SS159: How To House Hack

SS159 How To House Hack

House hacking has become a popular strategy for new real estate investors. In this episode, Charles discusses what house hacking is, how he used it to launch his real estate investing business, and how you can do it.

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Talking Points:

  • House hacking is a strategy that involves renting out parts of your primary residence to offset the cost of your mortgage and other home expenses.
  • When I began investing in multifamily properties in 2006, my first investment property was a 3- 3-family home that I house hacked. It offset the majority of my mortgage and home expenses, and it is a strategy that I suggest to all aspiring real estate investors.
  • The main benefits I realized from house hacking were the reduction in housing costs, a minimal down payment amount of only 3.5% with an FHA mortgage, and the ability to learn how to be a landlord on a small scale. House hacking is also much less time-consuming to self-manage when compared to a traditional investment property that might be miles from your primary residence. There are also tax deductions for doing repairs, mortgage interest, etc.
  • There are a few different strategies to house hack a property:
    • Rent out extra bedrooms in your home; find roommates to live with you.
    • Rent out a finished basement, in-law suite, or accessory dwelling unit (ADU). This can be done with a traditional 12-month lease or possibly make it a short-term rental.
    • Rent out your garage, driveway, yard, or attic space. I rented out a 2-car garage at my property. The garage had 2 doors, so I divided the garage and rented out each one separately. If you have room in your yard or driveway, you can rent it out for someone to leave their RV, boat, or other vehicle.
    • My favorite is to buy a multifamily house, 2-4 units, so you can be approved for residential homeowner financing, live in one unit, and rent the other 2 units out.
    • The best situation is to mix some strategies to offset most of your home expenses.
  • One note before we move on is to notice that I am saying “offset” your home expenses. Most house hacking situations will not generate cash flow for the homeowner. Maybe you will be able to cover your mortgage but, properties require constant maintenance, and have regular expenses. I would just keep this in mind when making the decision to house hack.
  • The Pros and Cons of House Hacking
    • Pros
      • You can decrease your home expenses
      • You can increase your net worth – build equity as the property increases in value
      • You will gain valuable real estate investing and property management experience
      • Low down payment options for first-time homebuyers
    • Cons
      • You need to live on the same property as your tenants (less privacy)
      • Vacancies and non-paying tenants will require you to tap into other funds to pay bills
      • You will be a landlord with tenants. You will have more responsibilities. If you leave for even a night, you will need someone you can call to handle any issues.
      • There will be costly, unforeseen repairs that will come up over the years.
      • It might not be cheaper than renting, with the additional time and money you will need to invest.
    • How To Avoid House Hacking Mistakes
      • Make sure you know your expenses before you purchase. Get a quote for insurance, figure out the new property taxes, underestimate the rents you will receive, get copies of utility bills from the previous owner, etc. Understand that you will have vacancies, and you will need to prepare for these, which is done through the reserve fund.
      • Set up a separate bank account for your property; it can be in your name, but it should be where you store all money for your property flows in and out of. I might set up a checking account and a savings account. Collect rent, pay bills from your checking account, and then move a monthly portion into your savings account for future repairs.
      • Pay yourself rent every month. Even if you are breaking even with your house hack, ensure that you consistently put money away every month into the savings account for the issue that will come up. If you have a 3-family property, and each floor is paying $1,000 per month, and your mortgage is $2,000 per month, you are breaking even on your mortgage every month from the other 2 tenants; however, you should also be paying into the property checking account your rent that will mainly go into a savings account but, it is crucial to have a reserve that you add to monthly.
      • Avoid a property that requires renovation, especially one that requires significant renovation. All repairs and renovations will cost more than you think, and you most likely do not have good relationships with reasonably priced contractors since this is probably your first property. I would suggest purchasing a good property requiring little to no work. If any repairs are required, have the money ready for these repairs before you buy. Once you purchase, you can make the repairs and rent the units.
      • Buy in a good area; it will make all the difference. Drive the neighborhood, know the schools, and understand what market rents are in the area.
      • Find good tenants. Ensure you properly screen new tenants and have them sign a formal lease.
      • This is a business; you must run it like a business. There will be uncomfortable moments as a house hacker, but it will only make you a better landlord. If you are fair with your tenants, stick to the lease terms, fix issues when they happen, and keep open lines of communication, you will do fine.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo, and today we’re going to be discussing how to house hack a property?

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Charles:
So house hacking is a strategy that involves renting out parts of your primary residence to offset the cost of your mortgage and other home expenses.

