Summary: Investing in the real estate market has long been a sound way to build sustainable wealth over time, and there are plenty of ways to capitalize on real estate investment opportunities and profits. One savvy way that many investors are increasingly participating in is “house hacking.” In this article, we’ll go over what house hacking is, and how it may be a great way to both get into the real estate market to buy a home while simultaneously investing for future wealth.
Some clever millennials are teaching the older boomers a new way to invest in real estate, which goes by the name of “house hacking.” This innovative way to invest in the real estate market is becoming an attractive tactic among many, particularly those who are also looking to buy a home for themselves to live in.
So, what is house hacking exactly?
What Is House Hacking?
House hacking has nothing to do with computers, although you may go on the internet to find candidates for real estate investments suitable for hacking. It’s a great way to get started investing in real estate.
The goal of house hacking is to acquire a multifamily rental property, live in one part of it and rent out the other parts for enough rental income to cover most, if not all, of the expenses of owning the property. That means the tenants that are renting from you are essentially paying your mortgage on your behalf.
As the on-site manager of a property that you own, you do not have to pay any rent. If you are clever, and the rental market is robust in the area that you choose for house hacking, then the rental income from the other units in the multifamily property will be sufficient to cover the property’s expenses. Then, you live rent-free.
Related: Rent vs Owning
What Types of Properties Are Appropriate For House Hacking?
Multifamily properties, up to four units, are the best candidates for house hacking. That’s because properties with many units have more tenants that help to cover the bills. But other properties like duplexes and triplexes can do well too.
But there really are many property types can be used for house hacking investment purposes, including the following:
- Spare bedrooms of a single-family home
- Basements of a single-family home
- Accessory dwelling Units of a single-family home (ie. garage apartment, on-site cottage, mobile home)
House hacking is an excellent strategy for real estate investors who are looking for a place of their own while also investing their capital into something that will grow in value over time.
Some investors may also combine house hacking with fixing and flipping, In this case, they may look for a run-down home to fix up while living in it at the same time. Once the property has been brought up to par with a little TLC, the investor can then quickly flip it for a profit.
House hacking can take on several variations, but all with the same end result: the investor has a place to live while allowing renters to cover the operating costs of owning a property. In many cases, there may even be a positive cash flow after all the expenses have been paid.
Speaking of cash flow, how do you know if there is extra money in the pot after all expenses have been paid, including the mortgage? That’s where accurate calculations come into the picture.
You’ll need to calculate the cash flow from the portions of the property that rent to others. If the rent covers all the expenses then the property is said to have a positive cash flow. That is the goal. Have some funds set aside to cover any downtime when a unit is vacant between renters.
You’ll want to understand your Net Operating Income (NOI) before you purchase a property, which represents the amount of money the property will make before you pay the mortgage and income taxes. This number is important for house hacking because it will tell you how much of your mortgage will be covered by your monthly rental income.
Here are some expenses you’ll want to factor into the equation:
- Property taxes
- Homeowners insurance
- Miscellaneous expenses
A seasoned real estate agent who is well-versed in properties in the area you are looking to buy in will be able to help you with these calculations.
But truthfully, even if there is no positive cash flow, that’s still OK, considering the fact that your mortgage is essentially being slashed. For example, if your mortgage is $1,200 per month, it could be cut in half thanks to the $600 in rental income coming in from the other units. That’s a much lower mortgage bill to have to pay for every month.
Owner-occupied properties qualify for lower financing rates and lower down payments than non-owner-occupied properties, which are held purely for investment.
There are many great things about house hacking, but perhaps one of the best ones is that you can get some of the best financing terms on a mortgage. Because you live in the property, you may be able to take advantage of this.
Owner-occupant financing comes with better terms compared to financing for an investment property that is not being occupied by the owner. Owner-occupant financing tends to come with lower interest rates and better terms compared to investment financing. And if you hold onto the property long enough, you may be able to retain the owner-occupied mortgage even after you move out.
Further, you may also be able to get away with a smaller down payment amount. With home loan products like FHA loans and VA loans, smaller down payments of 0% to 3.5% are possible, while investment loans typically require much higher down payments of as much as 20% or more. As such, the barrier to entry for this type of investment is a lot lower than with a traditional real estate investment vehicle.
Please note that you do have to actually occupy the property for this to work. Purchasing a property as a primary residence that you do not occupy for at least the first year can open you up to potential occupancy fraud.
A Word About Landlord Headaches
As the owner/landlord you will deal directly with any tenant relations and problems. If a pipe breaks in the middle of the night, you are the one who will have to deal with the problem.
Be sure to screen tenants thoroughly and maintain the property. Some do not like dealing with tenants; however, if you are careful when selecting tenants and handle any problems professionally, this work provides an excellent experience for understanding further real estate investments to build up your portfolio.
And since you are directly on-site, you don’t have to go through the hassle of traveling to your investment property to deal with issues that may arise.
Is House Hacking Right For You?
House hacking came about especially for those from the younger generation of millennials simply because buying a property is very challenging on one income and even difficult on two incomes. If you consider the payment of rent by others as part of the total income that supports a property, the math may work out better.
When the numbers work out on a particular property, you may have found an investment opportunity with house hacking. Work with qualified real estate agents and mortgage professionals who specialize in multifamily properties for the best results.
Looking For a Mortgage to Buy an Investment Property?
Are you in need of a mortgage to finance the purchase of a property to help make “house hacking” happen for you? If so, we can help. Sammamish Mortgage has been helping Washington home buyers and homeowners with their mortgage needs since 1992. We serve all of Washington, Oregon, Idaho, and Colorado and offer many mortgage programs. Get in touch with Sammamish Mortgage today to get started.