SS41: What is House Hacking?

Charles explains house hacking and why it is a great investment opportunity.

Watch The Episode Here:

Listen To The Podcast Here:

Talking Points:

House hacking is a real estate investing strategy that entails buying a property, living in one part of it, and renting out the spaces you don’t occupy.
House hacking is an easy way to get into real estate investing.
Occasionally an owner-occupant loan to purchase a 1-4 unit property can come with a lower upfront down payment as well as a lower interest rate.
House hacking enables you to build equity in a property, generate passive cash flow from the unit(s) you are renting out, and also receive certain tax benefits.

Defining House Hacking

The simple strategy of purchasing a single-family home, duplex, triplex, or other quadplex property has been around for decades, but the term “house hacking” has only entered the public lexicon in recent years.

These types of properties are the standard for house hacking, but you can get creative as well and divide up a single dwelling property into multiple units with the right know-how and resources.

House hacking as a way to get into real estate investing

While duplexes, triplexes, and quadplexes are ideal for housing hacking, they are often also more sought after for the very same reason, which can drive up the purchase price.

However, a single-family with a finished basement suite can also serve the same purpose and will very often cost less (depending on your city and state).

Lastly, when you purchase a property as your personal residence, some loans will allow you to put as little as 3% to 5% down as a down payment. These are FHA loans.

Purchasing a Single-Family Property

Purchasing a single-family property is another way to house hack, however; it comes with some drawbacks.

First off, you are actually living with roommates/tenants. You might start off renting to people you know but once they move out; you need to find and vet new tenants…and live with them
What is your exit strategy? Sell the home with the roommate(s), wait for the roommate(s) to move out, and then sell the property or wait for the roommate(s) to move out and then rent the whole property out to one tenant…much harder than just renting out an empty unit with no roommates.

Purchasing a Multi-Unit Property

First and foremost, if you want to qualify for an owner-occupant property loan, your property has to be “residential.” That means it cannot have more than four units.

Living in a property you are also renting will make it that much easier to keep up with maintenance, management, and any other problems which may arise.

When you move out; you just need to rent out your unit.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is house hacking. Now how’s hacking is what I consider to be one of the best initial investment strategies for real estate investors. You’re able to become a landlord. You’re be able to become a property manager. You’re able to make an investment. You’re BA eight. You’re able to purchase your own property that you’re living in a wall, all decreasing your monthly expenses. And I couldn’t get more wins in there as a great strategy for storing your real estate investing career. Now house hacking is a real estate investment strategy that entails buying a property living in one part of it and renting out the spaces you don’t occupy. How’s hacking is an easy way to get into real estate investing. Occasionally an owner occupant loan to purchase a one 40 in property can come with a lower upfront down payment, as well as a lower interest rate, which is the key to this whole strategy.

Charles:
Because when you start buying investment properties, you’re typically unless you have some creative financing or you have a relationship with a bank or something like this. You’re typically an investment property is putting down 20, 25%. In most cases. Now there’s scenarios where it’s more or less, but 20, 25% is typically what you’re gonna be putting down for a commercial property, commercial multifamily property. So five plus units, or if you’re buying your second or third three, four unit property or duplex, I’m like this as an investment, that’s going to be where you’re gonna be still be putting down 20 or 25%. So when you’re able to get in to a house with three and a half percent down, the government is guaranteeing pretty much providing you with a loan at 96.5% loan to value, which is unheard of. You can now purchase a property and you’re able to living one unit and rent out the rest.

Charles:
Now there’s a couple of different ways of doing this with how people figure out what they want to do and how they’re going to design it. But how’s hacking enables you to build equity in a property and generate passive cashflow from the units you were renting out and also receive certain tax benefits. And it’s all, these are true. But the main thing when you’re house hacking is that I’m going to focus more on buying in a good, a property in a good area. If I’m, if I’m house hacking, I really want to focus on three or four units. That’s going to be the target units that I want to find. How’s hacking single family. I’m going to go through the pros and cons of that house hacking a duplex. It’s good, but you’re probably going to have to come out of pocket with a lot more money per month than you would with a triplex or quad.

Charles:
I start off house. I came with a triplex and it was a great experience. I even rented out the second bedroom in my unit and that even allowed even more cashflow. So there’s a number of different ways that you can go about house hacking a property. And I want to go through them on this episode. So as a simple strategy of purchasing a single family home, a duplex or triplex or other quadplex property has been around for decades, but the term house hacking has only entered the public lexicon in recent years. And this is true. Back in 2006, when I bought my first house hack five first investment property multi-family property we didn’t have house hacking. We just knew that we’re going to live in one unit and rent out the others. Now these types of properties are standard for our house hacking, but we can get creative as well and divide up a single dwelling property into multiple units with the right know-how and resources.

Charles:
And this is a little trickier and I wouldn’t really suggest this, but it is a way that people do how sack. So how’s hacking as a way to get into real estate investing. All duplexes, triplexes, and quads are ideal for house hacking. They often are all more sought after for the same reason, which can drive up the purchase price. And this is a very interesting thing to note, even if you’re not house hacking, maybe if you’re looking for when the prices of a 2, 3, 4 unit property, because people want a house that those are going to be driven up, and they’re also people can get in with three and a half percent down. When you start getting into your 5, 6, 7 unit properties. And these are a small apartment complexes, small permanent buildings. These are where you have to come up with 20, usually 25% down, plus all your extra fees.