Charles:
When I began investing in multi-family properties in 2006, my first investment property was a three-family home that I house hacked and it offset the majority of my mortgage and home expenses. And it is a strategy that I suggest to all aspiring real estate investors. The main benefit I realized from house hacking were the reduction in housing costs, a minimal down payment amount of only 3.5% with an FHA mortgage, the ability to learn how to be a landlord on a small scale. Now house hacking is also much less time consuming to self-manage these type of house hacking properties when compared to a traditional investment property that might be miles from your primary residence. There are also tax deductions for doing repairs and your mortgage interests to name a few. Now there are a few different strategies to house hack property. Number one would be rent out extra bedrooms in your home.

Charles:
So maybe if you have a single family home, you can find roommates to live with you. Number two would be rent out a finished basement, an in-law suite or an accessory dwelling unit in an A DU. This can be done with a traditional 12 month lease or possibly make it a short-term rental Three would be to rent out your garage driveway, yard, or attic space. You know, I rented out a two car garage at one of my properties and the garage had two doors, so I divided the garage and rented out each one separately. If you have a room in your yard or driveway, you can rent it out for someone to leave their RV boat or other vehicle. Now my favorite is to buy a multi-family house. And this is number four because with two to four units and you can be approved for the residential homeowner financing.

Charles:
So the FHA financing for three and a half percent, you can live in one unit and rent out the other two. Now this is the best situation because you can mix some of the strategies together. Like I said before, renting out a garage and renting out a couple of the units you can really maximize the amount of revenue you can generate at your house by really getting creative. Now on OneNote, before we move on is to notice what I’m saying is offset your home expenses. Most house hacking situations will not generate cashflow for the homeowner. They’re not gonna make a profit for the homeowner. Maybe it will add you’ll be able to say cover your mortgage, but properties require constant maintenance and have regular expenses. And I would just like to keep that in mind when making the decision house hack that you’re most likely not gonna be making money using this investment strategy.

Charles:
So the pros and cons of house hacking, well, the pros are you can decrease your home expenses. You can increase your net worth, build equity as a property increase in value. You’re gonna gain valuable real estate investing and property management experience, especially if you’re self managing it. It’s gonna be a low down payment option for first time home buyers. Now, some of the cons of house hacking of properties that you need to live on, the same properties or tenants. So there’s gonna be less privacy vacancies and non-paying tenants will require you to tap into other funds to pay the bills. You’ll be a landlord with tenants and you’re gonna have more responsibilities if you leave even for a night. You’re gonna need someone you can call on to handle any type of issues that you might have. There’ll be costly, unforeseen repairs that will come up over the years and it might not be cheaper than renting with the additional time and the money that you need to invest into a house hack.

Charles:
So here’s some mistakes that you can avoid when you’re house hacking and make sure, number one, that you know your expenses before you purchase. Get a quote for insurance. Figure out the new property taxes. Underestimate the rents you’ll receive. Get copies of utility bills from the previous owner. You know, understand that you’ll have vacancies and you’ll need to prepare for these, which is all done from having a reserve fund. Next would be set up a separate bank account for your property. And it can be in your name, but it should be where you store all the money for your property and money for your property flows in and out of this account, I might set up a checking account and a savings account. You know, you collect rent, pay bills from your checking account and then move a monthly portion into your savings account for future repairs.

Charles:
Pay yourself rent every month. So even if you’re breaking even with your house hack, ensure that you’re consistently put money away every month into the savings account for the issue that will come up. So if you have a three family property and each floor is paying a thousand dollars per month and your mortgage is $2,000 per month, you’re breaking even on your mortgage every month from getting paid rent on the other two tenants. However, you should also be paying into the property checking account, your, your rent so that you know most of that’s gonna go into your savings account. But it’s crucial to have that reserve that you add to monthly. Avoid a property that requires renovation, especially one that requires significant renovation. All repairs and renovations will cost more than you think and you most likely will not have any good relationships with reasonably priced contractors at this point.

Charles:
‘Cause This is probably your first property. I would suggest purchasing a good property, requiring little to no work if any repairs are required. Have the money ready for these repairs before you buy. Once you purchase, you can make the repairs and rent the units. Next is buying a good area. It will make all the difference. Drive the neighborhood. Know the schools and understand the market rents in that area. Find good tenants. Ensure you’re properly screen new tenants and have them sign a formal lease. Now this is a business and you must run it like a business. There will be some uncomfortable moments as a house hacker, but it’ll only make you a better landlord. If you’re affair with your tenants, stick to the lease terms, fix issues when they happen, and keep open lines of communication, you’ll do fine. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show topics at globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programsat syndicationsuperstars.com. That is syndication superstars.com. Look forward to two more episodes next week. See you then.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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