In this blog, we’re going to walk through a case study of one of our past clients who have chosen to house hack. Earlier this year, our clients – we’ll call them Jim and Gabby – were looking to make the move into a more permanent home from a rented apartment. With their two young children, their goal was to find a 2 or 3 bedroom house and they hoped to stay in a good commuting location either east of Lake Merritt or along 580 in East Oakland.
Their budget of 650,000 dollars proved challenging in their target neighborhoods, so we talked about getting creative.
Our team went through some scenarios of what it would look like if, instead of searching for a single family home, they targeted duplexes. Together, we ran through numbers: We looked at the potentially higher mortgage and taxes expense and how it was offset by the rental income.
The difference was quite stark in their case. We identified two potential properties, one was a single family house valued right at the top of their budget at 650,000 dollars. It would have cost roughly 3,700 dollars per month to own. The second property was a duplex, providing about the same living space for Jim and Gabby’s family, while also having a second unit to rent out.
That duplex cost more than the single family home, at just over 800,000 dollars. This means that, if they were to buy the duplex and live in the whole thing themselves, their monthly housing payment would be about 4,600 dollars per month.
However, because it was a duplex, they could rent out that second unit and thus bring in rent income every month to help offset that 4,600-dollar monthly mortgage payment. The current rent in that second unit was 1,300 dollars, making their net housing payment 3,300 dollars.
Remember, their monthly payment on the 650,000-dollar single family home would have been 3,700 per month, meaning that they’d actually SAVE 400 dollars per month with the duplex.
Plus, with the duplex, they would also be able to take advantage of tax incentives for landlords. In a purchase like with this duplex, these tax incentives often allow for all the rental income to be offset by deductions like depreciation, meaning there often is no tax due on the rental income.
That duplex also had a few long-term advantages that we see fairly often in the East Bay. The tenant that was in place and paying 1300 dollars each month had been there for a very long time. And because of rent control, which limits landlords ability to raise rents past certain limits, the tenants rent is far below market rate. While that tenant likely isn’t going anywhere anytime soon, she will eventually leave allowing Jim and Gabby to re-rent the unit at market rate, which would be several hundred dollars more each month.
Another long-term advantage that Jim and Gabby will benefit from is the build-up of equity at a faster rate. In the first year alone, Jim and Gabby, as well as their tenant, will have paid down the amount owed on their mortgage by nearly 11,000 dollars. That compares to around 8,500 dollars for the single family home they were looking at. That equates to 2,500 dollars more in equity while spending less money each month. And that’s in year one alone. As the years go by, the equity, and therefore wealth build-up, is quite dramatic.
Jim and Gabby completed their purchase several months ago, and are doing great in their new duplex near the Dimond District in Oakland. Not everyone’s search goes quite like theirs. We’ve had clients that were totally convinced to pursue the house hacking concept and then in the end purchased a penthouse condo. Which admittedly was not a wiser investment. Though it met their personal goals and ambitions, which at the end of the day, is what we strive for.
So do you think your story will be like Jim and Gabby’s? Or have reasons you’ll be avoiding house hacking? Contact us and let us know!
If you’re looking for more real-world tools on how to get started house hacking, come check out one of our live upcoming house hacking classes offered in both Oakland and San Francisco. We’ll walk you through multiple examples, answer your questions, and even provide some free snacks and goodies!