mortgage. The seller/lender no longer collects the income stream from the mortgage, the investor does. Essentially, what we have done is gone from owning the property itself, to just owning the loan on the property.
Why go to all this trouble, when you could simply own the property outright? Investors like mortgage notes because they offer passive income delivered on a regular, predictable schedule. Often, there is a servicing company that serves as the intermediary between the investor and the buyer/borrower. Owning the mortgage note doesn’t require as much direct involvement as direct property ownership – no late night calls, property management, searching for renters, etc. Technically the investor doesn’t own the property; however, should the buyer/borrower default on the property, then the investor may foreclose and would then directly own the property.
In sum, investing in mortgage notes provides a streamlined, passive investment, with many of the benefits of direct ownership of real estate minus the headaches. We’ve really just scratched the surface on the topic. Stay tuned for further articles where we discuss metrics of importance in note investing, performing versus non-performing notes, and other topics.
After several years of consistent burgeoning home prices, talk on the ground for the last few months has quietly been of a general slowing of Oakland’s Real Estate market. Is this slowdown really going on? And if so, is it across the board, or only within specific areas or price ranges?