For many people the idea of getting into “real estate” can be both exciting and overwhelming. Aside from the steep learning curve and the time investment it takes to feel comfortable making the leap into investing. The idea of coming up with the capital required to purchase a property can seem unrealistic, especially for younger investors. For the aspiring real estate moguls among you, “house hacking” may be your first step on this journey. House hacking is the process of purchasing any multifamily property with the idea of living in one of the units while renting out the rest. It’s referred to as “hacking” for one simple reason. It’s a real-life hack! Think about it, everyone has to live somewhere. Take the thing that is an expense for everyone else and turn it into a revenue stream while making your rent cost zero!
Said another way, when done properly, house hacking allows you to have your tenants purchase a building for you, that you can live in for free, and they might even pay you to do it. All that you have to do is be able to finance the property. For this reason, this strategy is one of the best ways to get into real estate investing as it provides an opportunity to feel out real estate with hands on experience. Living in your investment property gives you more control over tenants and the property itself and will serve as an excellent crash course in real estate.
As we mentioned above, entering the real estate game can seem like a daunting task. Simplifying your entrance into this lucrative industry will allow you to actually take the all important first step with some confidence. Buying a house is something that most people do at some point in life anyways, why not make your first step an investment experiment? Most people decide to spring for the largest single-family home they can afford the first time around. While the thought of living in a multifamily can be un-attractive to some, a large single home can become a giant set of handcuffs for young couples. Being beholden to high monthly payments can prevent you from living life on your terms and could actually slow your road to the first upgrade.
Instead of tying your financial life to your home, create more freedom and independence for yourself while exploring a potential lifelong stream of income. This can be accomplished through hacking your first home. This strategy will not only mean no (or at least very low) monthly payments for the place that you live, it may mean having the place that you live put extra money into your pocket each month. While this is going on, an asset that can be sold again at any time is being purchased in your name. This double dip effect that house hacking can have on your net worth cannot be understated. Not only do you not have the drag of rent effecting your budget, you’re now free to re-deploy that money as a savings. With the average American paying around 30% of their annual budget towards housing, that will separate you from the pack in your ability to supercharge your savings.
So, if you’re convinced on the benefits of owner-occupying for your first home, your next question is most likely “how do I get started?”. This is a complicated question and the answer may depend more on preference than any perfected science. Once of the considerations in house hacking that one does not have in other types of real estate investment is the owner’s preferences. Where an investor typically plans to have someone else living at the property, and therefore is designing a space to be desirable to another person, house hackers will be living in and commuting from their property. This means that personal choice will play a much larger role in house hacking than in other types of investing.
Firstly, an investor has to know how much house they can afford. The simplest way to do this is to be pre-qualified by a mortgage underwriter for a certain size of loan. A mortgage originator will look at your current assets, your annual income, your credit, and several other factors to determine the size of loan that you will qualify for. Once you have this piece of information you can begin your search.
Location is critical when it comes to real estate so narrow your search down to an area that you desire to live in. Consider things like proximity to your work, amenities in the local community, and potential for your hobbies to be available to you in an area. While selecting a property, keep in mind that you won’t be the only person living there, and the success of your hacking strategy will depend on your ability to get your second (or third or fourth) units rented out. Balance your priorities with the types of tenants you would like to attract.
Once you have determined the dollar figure of the home you’d like to buy, and have the location selected you have to determine how you will be financing the property. While you may have done some research on this step while investigating your potential loan eligibility. Now will be the time when you make concrete decisions about how much money you’ll be putting down, how long your note will be, and the details of interest payments.
FHA loans are loans offered by the Federal Housing Administration, and offer certain benefits for first time home-buyers. These loans allow homebuyers to purchase property with very low-down payments. This is an appealing offer as younger buyers typically have little cash on hand.
For house hackers with connections to more seasoned investors, “hard money” is another route that you can go to secure funding. Hard money lenders are lenders who have plenty of money to put up, but usually are not looking to do much work for their part. Hard money lenders want young hungry investors to approach them with potential deals. Hard money lenders put up capital, and their partners do all the work to make the deal a success. For putting up this capital, the lender will usually expect a cut of the business on the back end.
