The what and how of housing hacking
In today’s market, if you’re going to buy a rental property, you’ll need to make a down payment of at least 20 percent. In many cases, you’ll need closer to 25 percent.
On top of that, you’ll have to fork over several thousand dollars more for closing costs. By the time the deal is sealed, you could bleed your bank account dry just trying to purchase a piece of investment real estate.
Fortunately, there’s a little-known strategy that savvy investors employ to acquire their initial investment properties with as little as 5 percent down. It’s known as house hacking – and it could be the loophole you need to get your foot in the door to start real estate investing.
What is house hacking?
As veteran investor Chad Carson explains, “House hacking is when you buy a small multi-unit real estate property, live in one unit, and rent out the others. The property for house hacking could be a duplex, a triplex, a fourplex, a single-family house, or even other creative property uses like garage apartments or mobile homes.”
The key is that the rental income from the other units will pay for some or all of the expenses for the entire property (including the one you’re living in). In many cases, you might actually enjoy a surplus. This means the house hacker gets paid to live on site.
The benefits of house hacking
This strategy is starting to catch on with savvy young investors. The reason it’s such an attractive option has to do with a variety of potential benefits, which include:
- Better rates. Owner-occupant financing features the lowest rates on the market. And here’s the best part: If you keep the property as a long-term rental, your owner-occupied loan will remain in place, even if you move out after a couple of years. That may save you thousands of dollars a year.
- Smaller down payment. As stated above, house hacking allows you to pay as little as zero to five percent down (depending on the type of financing), rather than 20 to 25 percent. Thus, you can hang onto your cash and avoid over-leveraging.
- Cash flow. House hacking can generate extra monthly income both now and in the future. (If you decide to move out and start renting your own unit, that cash flow will increase substantially.)
- Experience. There’s no better way to learn the ins and outs of real estate investing and landlording than by living on the property. It won’t always be comfortable, but you’ll learn a ton of valuable lessons that should carry you through future investments.
When you add up all of the benefits, house hacking is pretty much of a no-brainer. It might not be ideal for large families, but it’s the perfect option for a single investor or couple who has no kids.
If you’re young and looking for a way to get started in real estate investing, a few years of house hacking could set you up for solid success and lucrative returns down the road.
House hacking tips
If you’re considering giving house hacking a try, here are a few basic suggestions:
- Find the right property. Not just any property is appropriate for this approach. Typically, the best option is to acquire a duplex, a triplex, or a fourplex that can be partially rented out. However, you could also invest in a single-family property, as long as it has a garage, basement or in-law suite that may be rented out.
- Run the numbers. Although the mortgage cost and rental income will be the two most critical figures, you also have to account for items such as insurance, property taxes, maintenance, and other holding costs.
- Take landlording seriously. you can’t house hack successfully if you aren’t serious about doing the landlord part. Take your landlording duties seriously and treat your tenants well. In the future, you could hire a property management service to manage the site after you’ve move out.
- Keep up with the property. Don’t fall behind on maintenance or repairs. Admittedly, it never feels great to have to shell out cash for such things, but it’s better than falling behind and facing massive expenses several years in the future.
- Set clear boundaries. You must set clear and concise boundaries with your tenants up front. Let them know you’re always willing to help them out with various tasks and problems, but set expectations for when they may contact you, how, and what they can fairly expect you to do.
Putting it all together
House hacking isn’t for everyone, but it can be a really great option for young investors who want to learn the ropes without taking on more risk than they can afford. Done well, it has the potential to supercharge your pursuit of wealth building at the start, and give you more flexibility than you likely dreamed was possible.