The Best Properties for House Hacking

This module discusses the best properties for house hacking in the Denver market today. Several people who come to us have researched house hacking online about the type of property they think they need to be successful with a house hack strategy. While certain properties might be more ideal, the information usually acquired is from talking about house hacking on a national and very general level. Online national information is often like a “square peg in a round hole” situation—it just doesn’t work! We want to look at house hacking on the local and specific level and what will work best for our current market in Denver.

This module discusses the best properties for house hacking in the Denver market today. Several people who come to us have researched house hacking online about the type of property they think they need to be successful with a house hack strategy. While certain properties might be more ideal, the information usually acquired is from talking about house hacking on a national and very general level. Online national information is often like a “square peg in a round hole” situation—it just doesn’t work! We want to look at house hacking on the local and specific level and what will work best for our current market in Denver.

This module covers:

  • The four main ways to find an investment property
  • How multi family works for house hacking
  • How detached houses work for house hacking
  • How condos and townhomes work for house hacking
  • How Accessory Dwelling Units (ADUs) fit into a house hacking strategy

Four Learning Options!
Ultimate House Hacking Guide for Denver
  1. Order the book on Amazon or grab a copy from us
  2. Listen to episode “#206: UHHG – #3 The Best Properties for House Hacking” on the Denver Real Estate Investing Podcast
  3. Watch the YouTube video (at the bottom.)
  4. Read this blog post, which is from the book.
Start at the Ultimate House Hacking Guide for Denver Overview for a list of all the modules.

One of the misconceptions several people have is that the only good deals to be found are ones that are “off-market” or ones where you need to go around knocking on doors or work with a wholesaler to find them. While these methods work for some investing strategies, we’ve found that for house hacking, it’s not the best or easiest way to find good deals.

deal quadrant

There are four main ways to find an investment property.

  1. Multiple Listings Service (MLS) – Properties found online through sites like REColorado, which is the Denver MLS.
  2. Networking – Properties found through relationships with friends, family, business associates
  3. Wholesalers – Properties found through both MLS and “Off-Market” opportunities. Wholesalers spend their time getting property contracts with sellers, then finding investors to buy those contracted properties through an “off-market” format. This person is typically not a real estate agent.
  4. Lead Generation – Properties that are found by generating leads yourself. Think of those “we buy ugly houses” or “we pay cash for houses” signs on the side of the road. Usually these are investors trying to find sellers in a distressed situation who need to sell a property fast.

The good news for Denver house hackers is that the most successful way to find good house hack properties is through the MLS. This surprises some clients. They think working with wholesalers or doing some lead generation is where you are going to find the best deal for your money.

The reason working with those two quadrants is very difficult for house hackers is the timeline. Usually Wholesalers and Investors who are able to pay cash for properties are able to make an offer, put “hard” (non-refundable) earnest money down in a couple of hours, and close on property in seven to ten days! For a typical house hacker, who is buying the first or second property, that is simply too fast. As a house hacker, we want to make sure you do all your due diligence, making sure your financing is set up and that you feel comfortable with the transaction.

The good news is that house hackers don’t need the same discounts on properties as an investor or flipper because they are already getting the most powerful thing in a real estate transaction, which is a low down payment loan and a 30-year loan. As a house hacker, you are able to get what an investor cannot: a high leverage loan at a low interest rate amortized over 30 years. Many hard money loans for investors are for six to twelve months and have an interest rate greater than 10%.

Let’s look at the stats. I pulled our team’s stats from February 2019 through February 2020. The top half of this chart is strictly rentals that we helped investors acquire and the bottom half are the house hack numbers. We helped 20 clients buy house hacks and each one was found on the MLS. Bringing in another source, when we asked Joe about his house hacking clients, he confirmed that 0 deals were from lead generation, 1 was from a wholesaler and all the rest he’s ever done were found on the MLS.

This doesn’t mean we weren’t looking at these other sources for properties, it’s just a fact that 99.9% of the best deals we’ve found for house hackers in the Denver area have been through the MLS.

12-Month Stats

39900
TOTAL:81%19%00

Jeff confirmed that all three of his house hacking deals have also come from the MLS. Jeff has experience with creative ways to find properties, including doing some out-of-state investing, wholesales and short sales. Yet, he still focuses on the MLS to find his personal house hacks.

