House Hacking Part II: Co-Buying; Sufficiency Test; Fourplexes
I received a lot of feedback in response to Friday’s blog about “House Hacking,” or the strategy of buying two to four unit properties in order to use the rental income to subsidize a mortgage payment.
One successful Bay Area Agent sent me the following message:
“… This is the gospel I’m always preaching to buyers. I don’t know why more people don’t do this, fear perhaps? I bought a duplex for myself and my husband in 2016. We live comfortably in the upper unit while our tenants live in the downstairs unit. Our mortgage (piti) is $3700 and we rent the other unit for $2650, so excluding expenses, we pay about $1,000 to live in a 1,100 square foot home in Oakland. Eventually when we upgrade, we can easily rent both units to cover our mortgage plus net additional monthly income from this investment. This is a no brainer to me.”
CO-BUYING FOR AFFORDABILITY
Our Appraisal Manager reminded me of another great reason to buy units – it allows people to get into markets they otherwise could not afford via “co-buying.”
We closed a duplex purchase in February for $1.55 million where two people co-bought the property. The average price for a single family home in the market (Alameda, CA) where both individuals wanted to buy was $1.3 million, putting most properties out of reach.
Their agent, however, astutely recognized the opportunity to convince her buyers to combine resources in order to co-buy a duplex. Each couple then ended up paying only $775,000 to buy in the market of their choice.
FOURPLEX EXAMPLE AGAIN
My son read my blog and decided he might want to “house hack” in the Sacramento area where he lives. In reviewing fourplex options, I was struck by how well four unit properties cash flow in lower-end markets (outside of the Bay Area, for example).
Here is one example involving a fourplex in Woodland, CA (about 20 miles outside of Sacramento). It is listed for $549,000 and the total market rents are $4,200.
The total housing payment for an FHA buyer would be about $3,400 per month. Even if the buyer moves into one of the units (required by FHA of course), he or she will only have a net payment of about $200 to $250 per month.
There are numerous other examples like this all over the Sacramento area and in our primary Texas markets as well.
FHA SELF-SUFFICIENCY RULE
There is one major caveat that I should have mentioned Friday – FHA’s Self-Sufficiency-Test. This an FHA rule that requires three and four unit properties to effectively “cash-flow” with 75% of the market rent from all units.
Many three and four unit properties in the Bay Area do NOT pass this test and are thus ineligible for FHA financing.
Many properties in lower end markets do, however, pass this test (or come close) and the above example in Woodland, CA is a great example.
I used “actual” rents in my above example, but market rents are closer to a total $4,400 per month.
And 75% of $4,400 is $3,300 – so an FHA buyer would need to either put a bit more down or buy down his rate in order to reduce his payment to $3,300 (to pass the “Sufficiency Test”).
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