House Hacking: Is it Really a Way into Real Estate Investing?

By: ROS Team

Are you entertaining the idea of getting into real estate investing but are having second thoughts because you haven’t even bought your first home? Or perhaps you’re interested in generating passive income but are unsure where to begin.

We’ve put together some hints on how house hacking can be the key to lowering your housing costs and finally launching a career in real estate investing.

What is House Hacking?

House hacking is a real estate investment concept that involves renting out your principal property. Let’s take, for example, an aspiring real estate investor who owns an investment property near his workplace. He lives in one of the units in his multi-unit property and rents out the other units. He’s found that maintaining the property is too expensive unless he can compensate the costs by living in one of the units himself.

If you don’t want to acquire a multi family property, you can purchase a single family home and house hack it by making the garage into a living area or building a tiny home in the backyard.

Benefits of House Hacking:

According to the Bureau of Labor Statistics’ Consumer Expenditure Survey, the average American household spends close to $20,000 (or 33%) of their annual income on housing costs. Can you imagine being able to afford to pay all of your home expenses while also having a third more income?

Consider these other advantages of house hacking:

More Flexibility: House hacking allows for more residency flexibility. If you have to relocate because of your job, you can rent out the additional unit and continue to receive a rental income.
Ease Into your Rental Property Career: Living on-site and close to your tenants forces you to quickly learn the ropes of being a landlord. Being a part of the community where your rental property is located will help provide the vital skills for managing a successful rental property portfolio.
Enhance your Wealth through Passive Income: the additional cash flow obtained by house hacking enables you to swiftly repay your mortgage and save on your next capital property. Learn how to use the debt snowball method, a debt-reduction strategy in which you pay off debt from smallest to largest, building momentum as you finish each balance to pursue both alternatives.

Steps on How to House Hack:

To begin, you’ll need to decide if house hacking is the best method for you. The first step is to find a suitable property.

The steps below will be discussed in more detail:

1. Decide on your Funding

As an owner occupant, you may be eligible for traditional home loans as well as homebuyer assistance programs. Your property’s units may make you eligible for a loan with favorable terms and cheap down payments.

For example, FHA loans authorize multi-family structures with up to four units, and it only takes a 3.5% down payment. The FHA 203K loan is ideal for investors who want to renovate their rental properties. You can choose from homeownership programs and grants such as Homeownership Voucher Assistance and Project-Based Voucher Program.

Others may choose the BRRR method, which stands for Buy, Repair, Rent, and Refinance. BRRR is a house hacking technique that utilizes short-term cash to remodel and rent property, followed by long term mortgage refinancing.

2. Find Properties by doing Research

You’ll need to adopt a landlord’s perspective when buying a multi-family property. This means that location is vital in determining your purchase price and rent price. It will also be a means by which you’ll evaluate the demand for the property. Other factors that influence rental market stability and demand include population increase, job growth, and neighborhood amenities. As a novice landlord, consult with a multi-unit property specialist who can offer you estimates of what it costs to buy property in the area as well as the approximate rent you should charge.

There are other features of a property to look for while house hacking. These include:

Finished Basements: Some single-family homes have finished basements. Even full bathrooms and kitchenettes are typical in finished basements. The owner can live in this space while renting out the main portion of the home.
Additional Dwelling Units (ADUs): ADUs are independent, approved constructions added to the property. They’re known as guest houses or in law units, and most have electricity and plumbing.
Multiple Bedrooms: If you can’t find a multi-family property, look for single family homes with multiple bedrooms. More bedrooms mean more rental spaces.
Easily Converted Areas: Areas that can be easily converted into living spaces are the following best things: having multiple bedrooms. You can turn a loft, a dining room, or even an extra room into an apartment by a wall and/or a door. Adding bedrooms increases the property value and rentability.
Properties Near Public Transportation: Multiple, rentable areas are vital, but they are not the only aspect to consider. Space may be there, but the location may be unattractive to renters. Before choosing a property, look for properties in the most sought-after areas.
Areas Without Restrictions: HOAs often prohibit non-owner tenancy. Similarly, specific communities do not allow VRBO or Airbnb rentals.
Comfortable Living Spaces: While bedrooms are crucial, you’ll also want living spaces where your tenants can relax. There are also nooks and lofts. More space for your tenants implies more rent and a longer lease.

3. Always Compare Prices

Once you’ve found one or more properties that meet your criteria, analyze to see if the investment would be profitable. Calculations are required to run your analysis; start by estimating your rental revenue and property expenses.

Here are some examples of line items to include:

Monthly Rent
Taxes
Insurance
Repairs and upkeep
Utilities
Expenses
Vacant space

Then, determine your monthly mortgage payment by multiplying the purchase price by the expected down payment amount. A mortgage calculator makes calculating your mortgage payments online a breeze. It is a must for house hacking. Monthly cash flow is calculated by subtracting your monthly payment from the Net Operating Income (NOI). This figure represents the amount of rental revenue remaining after all property expenses including your mortgage has been paid.

A good cash flow indicates that you can live on your property for free and still earn some money. On the other hand, if your cash flow is negative, it may indicate that your living expenses have drastically decreased.

Final Thoughts:

Hopefully, you’re now more familiar with the concept of house hacking and how to house hack. It is an excellent technique to pay down your mortgage quickly, free up cash so you can reinvest it in more property, and grow your portfolio. It is also totally fair to use the strategy of house hacking solely to minimize your housing expenditures.

However, you may discover that producing passive income is a very effective strategy to develop your wealth and pave the way to financial independence. Conducting a thorough transaction analysis is critical to ensuring that you make the most incredible investment selection possible.