When living in a city like Los Angeles, many first-time home buyers think that it is impossible to buy. However, what has been gaining popularity is the lifestyle of “house hacking.” Considering people were getting roommates for rentals, why not be the landlord as well? You buy a house, condo, duplex, etc., to live in and you rent out the other bedrooms or units. Although for most loan programs you can’t use the potential rental income to qualify on the purchase side, there are still a few benefits to doing this:
- Your lifestyle doesn’t change much if you lived in a roommate situation anyways: Except each year you can raise rent while your mortgage stays the same. This means every year your housing cost go down.
- It will allow you to qualify for more on the next purchase: Because it is rental income, you are obligated to report it on your taxes. That might sound like it sucks, but it can be a good thing. For starters, there may be tax write off opportunities that you wouldn’t otherwise have. In addition, when you look to buy the next place, you will be showing more income on your tax returns, thus able to qualify for more later.
- Because you own it, if interest rates go down or values go up, you can refinance the mortgage. This means your mortgage will go down even more, even though your roommates/tenants are paying the same.
- You can buy sooner: You may want to put 20% down but putting 3% down is all you have now. That’s okay, because the difference in payments could be offset by having the roommate. Here is a quick example on a $400,000 purchase at 4.125% interest rate (such as a condo in Los Angeles):
| Down Payment | Payments |
| 20% | $1,550.88/month |
| 3% with Mortgage Insurance | $2,219.94/month |
That’s a difference of $669.06/month. Although that might seem like a lot, in many parts of Los Angeles you can rent out that second bedroom from somewhere in the range of $800-$1,000/month. That means your mortgage would be cheaper with putting less down to buy now and rent out the room. If you choose to wait, you could be chasing the market and end up paying that amount later. The only difference is the property appreciates in value; you can refinance to have the Mortgage Insurance removed.
Now you are probably wondering if this is possible in Los Angeles. Well guess what? It is, and I’m living proof. I bought my two-bedroom condo in 2015 putting 10% down, remodeled it and after my last refinance, my housing costs all in were about $1,500/month. I rented out the second bedroom for $800/month, thus I was living there for $700/month!
Fast forward to today, my wife and I bought a house and converted our garage into an Accessory Dwelling Unit (see my first article on the subject ADU: The Journey of the Legal Garage Conversion – Part 1). The plan? Because it is just me and my wife, we are going to live in the ADU and rent out the main house. Now that our first refinance is complete, we will have housing cost in the range of $1,300/month! Then when we choose to live in the main house, we will continue to rent out the ADU. Once the mortgage insurance is taken off next year, we will be living in the house for about $2,000/month. That approximately 30% less than what it would rent for.
It is possible, just keep in mind it doesn’t have to be for forever. As your income rises where you feel comfortable living by yourself, then by all means, live it up and be on your own. I did that when my roommate in the condo moved out.
The idea is to get your foot in the door in home ownership/real estate investing. Many of my clients and friends have been doing it with much success, and you can do it too. You just need to jump into it. Remember: time waits for no one.
What’s your personal house hacking stories? What questions do you have? Ask and I’ll answer!
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