Charles:
You can’t roll them really in and all this kind of stuff. So it takes a lot more money. Someone’s buying a $400,000 a house and they put down three and a half percent of that, right? 12, 13, 15,000, whatever that is with all your expenses. Whereas when you’re buying a $400,000 apartment complex, a hundred thousand dollars down, so it’s a completely different, a set up of liquidity. The person has to have when they’re buying that property. And most people in the house hacking it’s their first purchase, and they’re going to be living in there, which is how you’re supposed to do it. You’re supposed to be living in the property and that’s the FHA guidelines. There’s a whole bunch of more, and you can just Google it. However, a single family with a finished basement suite can also serve the same purpose with very often costs less depending on your city and state.

Charles:
So if you wanted to transform your basement into a suite, it’s possible, it’s a lot more work. I wouldn’t really suggest them. But the main thing is that you’re allowed to go down to three and a half percent on these FHA loans. So whatever your strategy is for the home, just keep in mind that you’re probably going to be paying a lot more for a 2, 3, 4 unit property, because now house hacking is all the rage. So when you’re purchasing a single family property, the house hack, it’s another way of house hacking. However, comes with some drawbacks. First off, you’re actually living with the roommates or tenants, even if they’re in your basement suite or mother-in-law suite, you might start off renting to people, you know, but once they move out, you need to find invent new tenants and live with them. This is a big thing.

Charles:
When I left college and I had friends that were buying houses where after college and single family houses, and I was like, well, what’s going to happen when, you know, when your friend leaves after 12 months or 24 months or 36 months. Right. And they go, ah, I don’t know. You know what I mean? There was, there was never an answer at that point. It was just that I can decrease my mortgage right now. And I’m a financial wizard and it’s a great idea, but the problem is what do you do? You know, what is your now, you’re going to have your mortgage payment double when that person moves out. But no one ever thinks that way. When they’re getting into a single family house hacking. Now there’s some people that do a single-family house hacking and they’re doing it for the lifetime of the property.

Charles:
And they don’t mind living with people that they haven’t previously known. That’s fine. But if you’re not a person like that, then purchasing with 2, 3, 4 units is probably going to be the best strategy next, what is your exit strategy? So with an E on your single family house and sell the home with the roommates, wait for the roommates to move out, then sell the property or wait for your roommates to move out and then rent the whole property out to one tenant. It’s much harder than just renting out an empty unit with no roommates. When I was house hacking, I’m my own property. And after like a few years, I left for a single family house before moving down to Florida. And I remember that I was living in one of the units and I literally rented the place out within a week or two.

Charles:
I actually had a roommate that was living for free and painting the whole apartment. So when I moved out for you know, we exchanged him not having to pay rent, to paint the apartment and we moved out. I didn’t have to take any money out of my pocket. I had a property that was beautiful. A unit was beautiful. I could rent it right out and I rented to a person and I think they stayed there for a little over a year. So it’s a great way of getting in. And you have a great exit strategy when you’re purchasing a multi-unit property for housing first and format for a first and foremost, if you want to qualify for an owner, occupant property loan, your property has to be residential. Okay? So one to 40 units and you can’t have more than this. Now, living in a property, you’re also renting will make it much easier to keep up with maintenance management and other problems which may arise.

Charles:
This is a prone Kong. You’re living with your tenants. However, it’s much easier. If someone says, Hey, I’ve got an issue and you walk down two floors, right? Or you walk up one floor and you’re able to address that issue, right? Go into your basement. You have some tools there, you do something maybe to make shift into your handyman gets there fine. But if you’re someone that wants complete privacy and you don’t want to be working, you’re a nine to five person and you don’t want to be working after hours when someone calls you. Well, first of all, property management is probably not your game. And this probably isn’t your investment strategy because you kind of have to be on call a little bit more and you get calls at all different times of the night. Sometimes not always. I’ve gotten them before, but when you’re self managing, but you’ll get a process in place.

Charles:
You’ll find handymen that can help you out. You’ll find people you can call. And the first year is going to be a little tricky. But after you get your Rolodex or your phone, let’s say a contact list of all their people and of who to call when there’s a certain issue. And you know that they’re not going to gouge you with pricing. Fantastic. Now you’re making progress. And after a couple years of this, you can now purchase your second property without issue. Next. When you move out, you just need to rent your unit. Exactly what I said. It’s perfect way of going through the process and not having to now, Hey, what do I do? I’m moving out of this property. I have it. Roommate’s still there. Like, you know, what am I supposed to do? Do I have to wait for this roommate?

Charles:
Do I have to tell this guy to leave? Do I have to give him money once he doesn’t leave? If he doesn’t leave, I’m getting paid half my mortgage from this one roommate. And I’ve got to make the other half up until he leaves. And so there’s a number of different issues when you’re house hacking a single family property, unless you don’t have an issue with living with strangers. And you’re you’re in there. Longterm personally, for me, I would find a 2, 3 40 unit preferably or three or four unit. And I would focus on buying that. And I would focus on finding good tenants and do work around the property and little by little and bringing rents up to value. And so when you move out, you have a property completely renovated, all set the go. And now you have, at that point, you have a full 100% rental property that you can now. You can now have cashflow come off for years. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments, and potential show topics at global investors, podcast.com. Look forward to two more episodes next week. See you then

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