For house hackers without connections to hard money lenders, more traditional lending options are also available. Standard mortgages are always an option, and there may even be special programs available to investors depending on their specific situation and the state that they live in. Without diving too deeply into how a traditional mortgage functions, understanding the basic features is important. A mortgage requires a buyer to put a down payment on a property, and also agree to make a series of future payments that go partly to chipping away at the original purchase price of the house, and partly to paying interest to whatever lender has put up the money to allow the sale to occur.
Funding and financing these projects is one of the more research-intensive aspects of house hacking because people looking to use this strategy are usually on a tight budget. Individual situations will vary greatly, but as a rule of thumb you should expect to pay around five to eight percent of a properties total value at the time of closing. FHA mortgages will allow you to put down as little as three percent, and expect to pay an additional two to five percent on additional closing costs and fees.
So, let’s assume that you’ve found a property that suits your needs and has additional space for tenants, and you have worked with a mortgage professional to determine how much house as well as how much cash you’ll need to get the project started. Now comes the fun part, the actual house hack! After these pieces have been put in place, all that’s left to do is to spruce up the property however you see fit, according to your budget. Additional money that you put into the property will go a long way to increasing the monthly rent that you’ll be able to charge your future tenants. That’s a good thing because the goal of a house hack is to ideally have someone else buy an asset for you while they pay your rent.
Additions that typically lead to direct increases in rental value are appliances, bathroom furnishings, hardwood flooring and conveniences like AC or in apartment laundry already hooked up. Just think about the things that you would pay more to have in an apartment and attempt to add as many of those features as you can. This will help you justify your rent when the time comes.
That leads us to one of the most difficult aspects of house hacking and that’s your tenants. Once you have your property purchased and set up, you can begin moving into one unit, but in order to make this hack go smoothly you’ll need to quickly fill the other unit(s) with good tenants who pay rent on time and respect the property as their own. This can be a challenge for many house hackers as this will likely be the first time that their learning how to work with tenants.
One of the most important pieces of the tenant search is setting your rental price. Before you purchased the property, you should have done some math to determine how much the mortgage, or whichever other financing method you chose, will cost each month. Ideally, for a successful house hack you would like to be taking in more rental income than you’re having to pay out. If you can even create an additional one or two hundred dollars of “cash flow” per month you’ll be taking advantage of house hacking. Imagine, every month, getting paid to live somewhere, WHILE someone purchases that place your living for you!! That’s the beauty of a house hack.
So, when it comes to setting rent, most of your work should be done on the front end. How much do similar apartments rent for in your area? Who is your ideal tenant and how much can they afford to pay? If you are evaluating a potential property and see that purchasing the home will cost much more each month than you’ll be able to charge in rent, it may not be a great investment opportunity. Try to identify potential properties in the area where your mortgage will be less expensive than the cost of purchasing a property, this will lead to the most successful hacking scenarios.
After setting your rents you’ll need to find a tenant, this can be done in a multitude of ways and the more different methods you use in attracting tenants the better. Cast a wide net and post your property on real estate sites, blogs, even working with realtors can be a good idea. The more potential tenant’s you have to choose from, the better the odds that you’ll find someone who is not only able to pay every month, on time, but will also be respectful to your space.
Hastily rushing the first person who shows interest in your unit could be a one-way ticket to finding thousands of dollars in damage for you to take care of when that person moves out. Ideally, hackers would like to find long term tenants to avoid vacancies while you look for new tenants. Footing the bill only a few months can erase any money that you’ve earned throughout the year on your property.
Aside from concerns about nasty tenants and standard hazards of owning a property that you may have to pay to fix, house hacking is one of the least risky methods of entering into real estate investing. Even for those with no interest in growing a business, free rent and ownership of a property with minimal cash outlay on your part should be attractive to everyone. Most Americans spend around thirty percent of their budgets on rent alone, saving yourself an entire third of your budget will allow you to save more, take more vacations, and will open up a world of possibilities not available to traditional buyers and renters
When done correctly, house hacking should be seen as a way to take something that you have to have anyways, and turn it into a profit center for yourself. When checks come in your mailbox each month, and when those checks cover your rent and then some, you truly are freed up to supercharge the rest of your financial life, not to mention the profit that one can make on the back end when they sell a property that was purchased with someone else’s rent check. If your interested in learning more about this, and other topics in real estate investing, make sure to subscribe to our mailing list!