Many people want to invest in real estate and are looking for the best ways to enter the market. Why wouldn’t they? Real estate has always been the safest place to invest your money in and a lot of property investors have become millionaires with their investment properties. However, most people shy away from real estate investing because they can’t afford to buy a second property. What if we told you there’s an investment strategy popular among younger property investors that may just as well be the best way for making money in real estate? This is known as house hacking.
House hacking is a mix between buying a primary residence and a rental property. Simply put, you buy a multi-unit property (duplex, triplex, fourplex), live in one unit, and rent out the rest. While doing so, you’re able to collect rent from your tenants, use it to cover your mortgage payments, and live in your house for free!
Related: The Ultimate Guide to House Hacking
Why Consider House Hacking
Living in the same property you’re planning on renting out has a number of benefits. Besides the obvious benefit of living for free by having your tenants pay for your residence, house hacking a property also allows for:
1) Gaining Real Estate Investing Experience
The first benefit of house hacking is that it gives you easy entry to the real estate investing business. This investment strategy bridges the gap that exists between beginner property investors and those that have been in the industry for a while. In fact, many agree that it offers the easiest way to start investing in a property.
As you’re renting out your property, you’ll get first-hand experience on what it’s like to become a landlord. You’ll have the time to learn more about the market, have your finances in order for making a purchase, and set your strategy for investing in real estate – all while making money from your primary residence. Thus, house hacking allows you to enter the real estate market with confidence and build an investment portfolio of rental properties as you periodically upgrade from home to home.
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2) Significant Savings
House hacking also eases the financial burdens that many beginner property investors associate with buying and owning an investment property. Mortgage payments can be expensive, depending on the type of loan you get and down payment. And these payments are only a part of your rental expenses as a real estate investor – there’s also insurance, property management fees, repairs, and maintenance costs to worry about. Owners of rental properties can struggle with negative cash flow if their rental income doesn’t cover these expenses.
Renting out a unit of your primary residence, on the other hand, allows for significant savings. It’s entirely possible to pay down your mortgage with rent collected from your tenants and not have to worry about covering these costs out of your own pocket. Doing so will decrease a huge portion of your rental expenses as a real estate investor, which allows for positive cash flow.
3) Passive Income
House hacking is one of the easiest ways to break into the real estate investing industry for property investors looking to make a passive income. Think about it this way: you’ll have an added source of income without having to put any work in return! It’s really that simple.
In addition, when real estate investors generate passive income and deduct mortgage payments from their pocket money, this enables them to save more money faster to put towards their next real estate investment! Thus, house hacking will get you to your second home while allowing you to benefit from holding your first in the form of cash flow and appreciation.
Tips for a Successful House Hacking
Think of Your House as an Investment
If you want to get into house hacking as a strategy for building wealth and making money in real estate, then it’s important to treat your property as an investment. If you’re still searching for a house to buy, keep in mind that not every house is equally “hackable.” Thus, make sure you find one with a number of units so you can live in one and rent out the others.
As an aspiring real estate investor, you want to save money while living in the property that you’re renting out. Therefore, you need to assure that the house you’re hacking can generate a healthy and positive cash flow. Even though it makes sense that sharing your property with tenants will cut down on living expenses, you don’t want to be stuck in a negative cash flow rental property. Moreover, a positive cash flow rental property will allow you to refinance equity out of your primary residence and leverage that cash to put a down payment on a second investment property!
Looking for a positive cash flow rental property? Click here to start looking for and analyzing the best investment properties in your city and neighborhood of choice.
Do the Math
If you’re planning on turning your house into a rental property when you decide to move out, don’t count on appreciation to make your investment decisions. Instead, you need to calculate the numbers – the most important one is the cap rate. Basically, this number shows you the profitability and return on investment you’d get from house hacking. To calculate the cap rate, subtract the annual operating expenses from the annual income to get the net income. Then divide the net income by the purchase price.
For example, if you bought your primary residence with a purchase price of $100,000 and you’re sharing it with two tenants whom you charge $400 a month each. In this case, your rental income is $800 per month or $9,600 per year. Furthermore, say that after calculating your operating expenses they sum up to $5,000 per year.
Following the formula (annual income – annual operating expenses/purchase price), your investment property has a 4.6% cap rate. Is this a good cap rate? A real estate investor would typically aim to buy a rental property with 8% – 10% cap rate. For a house hacker, on the other hand, experts believe that 3% – 4% cap rate is actually a good return on investment since you’ll occupy one of the units.
Mashvisor offers property investors a Rental Property Calculator that helps them analyze the cap rate (and other real estate metrics) of rental properties to assure a profitable investment! To learn how we will help you make faster and smarter real estate investment decisions, click here.
Rent Out on Airbnb
If you already have a house but it doesn’t have an entire extra unit to rent out (a single-family home, for example) you can still consider renting out a room to either long-term or short-term tenants. Many property investors actually found that renting out for the short-term on websites like Airbnb can bring in higher rental income than renting out traditionally!
It should be mentioned, however, that this depends on factors like the location and Airbnb occupancy rate. Before you list your primary resident on Airbnb as a house hacking strategy, make sure that short-term rentals are legal in your area. Moreover, the best real estate markets for an Airbnb investment are those attracting tourists. In such a location, property investors enjoy a high Airbnb occupancy rate, higher rental rates and, consequently, can make enough money to cover a portion of their mortgage payments.
House hacking is a great investment strategy for building wealth and making money in real estate in an unconventional way. As an aspiring real estate investor, you can cut down on your living expenses, make cash flow to cover your monthly mortgage payments and start saving up to leverage and buy your second investment property.
Mashvisor can help you hack your property! Using the best investment tools, our platform directs you to the best rental properties for sale in any city and neighborhood in the US housing market in just 15 minutes! Why not give it a try? Click here to start out your 7-day free trial with Mashvisor and enjoy a 15% discount after.