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House Hacking in Washington DC

The secrets to starting your wealth building strategy through low money down real estate investing

“The Market’s going to crash”. “ My parents lost money in 2007.” “  I’m waiting to buy the dip” .”  I can’t afford to live in Washington DC.” “ I don’t have enough money for a 20%  down payment.” “ That’s ridiculously overpriced.”  

When will it stop? The negative talk, the self doubt, the I can’t mentality.  The “I won’t ever be able to” mentality.

So how do we change that “I won’t ever be able to” mentality to “How can I?” Repositioning our minds into the owner rather than the consumer mindset.  Because most of the time, that’s all it is.  The adaptation of how we think about certain life choices, whether financial (in this case), physical, emotional, or mental.  

So I challenge you to look at this post with an open mind.  There is no right or wrong way to implement this strategy into your life, and every one of our scenarios is going to be different; the point is to start thinking like the owner and investor, changing the financial makeup of your future, and leaving the consumer in you behind, or until you go to the Apple store again for the next iPhone upgrade, kidding. . . Kind of.

Now, let’s get to the infamous HOUSE HACKING.  Let’s first start by defining House Hacking.  House hacking is where you take a portion of your home (that you own), don’t worry we will get there, and find a way to generate income off of it.  Whether that be renting out the in-law suite in your townhome, converting your carriage house into a rental unit (please do this legally) and renting it out, or simply taking your 2 bedroom condo and renting out the spare bedroom to a friend/ someone you met off of Facebook.  

For this post we are going to concentrate on the condo scenario, because it’s the most realistic price point for most first-time buyers in the DMV.  Now remember what I said above, everyone is in a different situation and every market is going to be different, so adapt accordingly.  

I’m going to be using an example of a client and friend of mine (who will be referenced as Jason for this article) who executed the low money down house hacking strategy PERFECTLY!

He purchased a 2 bedroom / 2 bathroom condo in the Petworth neighborhood of Washington DC. This particular unit had a nice 6×12 outdoor patio off of the kitchen area, which as we all know in COVID world is extremely valuable, outdoor space. 

Let’s look at his actual numbers: 

  • Purchase Price: $525,000
  • Seller Credit: 3% ($15,750)
  • Net Price: $509,250 
  • This is the best part: Appraised Value: $538,000

So Jason technically made $28,750 in initial equity on the acquisition of this property.

Now , that may be confusing to some, so let’s break it down.  We asked for the 3% seller credit because we wanted to keep Jason’s Cash to Close as low as possible, for a few reasons: 

  1. He didn’t have enough cash for the 7% down AND the $15,000+ Closing Costs
  2. He wanted to keep his excess capital in his bank account as a reserve fund, just in case of an emergency
  3. He knows he will be living in the unit for 2 years and then turning it into a rental for the remaining 28 years on the note, so why not have the tenants pay the additional $45/monthly, which was the cost of financing the $15,750 in closing costs into the loan.

So Jason purchases this property and makes $28,750, great! Great for the future.  That is “future value,” But what does his short term value look like: 

Financing: 

Jason used 7.5% Down Primary Residence Conventional Financing

He could have used as low as 3% down but wanted to get his mortgage to a number where he felt comfortable paying it each month with or WITHOUT House Hacking the property while living there

So he is going to be able to get a favorable interest rate because it’s primary residence financing AND he only has to bring 7.5% of the purchase price to closing. 

Mortgage Payment: 

  • PITI + PMI (principal, interest, taxes, insurance + private mortgage insurance)= $2,410/month
  • Condo Fee = $136/month
  • Total Monthly Payment: $2,546/month
  • Total Down Payment: $40,000 (7.6% of purchase price)

This is all great, Jason is winning thus far.  He has bought a property for less than its value, has a monthly payment for a 2 bedroom less than $2,600/month ALL IN (not including maintenance and utilities) and he’s finally no longer paying rent.  But how can he milk this situation even more? That’s right HOUSE HACKING his property. 

So since he’s in a 2 bed/ 2 bath condo, there is really only one way to “House Hack” this property – By renting out the other bedroom to a friend, colleague, girlfriend, boyfriend, someone you meet at your favorite coffee shop, or someone you meet on social media.  

In Jason’s case he had a friend (let’s call him Steven) who was already renting an apartment with him.  They were both splitting the rent on SOMEONE ELSE’S condo, paying someone else’s mortgage, so it was Jason’s turn.  Jason’s turn to become the owner and no longer be the consumer.  

So he rented the other bedroom to his friend for $1,200/month (utilities included.) You can decide how you like to distribute these utilities, really up to you, again, everyone’s situation is a little different, adapt accordingly.  Now, let’s look at Jason’s numbers again: 

  • Total Monthly Payment: $2,546/month
  • Steven’s Monthly Rent Payment: $1,200/month
  • Jason’s Final Total Living Expense: $1,346/month

So now Jason owns this condo in Washington DC, made $28,750 on the purchase in equity, and is only living for $1,346/month.  Not bad.  But there is more. 

When you own a property, every time you make a mortgage payment, a percentage of that payment goes towards your equity paydown (principal).  Typically when you purchase with 3-7% down payments, for the first 3 years of owning and paying down the mortgage, the equity paydown is going to be 25-30% of your monthly payment including HOA.  So let’s again look at his equity paydown per month.

  • Total Monthly Payment: $2,546/month
  • X 25% (let’s be conservative)
  • Total Monthly Equity Build: $636.50/month 
  • So every month his net worth is going to be increasing by $636/month.  Meaning every year: 
  • Total Yearly Equity Build: $7,368/year

Jason’s net worth is going to be increasing by a little around $7,000 the first year, and that’s without accounting for any appreciation or tax benefits (that’s for another article).

So “House Hacking” helped Jason reduce his monthly expenses, hopefully allowing him to increase his monthly savings for a sense of security and more investing in the future.  

The Key Factors: 

  • You don’t need 20% down to buy a house
  • 3-5% down primary residence financing gets primary residence interest rates
  • House Hacking is where you use a portion of your house to generate income to reduce living expenses
  • In the first 3 years of homeownership, typically 25-30% of the payment goes towards principal
  • Become an owner not the consumer
  • If you aren’t willing to take a chance on yourself, no one will.
  • We are ALL a work in progress.

Happy Investing.

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