Are you a newbie in the real estate game wondering how to get started? Well, you better start listening to the buzz about house hacking.
House hacking has been deemed as one of the best methods to get started in real estate investing. In this blog post, we'll cover what exactly house hacking is, why it's a good starting point for beginners, various ways to approach it, how to find properties to house hack and where to learn more about it.
What is House Hacking?
House hacking strategy has become very popular in the real estate investing world. It involves living in a property and using it as an income-generating asset by renting out a portion or multiple units of the property to tenants.
The goal is to generate enough rental income to cover, if not entirely, the mortgage payments, taxes, insurance, and maintenance costs of the property.
House Hacking By The Numbers: A Detailed Example
Let's illustrate house hacking with a practical example. Consider a duplex property with a purchase price of $200,000. As an owner-occupant, you put a 5% down payment, which amounts to $10,000. The remaining $190,000 is financed with a 30-year mortgage at a 4% interest rate.
This results in a monthly mortgage payment of approximately $907. Combining this with estimated monthly expenses for insurance, taxes, and maintenance, let's say the total monthly expenditure comes around $1,300. Now, you live in one unit of the duplex and rent out the other unit for $1,500 per month.
This rental income covers your entire monthly expenditure, and you are left with a positive cash flow of $200. Not only do you live for free, you also gain additional income! That's the power of house hacking.
What are the benefits of house hacking?
House hacking is a fantastic strategy for beginners to become a real estate investor for several reasons.
- Own a rental property at lower cost: Firstly, it opens the door to owning a rental property at significantly reduced cost. Since you'll be living in the property, you can take advantage of owner-occupied loan programs which often require lower down payments and have more favorable interest rates compared to traditional investment property loans.
- Lower your housing expenses: The rental income you generate can cover a large portion, if not all, of your mortgage payments and other costs associated with homeownership. This lowers your cost of living (housing costs) and allows you to save money to invest in other rental properties faster.
- Financial freedom: By effectively living for free and earning income from your property, you're able to build wealth over time. This wealth can be used to invest in additional properties or other investments, speeding up your journey towards financial independence.
- Building equity: This real estate investment strategy allows you to live in your property while your tenants pay down your mortgage. Over time, this will increase your net worth and provide you with a valuable asset that can appreciate in value.
- Resilience to economic downturns: Even in a recession, you can continue to be a successful house hacker. Due to the inherent necessity of housing, there will always be a demand for rental units, ensuring a steady stream of income. This can provide a financial safety net during tough economic times, making house hacking a strategic choice for long-term financial stability.
Different Ways to Approach House Hacking
There's no one way to house hack, as different properties and situations may call for varying approaches. The most common ways of house hacking include:
- Renting out a portion or a room within your primary residence: This is the most straightforward way to house hack, which involves renting out a room or part of your home to a tenant while still occupying the rest. It could even be an existing property like a single family home!
- Purchasing a multifamily property: Buying a property with two or more units, living in one unit, and renting out the others as separate units.
- Using Airbnb: Renting out a portion or all of your property as a vacation rental on websites like Airbnb, and generating passive income.
How to Find Good Properties to House Hack
The first step to successful house hacking is finding a good property that is suitable for your investment goals.
You can look for properties in neighborhoods with high demand and low inventory to get the best deals – those that generate enough rental income to cover the mortgage and other expenses.
You can also network with real estate professionals, attend real estate events and search online platforms such as Zillow, Redfin, or Realtor.com.
Real estate softwares like Coffee Clozers automate finding cash flowing properties in up-and-coming areas within minutes.
Step-by-Step Guide to Finding Properties for House Hacking
- Define Your Investment Goals: Establishing your investment goals is the first step towards finding the perfect property for house hacking. Knowing what you want to achieve will help guide your search.
- Research Markets: Research various real estate markets to find a location that aligns with your investment goals. Look for areas with a strong rental market, low vacancy rates, and high appreciation.
- Consider Different Types of Properties: There are several types of properties you can consider for house hacking, including duplexes, single-family homes with extra space, and accessory dwelling units (ADUs).
