November 24th, 2019 9:40 AM by Jackie A. Graves, President
The internet loves the word “hack” because it usually means
there’s a creative, inexpensive shortcut that solves a common problem. But it
also often results in a solution that’s not quite up to par, which is why many
investors may have turned a deaf ear to the concept of house hacking.
In reality, house hacking helps you break into the real estate
investment market while also covering your own housing expenses.
That last part is huge. For most people, their biggest bill is
their rent or mortgage, with the average rent in the United States hitting
an all-time high of $1,405 last year. They’re spending hundreds of dollars each
month to keep a roof over their head, money that could otherwise be used to
build wealth or achieve financial freedom. Home prices have skyrocketed in the
last 30 years while household incomes have remained largely the same, so home
buyers need to find creative ways to afford their monthly payments.
Whether you’re a real estate investor newbie or are a seasoned
investor looking for a new way to build wealth, house hacking not only provides
an attractive income, but can also allow you to live for free.
By definition, house hacking is the act of turning your
investment property into your primary residence. In some cases, you might
convert a single-family home into a duplex or rent out a bedroom. But
typically, the practice applies to multi-family residences, one of which is
yours and others are rented out to other tenants.
As the landlord, you receive rent from the other units, which
will ideally be more than enough to cover the mortgage and your own living
expenses. When this is done correctly, you can use the leftover money to
quickly increase your investment capital. This is different than the house
flipping popularized by HGTV – it’s not about a quick flip.
However, there is some risk involved. If you end up with a money
pit, you could end up spending more than you’re collecting in rent, which would
essentially defeat the purpose of house hacking.
Let’s say your household brings in an average salary of $73,298 each year.
In a recent report, Americans spent an average of $19,884 on housing, which is roughly 27% of your
annual pre-tax salary. Imagine what you could do with an extra $19,884 ever
Maybe you’d want to put it toward more rental properties to grow
your portfolio. Or, perhaps you’d want to save it to pay for your kid’s
college, their first car, or even retire early!
Here’s a quick example of what house hacking looks like in
action, based on a property purchased last year using this exact strategy:
• Four-plex property: $220,000 including closing costs and
• Cash to close: $10,000 including the down payment, property inspection, and
$3,000 in additional repairs
• Monthly rent from 3 units: $2,000
• Monthly mortgage payment: $1,400
• Monthly cash flow: $600
• Budgeted expenses: $600
• Final Income: $0
• Money saved from not paying rent: $8,400 per year
There wasn’t money earned on this deal, but rent was free.
Instead, there was enough money to cover expenses and repairs. As for the money
saved on housing, it was now invested in building wealth — $8,400 per year.
But aside from living essentially for free, house hacking
provides so much more. For some investors who are doing this, it’s their ticket
to early retirement. For others, it’s a long-term plan for making money and
allowing you the financial independence you crave.
Successful house hacking relies on three core components:
• A multi-unit investment property
• Affordable down payment
• Low fixed-rate mortgage
Ideally, you can find a below market value property that will
help you build instant equity. We recommend only considering properties where
the total rental income is at least 1% of the property’s purchase price.
Here’s another bit of good news: if you plan on using the
property as a primary residence, you can usually find more favorable
Money is usually one of the biggest obstacles that prevents
people from investing in real estate. But when you can get a mortgage with a
low down payment and low interest rate, like a 3.5% FHA loan, the barrier to
entry is much lower.
The right real estate agent can make all the difference,
especially when you can work with an investor-friendly one. Lean on your agent
throughout the process, from finding investment properties to exploring
financing options. You’ll likely get a lot farther with an agent than you could
going it alone or using an iBuyer like Offerpad, especially if you’re
new to house hacking.
We’ve found that the best way to implement this investment
strategy is in the Midwest where property is affordable, but it can also work
in other parts of the country (e.g. renting out an Airbnb in Denver to cover
You’ll want to do some digging in your local market to find
properties below market value or at least affordable. Much of the country right
now is still experiencing a seller’s market, but there have been
several signs that’s about to change. The market looks to be cooling, which is
great news for investors who want to score a potentially good deal on a
Foreclosed homes, HUD properties, or fixer-uppers are good labels
to start with. When looking at these homes, remember you’ll likely need to do a
little work to get them move-in ready. Look at the roof, the plumbing, HVAC
system, foundation, condition of the windows and doors, appliances, and the
kitchen and bathroom.
You’re not likely to find a property that’s in good condition,
in a good neighborhood, AND priced affordably. You’ll usually have to bend on
something, and we recommend prioritizing the things you can’t change.
Getting a mortgage for a house hack is similar to getting a
mortgage for any primary residence, but it’s a little harder. You may have
certain requirements to meet that you otherwise wouldn’t.
You’ll need to know your low down payment mortgage options,
which in this case would be a VA Loan, FHA Loan, FHA 203K, or Fannie Mae
Homestyle Renovation Loan, to name a few.
Look at the credit score requirements, down payment options,
property eligibility requirements, if you need mortgage insurance, and whether
you can wrap home improvement costs into the loan.
It’s a good idea to get pre-approved for a mortgage first to be
ready when you find the right property.
You close on the property, fix it up, start getting tenants, and
BOOM — now you’re a landlord. One upside to living on property is being
able to manage it yourself rather than outsourcing to a property manager.
First and foremost, remember this is a business, and you’ll need
to learn quickly what to do and what not to do if you want your house hack to
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