Let’s face it, Bay Area’s housing price is f**king insane. Even a tiny, old house in an average neighborhood can cost over a million dollars. While there are many benefits to home ownership, at Bay Area, even with tech salaries, owning a house and paying that mortgage every month can be painful. To relieve some of that pain, one way to make owning a house easier is through house hacking.
Duplex is the traditional way to do house hacking. Stay in one unit and rent out the other. Easy peasy. The problem is that duplexes aren’t that common in the Bay Area. Even if you see one, it might still be expensive. Worry not, there are other ways to do house hacking.
Split level is another good choice for house hacking. Split level is a house with two or more floors. Usually the ’in-law’ units on the first floor and master room on the second floor. Some townhouses have rooms on the first and third floor with kitchen on the second floor. You can live on one floor and rent out the other. There’s usually a separate entrance for split level housing so the interaction with tenants can be minimum.
Look out for properties that are easy to divide up and offers privacy. I have seen properties that have a door that separates out one side of the house from the other with separate entrance to each side. This type of house makes an ideal candidate for house hacking.
Let’s do some back of the envelope calculations to see how house hacking plays out in the Bay Area.
For a million dollar apartment in the city with 3 bed 2 baths, mortgage each month is around $4,800, assuming a 4% interest rate and 30 years conventional mortgage. Plus property tax $680, homeowner insurance $230 and HOA (Condo management fee) of $300. Each monthly payment is around $6010. This is a pretty hefty sum. If you rent out each bedroom for $1,800. That would be $3,600 from the rental income, leaving you to pay $2410. If the living room is big and you decide to rent that out too for $1100, you would only need to pay $1310. Win!
$1310 is probably the amount you need to pay anyway to rent a place in the city. Additionally, each month as you pay down the mortgage, some amount goes towards the principle. So your equity in the house grow over time. You also can finally stop worrying about if the landlord is going to increase price and you have to move out each year. Finally, if the house appreciate over time and you decide to sell if after a few years, you can cash out on the appreciation too.
These are the numbers for a condo, you can use the same method and plug in different numbers for the properties you are interested in. First calculate how much payment you need to make each month, then subtract how much you can make from the rentals to derive your final payment each month.
You can also get creative and do airbnb or hacker house. Those methods may require more management but can potentially make more profits.
Before doing house hacking, here are some things to consider.
Unfortunately, house hacking mainly helps with monthly payment but you will still need enough to make the initial down payment. The good news is that some banks can take down payment as low as 5% provide provided you meet certain requirements and possibly pay mortgage insurance. Do you own research and find out the options.
Number of Beds and Baths
Since you are doing house hacking, each additional room means more tenants and more potential income. Sometimes, the additional cost of a 3 bedroom vs 2 can be balanced out by higher potential rental income. But there’s also the possibility of vacancy. Be sure to take these into account in your calculations.
Many people prefer their own private bathroom when renting. Having a good bathroom to bedroom ratio helps in renting out the place quickly.
Some condos may have regulations around rentals or airbnb. Be sure to ask to ensure your plan works with the given regulations.
Will the rental income be taxed?
The answer is that it depends. Yes, the rental income will be taxed but there’s usually enough deductions on real estate to even out the income. One main deduction comes from depreciation. The idea is that the house value depreciate over time and you can use the depreciation to deduct from the rental income. Other potential deductions include HOA, utilities from the tenants and rental repairs. Be sure to keep all the receipts and find a qualified accountant to help you with the taxes.
Bay Area’s housing is expensive. House hacking can provide a viable way to home ownership. The fun part is you can keep doing this. After you get tired of your place in a few years, you can rent out your entire place so it pays for itself, buy a new place and repeat the process. If you do this a couple times, you will end up with a couple properties that pay for themselves as you gain more equity each month. Not bad deal at all!