House Hacking // What to Look for in Your First House
Over the past 10 years, Garrett and I have purchased 6 homes on our journey to become landlords, house-hackers, and early-retires. But we started out like many 20-somethings back in 2008, buying our first home in Seattle to build our life around.
the Dexter House renovation // front of house
The Wallingford House was an 1000sf fixer with 2 bedrooms, 1 bathroom and all of my heart. We bought the house for $445,000 and with only $12,000 down, our mortgage was over $3,000 a month. Eeek! Honestly, we had no business buying a home that expensive (and, in fact, that's the most we've ever paid for a home). We had no cash reserves, no room in the budget for saving, and zero financial foresight. I'm pretty sure we even borrowed part of that $12,000 from our parents. But despite our ignorance, there were a few reasons why that home turned out to be a smart buy for us.
So today, with the benefit of hindsight from 10 years of purchasing, renovating, and renting out houses for financial gain, I wanted to share 7 things we would look for in a first home. Let's pretend Garrett and I are first time homebuyers again, but this time with knowledge of house hacking and financial independence. This is the list we'd give our real estate agent of 'must haves'. For reference, this list is specific to our experience, which is in a major urban city (Seattle) with high demand for rentals and a quickly-appreciating real estate market.
One // Fixer
Finding a home that needs work is number one on our list. We're elbow-grease kind of folks and renovating can add equity into the property. Increasing the value of the house allows the owners to resell it for a profit, rent it out for increased monthly income, and/or refinance for better loan terms. In fact, that's exactly what we did at the Wallingford House. After renovating the home and adding 2 more bedrooms and a bathroom, we increased the value enough to qualify for a standard 80/20 mortgage, which allowed us to remove the mortgage insurance, and eventually rent the home out. Like Thomas Edison said, opportunity comes "dressed in overalls and looks like work."
Two // Price
Lots of financial-savvy people will tell you to buy a home that's worth only half of what the bank qualifies you for. And while that's smart advice, Garrett and I have never followed it. Ever since we started looking at homes as investments, we've used two rules of thumbs to determine what we'll pay for a home. First, we have to rent out the home for the cost of the mortgage payment (principle, interest, taxes, and insurance). This is a safety net that means if things don't go as planned (like for instance, a recession hits) we're not losing our shirts every month. Second, we want the projected, post-renovation annual rent to be greater than 10% of the cash we have into the property. For example, if we bought a home for $300,000 and put $60,000 down and spent another $40,000 on renovations, we'd have $100,000 cash invested in the property. We'd have to net $833/month after expenses to make $10,000 per year or 10% on that cash, which would make the rent upwards of $2500/month. There are lots of other rules of thumb out there (I like the 1% rule too), but these have done well by us.
Three // Old homes with Original character
This is a bit of a personal preference, but we like old homes. I keep a filter on Zillow and Redfin to search for homes built before 1950, thus making sure to see only the oldest of homes in our area. We do this for a few reasons. First, old homes with original character are inspiring, interesting, and unique. Second, old homes were built to last. They used real materials back then (no particle board) and were created by craftsmen. It would take a fortune to recreate some of the molding and built-ins that were standard to this vintage of home. I'm not saying we'll never buy a home that's newer than 1950, but that's another rule of thumb we use.
Four // Location
This is a non-negotiable item on the list. We look for homes close to downtown, mass transit, and schools. And we make sure those homes are in safe neighborhoods that we would want to live in. Over the years we've found that properties that are close to parks, grocery stores, and restaurants/bars tend to always be desirable and thus a good long-term investment. Many of our homes are on busy streets too, which we've found make great rentals because they cost less to purchase and command similar rent to homes on less-busy streets.
Five // Unfinished square footage
Unfinished square footage - usually basements - can provide a nice equity bump when finished. Not all of our homes have had tall enough basements to finish, but we love it when they do. Finishing out a basement costs much less than adding on and can really increase the enjoyability and value of a home.
Six // Zoning
If at all possible, look for a home with zoning potential. Could you convert the home to a duplex? Triplex? Add an apartment over the garage? It's not always easy to predict what you'll want to do with the property in the end, but having flexibility in the zoning is nice. The Wallingford House had a rentable backyard cottage, which was the only reason we felt comfortable buying a home that expensive in the first place.
Seven // Passion
We look for properties that we're passionate about. That can be hard to quantify, but for us it often means lots of natural light, cool original details, and connection to the outdoors. But whatever floats your boat, the bottom line is that you should be excited about the home. Whatever you plan to do with the home - live in it, renovate it, rent it - properties are hard work and that work is much easier to do when you love what you're working on!
The market has changed a lot in the decade since we bought our first house. But even so, these rules would drive our search today for a first home. I'd love to hear if you guys have any other criteria for buying homes or thoughts on these rules.
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