Some of the off-market properties would be a week away from foreclosure and ultimately not even realistic for a traditional investor to obtain. It can become a full-time job where you need to be ready to answer your phone at any given time and negotiate an offer within hours. In fact, it’s typically an investor’s full-time job, or they have hired a person or team to completely focus on answering the phones and digging into properties.

The properties that Jeff could accept the timeline for through wholesalers were, a lot of times, in such disrepair that they would not qualify for an owner-occupant loan. To qualify for the traditional low down payment financing, the property needs to be habitable and livable.

One example that I have had with one of our clients was we found a property that was basically a “fix and flop.” Investors had purchased the property as a high-end flip. They started demolition, but then ran out of money and needed to sell it. Our clients wanted to buy it and live in it while they fixed it up and finished what the previous investor couldn’t. The problem was that the property was not habitable. It didn’t have kitchen appliances, the water had been turned off due to sewer issues and the gas was turned off as well. All these things meant that the property was uninhabitable and wouldn’t qualify for regular financing.

We understood this and they lined up a construction loan to buy the property. After the renovations were completed, they refinanced into a conventional loan. Construction loans often require 30% or more for a down payment and have a higher interest rate. They were experienced and had the cash to take down this property.

So, while the deals are not impossible to find, it really requires someone who can dedicate the time and energy to it, which, like Jeff, a lot of house hackers don’t have. They already have full-time jobs. They don’t have the ability to take on big renovation projects and spend months sourcing off-market deals. They need an easier way to find livable houses and the MLS provides that.

Let’s compare different property types and how they work for house hacking.

Multi-family

A duplex, triplex or fourplex.

For house hacking specifically, anything that is four units or less is a multi-family property. Once it’s five units or more, it no longer qualifies for a residential loan and is a commercial property. Commercial loans offer no favorable owner-occupied financing and typically require a 25% to 30% down payment. The concept of a multiunit makes perfect sense. Buy a multi-family, live in one unit and rent out the others. However, in the current Denver market, multi-family house hacks are tough to find.

Inventory/Quality: Low

  • Duplexes under $736,000: 19
  • Triplexes under $889,000: 7
  • Fourplexes under $1,100,000: 11

These price points were picked because these are the limits for each (duplex, triplex, fourplex) to qualify for the FHA loan limits. The numbers above show a snapshot in time of when I pulled the stats. It’s a typical representation of multi-family inventory.

Financing:

  • FHA or VA
  • No low down for conventional loans (minimum 15% down for duplex, 25% down for triplex/fourplex)
  • You can use FHA on your first property but typically not on your 2nd or 3rd. FHA is not designed to help investors build a rental portfolio.

Other considerations:

You need to think about this from the seller’s point of view. If there is a multiple offer situation (very common in the Denver market), which offer looks better to a seller: The house hacker with an FHA loan or a traditional investor using a loan with lower health and safety criteria? Sellers will typically go with the offer that will be the least headache and most likely to close. Other things to consider:

  • Appraisal standards are much stricter for FHA than conventional on health and safety items.
  • You must move in within 60 days. Most multi-family properties have tenants. What is the timing of the leases? You will need to have one tenant move out so you can move in.
  • High competition from investors. Investors care a lot less about the property condition than a house hacker who is going to live there.

10% of our house hack transactions have been multi-family properties over a 12-month period.

Using the above numbers as an example, if you have a total of 37 (19+7+11) multi-family available, and you consider that they have to pass the more strict health and safety guidelines for FHA, and you consider a unit either needs to be vacant or there is a lease ending within 60 days, how many will be an option? There is no way to pull data, buy my guess based on looking at properties all the time is that at least 50% are not going to be an option. Then, out of those units, you have competition from investors.

We aren’t saying these deals don’t exist or that you shouldn’t do it if the opportunity presents itself, all we want to get across is to not get hyper focused on one type of property. Any property for a year is better than no property because you are waiting on the sidelines for that perfect multi-family. Even if your first house hack is a multi-family, like Jeff’s was, all future properties will be single family where you can use a 5% down conventional loan.

