House Hacking: How to Live for FREE During Residency
When most people think of residency, they usually think of long hours, tough preceptors, and meager salaries. Unfortunately, all of these factors stack the deck against anyone looking to get into real estate investing. I certainly wasn’t considering investing in real estate during my residency. It really wasn’t even on my radar. I was just trying to get by – academically and financially. Knowing what I know now however, I wish I would have taken a serious look at house hacking my way through residency.
House hacking, in its simplest form, is combing your personal residence and an investment property. (I’m sure you’re already picturing two dashing Canadian brothers turning someone’s basement into a rental suite) While house hacking can be done with a single family unit, the traditional definition involves buying a small multifamily property (duplex, triplex, or quadplex), living in one of the units, and renting the others out. The rent you collect allows someone else (your renter) to partially or completely pay your mortgage while you live there for free! There are a couple of tricks to keep in mind before you get started though.
Financing
When a home will be your primary residence, and you will be living there for at least a year, financing becomes significantly easier. Conventional and government loans become readily available and the bank treats homes up to four units as a single residence. These means one loan and a relatively easy approval process. Furthermore, if the property qualifies for an FHA loan, you only need 3.5% down. Most other types of investment properties require 20% down, a significant amount to have in savings for a cash-strapped pharmacy resident. For additional information see our previous article: Mortgage Financing Part 2: Government-backed loans
Finding Renters
Finding qualified individuals to live alongside you can be one of the more challenging parts of house hacking. Background checks, credit checks, and a quick interview are usually recommended before selecting a tenet. While there are property management companies and real estate agents you can hire just to eliminate some of this hassle, house hacking our way through residency gives us a distinct advantage. Co-Residents. If you are joining event a modest size program, you are about to spend 10+ hours a day with several qualified, contracted individuals looking for a nice place to stay for one to two years. Even better, as soon as those renters move on, a whole new batch of eager tenets will be rolling in next year.
The Numbers
Let’s walk through an actual example using my residency site, Akron General Medical Center.
Assume we want a decent triplex in one of the nice suburbs of Akron, something close to the hospital (10 miles or less). When I was a resident, we had 8 total pharmacy residents (and about 80 medical residents) so finding two colleagues for our other units shouldn’t be a problem. If we look at recently sold triplexes, we find that there is a huge range depending on condition. As you know, time is at a premium as a resident, so we want something that won’t require too much repair work. If we filter out results that need more than a coat of paint or a few minor fixes we find that a triplex of this caliber runs about 200-220k for our area. Obviously, this can change dramatically based on your location so make sure you do your own research for your area.
After some searching we find a 3-unit home that you can get for $200,000. We also find that market rent is about $850 per unit when in good condition. Using an FHA loan to finance the property means we only need 3.5% down or $7,000. Set aside another $3,000 for closing costs, $1,000 for minor repairs and paint, and $4,000 for anything unexpected early on. Total cash you will need to have in hand is about $15,000. No easy feat to be sure, but not outside the realm of possible.
Because the loan is FHA-insured, the bank will require your mortgage payment to include principal, interest, taxes, and insurance (both homeowner’s and mortgage insurance). This is known as PITI. All together, a $193,000 loan that will probably require a payment of $1,300 per month.
Now we could stop here. Assuming both other units are rented we now have $1,700 coming in and $1,300 going out each month! Woah, $400 in your pocket each month and you live for free! Not too shabby. Unfortunately, this doesn’t take into account all the real world expenses, something we should definitely plan for. While we are house hacking right now, we want this property to be profitable for years to come.
First up: Utilities. These include water, sewer, trash, electric, and gas. You can obtain averages for the house you are considering or you can actually call the utility companies and obtain a closer estimate based on past use. After a few phone calls, we estimate the monthly utilities to be $230. Keep in mind that you can always have your renters pay their portion of the utilities, but for the sake of analyzing this deal, lets assume the we as the owner will cover those costs. Next we need to account for the time our property will not be rented. On average, a rental property will go unrented about 5% of the time for this area (could be lower or higher depending on the market). Finally, we need to plan for the big ticket items that occasionally need to replaced or repaired. These are commonly referred to as capital expenditures or CapEx and include things like the roof, the furnace, the water heater, etc. You can do in-depth CapEx estimates but generally this can also be set at 5% of the total gross rent. Therefore, if we look at all our expenses, we see the following:
Mortgage: $ 1,300
Utilities: $ 230
Vacancy: $ 142
CapEx: $ 142
Total: $1,814
Now let’s look again at our breakdown. We still have $1,700 coming in, but our more accurate cost estimates mean we have over $1,800 going out. Still, this means for $114 per month, you have a great place to live AND are generating equity! In fact, if you split the utilities equally among the 3 units, you actually put $39 in your pocket each month! Best of all, if and when you move out, you have $850 more coming out, meaning you would net up to $736 per month while someone else pays your mortgage!
As our simple example shows, House Hacking can be an incredible way to start your career while also investing in real estate. Keep in mind that being a landlord is not for everyone. If the numbers interest you however, I encourage you to read more about house hacking and see if its something that could work for you.
Ready for the next step? Book a FREE, 30-minute Jump Start Planning Call with Nate, the Real Estate RPH