- Duplexes: These properties are ideal for house hacking as they come with two separate living spaces. You can live in one unit and rent out the other.
- Single-Family Homes with Extra Space: If you have a single-family home with an extra bedroom or a finished basement, you can rent out these spaces for additional income.
- Accessory Dwelling Units (ADUs): These are secondary housing units on the same grounds as the main house. They can be detached (like a guest house or garage apartment) or attached (like a basement apartment). Renting out an ADU can be a great way to generate rental income.
- Evaluate Potential Properties: Once you’ve identified potential properties, evaluate them for profitability, considering factors such as the cost of the property, potential rental income, and maintenance costs. Checkout - 5 Best Rental Property Calculators for Real Estate Investors
- Make an Offer: If you find a property that meets your investment goals and could potentially provide a good return, make an offer. Consider working with a real estate agent who can guide you through the process.
- Remember, proper planning and due diligence are key to successful house hacking.
- Starting with a clear objective and thoroughly researching potential properties can pave the way towards a profitable house hacking venture.
Best Loans for House Hacking
Here are some of the best loans that you can consider when planning to house hack:
- FHA Loans: An FHA loan is backed by the Federal Housing Administration (FHA), are great for house hacking, particularly for first-time homebuyers. They offer low down payment options (as low as 3.5%) and have lenient credit score requirements. Do note that mortgage insurance will apply if the down payment is less than 20%.
- Conventional Loans: While conventional loans often require a higher credit score and larger down payment (typically around 20%), they can be a good choice for those with a strong credit history. If the down payment is less than 20%, private mortgage insurance (PMI) is usually required.
- VA Loans: If you're a veteran, service member, or eligible surviving spouse, VA loans can be an excellent option. They offer benefits like no down payment and no requirement for mortgage insurance, making them a cost-effective choice for eligible house hackers.
Remember, no matter which loan you choose, if you put down less than 20%, you'll likely need to pay for some type of mortgage insurance.
This insurance serves as a protection for the lender in case you default on your mortgage payments. It's crucial to factor this additional cost into your budget when planning your house hack.
Considerations for House Hacking: Local Laws, Short Term Rentals, and Accessory Dwelling Units
House hacking is an innovative investment strategy, but it's important not to overlook the legalities and regulations that can complicate things. Here are some key considerations:
- Local Laws: Every city or town has its own set of zoning laws and regulations, which govern what you can do with your property. You must ensure you're aware of these laws to avoid running into legal problems down the line. This might include restrictions on the number of renters or the type of rental (short or long term) you can have in your property.
- Short Term Rentals: If you're planning to use platforms like Airbnb or VRBO, make sure to familiarize yourself with the local laws regarding short-term rentals. Some cities have specific rules and restrictions, requiring permits, limiting the number of days a property can be rented out, or even prohibiting short-term rentals altogether.
- Accessory Dwelling Units (ADUs): If your strategy involves converting part of your property into a separate living unit (an ADU), local building codes will come into play. These codes dictate everything, from the size and placement of the unit to the type of facilities it must contain. Moreover, some areas may not allow ADUs at all.
It's always a good idea to consult with a local real estate attorney or real estate agent to ensure your house hacking plans are within the confines of local and state laws.
Remember, understanding and complying with these regulations is just as important as the financial aspects of house hacking.
Good Resources to Learn More About House Hacking
House hacking is a complex topic, and there's always more to learn. There are several online platforms, books, podcasts and blogs that offer valuable insights to help you get started.
BiggerPockets, a real estate investing community, is an excellent resource to find detailed guides, forums, and podcasts for those new to real estate investing.
You can also listen to real estate podcasts like “The Simple Wholesaling” or “The Real Estate Guys” to learn about different real estate investing strategies.
House hacking is an excellent way to generate passive income while living in your own home, without making major upfront investments.
It's an excellent strategy for newbies who want to get into real estate investing without taking too many risks.
By following the tips above, you'll be better positioned to understand what house hacking is, how to approach it, how to find good properties for it, and where to learn more about it. Good luck, and happy hacking!