Houses (Detached)

Single family homes, no shared walls, usually in a more suburban neighborhood.

Inventory/Quality: High

  • Houses with 4+ bedrooms, 2+ bathrooms under $400,000: 276
  • Price range: low 300s to high 400s
  • High 300s to low 400s are most common ($370k-$430k)

I used the 4+ bedroom, 2+ bathroom <$400,000 search filter to show the most common type of homes that we’re buying for house hacks. Without the filter, the results would be skewed with all the homes on the market.

Financing:

  • FHA, VA, USDA, Conventional
  • Can get 5% down conventional financing on your 1st through 10th properties.

Other considerations:

  • Usually make the most sense in the current market

70% of our house hack transactions are detached homes.

Things may change in five to ten years, but in our current Denver market, these properties typically work the best for house hacking. There’s higher inventory, more loan options available, better conditions and are usually not tenant occupied. The odds are much more in your favor.

Condos and Townhomes (Attached)

Properties that are attached to other units or share at least one common wall with another unit.

Inventory/Quality: Medium

  • For units that are within a price point that make house hacking numbers attractive, usually two types of quality: “renter-grade” and ones that are a little nicer that you could live in for a year or two.
  • Typically buy 3 bedroom, 2 bathrooms. These are the “sweet spot” for when you move out and convert it to a rental.
  • Price range: Mid 200s to low 300s

Financing:

  • FHA, VA, Conventional
  • Some condo complexes are not FHA approved
  • Townhomes are treated like single family homes and approved for FHA
  • Can get 5% down conventional financing on your 1st through 10th property.
  • First-Time Home Buyer programs – 3% down payment
  • Down Payment Assistance programs may be available for first property

Other considerations:

  • Keep an eye on HOA fees and HOA health. A monthly HOA of $300-$350 is typically the highest you’ll want to go.
  • Does HOA allow for rentals? Most in Denver do but sometimes there’s a limit of how many properties can be “investor owned”. May also not allow Short-term/Airbnb rentals.

20% of our house hack transactions

The biggest hurdle when looking to house hack a condo or townhome will be the HOA. On top of making sure that your HOA is approved for FHA financing, and that the monthly amount works for your cash-flow numbers, you also need to consider the impact it can have on your overall monthly payment and ability to qualify for the mortgage.

Using Joe’s example, let’s say you qualify for a total mortgage payment of $2,000. If you are looking at single family, detached homes, you could afford around a $400,000 house because your mortgage payment will be about $2,000. If you found a property with an HOA of $250, you are now only able to afford a condo/townhome around $350,000. It would have a monthly mortgage of about $1,750 because the HOA of $250 has to be considered for the total payment of $2,000.

You will also need to consider the overall “health” of the HOA. The HOA is essentially a third party to the loan that can impact the value of the home. Lenders now do extensive HOA background checks to make sure that they are keeping up with maintenance, making sure they are collecting and putting money into the reserve account for future maintenance items, confirming the HOA has appropriate insurance, and making sure they are paying their bills. Lenders don’t like to see super low HOA fees because it makes them think they aren’t doing enough for maintenance. Lenders don’t like super high HOA fees either because it’s an indicator that some residents are in default of payments and the rest of the residents are having to compensate for that. The good news is that your team of professionals (agent, lender, etc.) will help you through checking the HOA. You do not need to research this on your own before going under contract on the property. After you’re under contract, part of the due diligence period allows you to dig into the HOA health. Fortunately, we are often familiar with complexes and know the few to absolutely avoid.

Even though it might seem overwhelming to address all these HOA issues, it should not be a deterrent to not look into these properties. Joe, Jeff, and I will all consider a property, regardless of if it has an HOA or not. Joe and I both own investment properties with HOAs and have had zero issues. We will continue to buy more rentals with HOA’s.

Accessory Dwelling Units (ADUs)

ADUs are usually a one-bedroom, one-bathroom unit that is in the back of a house or above a garage. Commonly called carriage houses, granny flats or mother-in-law suites. These have become very popular recently. However, they sound much better on paper than trying to implement in the house hacking strategy.

There are two ways to think about ADUs: purchasing a house with an existing ADU or buying a property and then building an ADU.

