“Our budget for a starter home was $600,000 to $700,000, but when we toured homes in that price range in Washington, D.C. and Northern Virginia, most were nowhere near the quality of the townhouses we rent. “We've been pre-approved for over $1 million in loans, but we want to be careful with our spending,” said Yam, a nurse at George Washington University Hospital in Washington, D.C. .
With plans to attract tenants, they increased their budget and purchased a single-family home in Michigan Park in northeast Washington, D.C., for $865,000.
Chan and Yam are part of a growing group of buyers who want to make homeownership more affordable through househacking. In a recent survey by Zillow, 55% of Millennial homebuyers and 51% of Gen Z homebuyers said they think house hacking is a good path to homeownership. More than half of both age groups hope to convert their home into an investment property when they are ready to move.
Find the right configuration for house hacking
House hacking is when a tenant rents out a bedroom, basement, or apartment over the garage, or on a larger scale, a second, third, or fourth unit in a duplex or small apartment building. Refers to any arrangement that includes.
Some homebuyers are fine with sharing their living space with tenants, while others prefer to rent a part of the home that has a separate entrance.
Viry Iranpour, a real estate agent with RLAH @properties in Chevy Chase, Md., and a board member of the Greater Capital Area Association of Realtors, owns a two-bedroom condominium in Rockville where his tenants We rented a room and shared a kitchen. and living space.
“Currently, I own a single-family home in Brightwood because it has a separate basement that I rent out to tenants,” Iranpour said. “That would give you more privacy.”
When Tai Hung Nguyen, a real estate agent with Better Homes and Gardens Real Estate Premier in Falls Church, Virginia, and his wife bought their first home, a three-story townhouse, they thought they would rent out the downstairs. Ta.
“We had a bedroom and a full bathroom downstairs, but we didn't think ahead of time about the fact that it wasn't cut off from the rest of the house,” Nguyen said.
They decided that they did not want to live in a house with strangers. Additionally, like many older homes, the laundry room was located on the lower floor.
Yam and Chan, both technical sales consultants in Tysons Corner, Virginia, looked in northern Virginia and Washington, D.C., for townhouses or single-family homes with separate basement entrances.
“A friend of ours bought a row house in Washington, D.C., where he rented out the space to earn extra income through ‘furnished finders,’ which were primarily used by traveling medical workers for short-term rentals.” said Yam. “First and foremost we wanted a place where we wanted to live, but then we also thought about where people might want to rent our space.”
Their new home is 2,100 square feet with four bedrooms and three full bathrooms.
“We have family in the area and plan to live here, so it's nice to have a single-family home where we can grow,” Chan said.
In the meantime, a wet bar in the basement, which already has a small refrigerator for tenants, plans to add a kitchen counter with an induction cooktop, Chan said.
One issue they haven't solved yet is laundry. The washer and dryer are in the basement, which is inconvenient if you have a fixed tenant, especially long-term renters. We may add a second laundry set on the second floor in the future.
“One of my clients purchased a home in Herndon that had a walk-out basement with a separate entrance, bedroom, and full bathroom that he could rent out to a tenant,” Nguyen said. said. “There are two washing machines in that house. We had to make a bid to buy it, but we found a tenant who would help with the mortgage right after we closed.”
Depending on the property, buying a home with space to rent to tenants can be more expensive than buying a home without rentable space. If you're thinking about house-hacking, first talk to your lender and get pre-approved for a loan to find out how much cash you need and get an estimate of your monthly payments.
As long as you live in the home you're buying, or in one of the units if you're buying a property that has one more unit, you're buying the property just like any other buyer, not as an investor. You're buying, says Jonathan Okun. He is a Senior Mortgage Consultant at Prosperity Home Mortgage in Bethesda, Maryland.
“In the past, financing guidelines were a little different if you were buying a two-, three- or four-unit building, but now you can finance that kind of purchase with a traditional loan for as little as 5% down. ” Okun said. “With a down payment of 3.5%, he can also take advantage of FHA financing.”
Each lender has its own guidelines, but in some cases buyers can include up to 75% of the rental unit's expected market rent as income, Okun said. In other words, if the estimated market rent for the rental unit is he $2,000, he can add $1,500 to his monthly income to qualify for the loan. However, if the basement is accessible from inside the home, it is still considered a one-unit home, so lenders typically do not count the anticipated rent as income if you plan to rent out the basement.
“If you’re buying a multi-family property with two, three or four rental units, the loan limit will be higher than a one-unit home,” Okun says. “Conventional financing for multi-unit properties requires a credit score of at least 640.”
First-time buyers in the Washington, D.C., area with incomes under $180,000 may qualify for lower interest rates than repeat buyers, Okun said. For example, if a repeat buyer with a credit score of 640 and a 5% down payment wants to purchase a 4-unit building, the interest rate could be 7.5%, but a first-time buyer who meets that income limit would , you could pay 6.375%. Fannie Mae program.
“If the appraiser says your home is a single-family home, then you would be financing that property according to normal guidelines,” Okun says.
An important step is to discuss all your financing options with your lender before thinking you can house hack.
Planning for landlord obligations
While the financial benefits of house hacking are clear, buyers should consider their own lifestyle and other issues before committing to the plan.
“The big issue is safety,” Nguyen said. “You should screen tenants, especially if you're sharing a home with them. Even if you're renting to a friend of a friend, find out their background, get credit, and make sure they have stable employment and income. You need to check.”
Nguyen said homeowners who rent out part of their home should have a legal rental agreement that spells out what will happen if they don't pay rent or move out unexpectedly. He recommends paying a lawyer to write the contract for you, rather than relying on templates from Internet sources.
“You need to know tenant law,” Nguyen said. “Washington, D.C. and Maryland have tenant-friendly laws that can make evictions more difficult than Virginia, which has landlord-friendly laws.”
Different jurisdictions have rules as to what is required for a rental space to be legal.
“If you own a two-unit home, you need a certificate of occupancy to legally rent out the second unit,” Iranpour said. “In some locations, it can be difficult to evict someone who doesn’t pay rent, especially if it’s not a separate legal unit.”
Depending on the configuration of your home, it's often easier to include some of your utility costs in your rent, Nguyen says. However, he cautions that you should use the phrase “normal use” of utilities and specify which utilities are included in the lease.
“I know a tenant who was doing Bitcoin farming in his basement, and he was using about 10 times more power than normal,” Nguyen said.
Homebuyers planning to house hack should also be aware of local ordinances and homeowner association rules that could affect their ability to get a tenant, Nguyen said. . For example, many places won't allow him to add his second kitchen in the basement, he said. Some homeowners associations may limit the number or type of cars that can be stored on the property.
“When you do house hacking, you're the landlord, so you have to keep that responsibility in mind,” says Iranpour. “As the homeowner, it's up to you to take care of everything.”
Nguyen said part of the responsibility is notifying insurance companies that there are tenants. He recommends requiring tenants to purchase renters insurance to protect themselves.
Bottom line: Understand the risks and benefits before attempting house hacking.
“When house hacking, you should still buy what you can afford,” Nguyen says. “Income from tenants should be a bonus and not necessarily required for mortgage payments. You should not rely too much on tenants as there are a lot of things that can go wrong with them. ”