Purchasing a house with an ADU

If you can find a house with an ADU already in place, do it! It has a lot of advantages for increasing rental income. Unfortunately, they are very tough to search for on the MLS and the quality range is huge.

  • Inventory – First of all, there aren’t too many houses with existing ADUs in the Denver Metro area. The next big challenge is finding the houses that do have ADUs. There isn’t a good way to source them. Most agents don’t mention them in the MLS listings, so it makes it very hard to search for them.
  • Financing – Good news, ADUs have no impact on the financing. This means that whether a house has an ADU or does not have an ADU, lenders treat it the same as a typical single-family, detached house. So, you can qualify for an FHA, Conventional, USDA and VA loan just as you normally would.
    • If there is a property with an ADU, usually it sells at a premium because people (a.k.a. Investors and house hackers) know the value of that extra income potential on the property. So, it can drive the purchase price way up.
  • Location – They tend to be on the west side of town (west of I-25.)

Building

Almost on a weekly basis, someone asks me about building ADU’s. Here’s why building one from scratch usually doesn’t make sense.

  • Zoning – In 2019, Denver County did pass a rule that will allow more ADUs, which is good news.
  • Cost – Average cost to build an ADU range from $150k to $200k. How do you fund that? Most people don’t have $200,000 in cash, so they need to use financing.
  • Financing – There are no low down options to go build one.
    • Conventional loan – If you buy a $400k house in Denver and then want to pay $150k to put an ADU on the property, Joe can only give you a loan for the $400k, with conventional, 5% down. The other $150k is on you.
    • HELOC – Some can take the equity from their home to fund the ADU, but you must have enough equity in your property to take out money. This isn’t an option if you just purchased a place for 5% down.
    • Construction loan – You typically need to put 35% down.
  • Time – Typical ADU builds can take about one year to build. It takes a long time to get permits, inspections and sign-offs from the city.
  • Appraisal – Once construction of the ADU is completed, it’s really hard to get the improvement to be a direct value add to the overall property based on the amount you spent to produce it. If you have a $400k house and spend $200k on an ADU, very rarely will the new appraised value be $600k. The highest adjustment Joe has ever seen for the addition of an ADU is $50k. More commonly, he sees about $30k-$35k positive adjustment on the appraised value. You’re essentially building a tiny house, but appraisers typically only value the extra bedroom and bathroom just as if it were in the main house.

Overall, you have to look at the numbers. If you have an extra $200k to build an ADU, instead of spending it on an ADU, why not use that $200k to purchase another rental property or a fourplex?! If one ADU can bring an additional average $1,200-$1,500 in monthly rents, a fourplex will bring in 4 times as much. The stronger cash-flow wins!

So, if you look at how best to allocate your capital, it usually will not be from building an ADU. It will be to take that money and buy a rental property with 20%-25% down, then leveraging up when the time is right. Every time I’ve sat down with a client and ran them through the numbers, every single one has abandoned the ADU build idea. I expect the build cost to come down eventually, so hopefully this option becomes affordable.

Tiny Homes – Non-Permanent Fixtures

Are you allowed to park a tiny home in the backyard and use it essentially as an ADU? The answer is: it depends on the municipality. Essentially, tiny homes are just like trailers; they are not permanent fixtures. If your county allows you to park a trailer on your property and allows it to be hooked up to water and sewer, then yes, you can have a tiny home on your property. Make sure you check out all the rules and regulations with your municipality before parking a trailer!

To wrap up, what is the best property for house hackers? Well, if you haven’t already guessed, it’s our famous answer: It depends!

You really need to do a deep dive on your personal situation and figure out which property would meet your needs best. The best thing you can do is know your wants and needs. Do you have a spouse that you need to consider, are kids involved, how important is the commute to work, will you be able to go from your luxury apartment to a run-down duplex with no covered parking? Jeff makes the best point in that you need to be honest with yourself and identify what you can and cannot deal with.

YouTube Video: Best Properties for House Hacking

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Authors
Chris Lopez
Chris Lopez is a Denver area real estate entrepreneur and investor, as well as the host of Bigger Pockets’ House Hackerz and the Denver Real Estate Investing Podcast.
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