House Hacking 101: What is house hacking and how can you make money in real estate with this strategy?
If you are looking into house hacking, let me congratulate you because you are on the right path to getting started in real estate. In fact, this investment strategy can set the path for making money in the business with minimal risks. So, let’s just dive deep into it. I’ll talk about the house hacking definition, the advantages, the different methods of house hacking, how to finance the strategy, and, of course, how to analyze an investment property to make sure it will generate positive cash flow to allow for a successful house hack.
1. House Hacking Definition
House hacking is a very easy real estate strategy to understand. In essence, it is when you buy a property, you live in part of it, and you rent out the rest. All the while, your tenants pay you a rental income which allows you to live for free in your own home. So, now that you know what is house hacking, let’s see how it benefits a beginner real estate investor.
2. Benefits of House Hacking
The main advantage of house hacking is the fact that it helps you save money on living expenses. It might even help you completely eliminate living costs through the rental income you receive from your tenants. Additionally, the rental income will allow you to build equity for free while it pays off your mortgage. Another benefit is that the rental expenses, in this case, are subject to tax deductions (an investor’s best friend!). It’s also important to note that there are various investment property financing strategies that support this particular investment type. Some of these actually have fewer requirements and lower down payments which are a great advantage for beginners.
Related: House Hacking: Your Entry into Real Estate Investing
3. The Different Ways to House Hack
The amazing fact about house hacking is that it’s a real estate investment strategy that gives you options. In other words, there is no one way to do it. Instead, there are a few ways you can choose to house hack. Here are 3 methods to make the best of an investment property while saving up on housing costs:
Traditional House Hacking
This is the method where buying an investment property takes place. Traditional house hacking is when you buy a multi family home (a property with 2-4 living units), you move into one unit and rent out the rest. With the right rental property, the income can cover most, if not all, your monthly mortgage payments.
One strategy that works best for house hacking is a duplex investment strategy. As a matter of fact, buying a duplex is the best way to house hack especially for beginner real estate investors. It is a multi family property that has two living units. House hacking a duplex comes with the benefit of being more affordable than a triplex or quadruplex and you can ease yourself into dealing with only one tenant rather than multiple tenants for your first rental property.
House Hacking Your Own Property
What is house hacking your own property? It simply means that you rent out the place you live in, which you already own. Yup, that’s right. And here, you don’t even need to buy an investment property. You can rent on a room-by-room basis which is perfect for Airbnb. Or, you can rent a room/an entire floor for a tenant long term. This may even be possible if you’re a tenant. Just be sure to check your lease agreement and clear everything with your landlord. Doing this can help you with your own rent or even allow you to save up to buy your own property.
4. Investment Property Financing
If you do choose to go with traditional house hacking, you’ll need to buy a rental property. So, how do you finance such a strategy? There are a few options here, and you can choose whatever applies to you or works best for your situation. Let’s go through them one by one:
Related: The Best Approach to Investment Property Financing in 2019
A Conventional Loan
A conventional loan works for all types of investments as long as you have a good credit score. The good thing about it is that you are buying an owner occupied multi family home. Therefore, it might be easier for you to get approval for a loan. However, most conventional loans require a 20% down payment. If you have the cash saved up and you are confident in your credit score, go ahead and apply for this type of loan.
An FHA Loan
Another investment property financing option is an FHA loan– Federal Housing Administration loan. This loan is pretty different from a conventional loan. The FHA works as a backup system rather than the actual loan provider. So, private lenders such as banks are the ones who provide the funding but the FHA backs it up which provides a strong guarantee for repayment. In case you fail to repay the lender, the FHA repays them in your stead. From here, you can guess that they have more flexible requirements for application. Here are some advantages/requirements of the program:
1. A down payment of 3.5% or less.
2. Approval is possible with bad credit history.
3. FHA loans are specifically for owner occupied properties. You are required to live there for at least one year but then you can move out and rent out all of the units if you wish.
4. You can easily get extra funding since the FHA backs up your loan with the FHA 203K program.
One of the best property financing programs is the VA loan program. With the government backup system, you won’t have to worry much about how to finance an investment property. This program targets veterans who serve or have served in the military for a specific period of time. Therefore, it provides the most flexible terms for those who wish to own a house of their own. Some of the advantages include no down payment requirements, no pre-payment penalties, low-interest rates, and more than 100% of the property price for a loan.
You can find all the information on this financing strategy here.
5. Real Estate Deal Analysis
It is never enough to just know what is house hacking. In fact, for this to work out for you, you must take the time to perform a meticulous deal analysis. This includes a thorough market and investment property analysis. As for the market analysis, you want to make sure it supports an investment of this kind. Examine the rental demand, the population rate, and the job market to ensure your property doesn’t experience high vacancy rates.
On the other hand, an investment property analysis is essential for making sure the property itself has the potential for generating income. This is called the return on investment analysis where you examine the investment to price ratio through various evaluation techniques such as the cap rate and the cash on cash return.
Related: How to Do Investment Property Analysis
Now, how do you do all of that? Simply by using a house hacking calculator (investment property calculator). This real estate investment tool provides the most accurate examination of an investment property. It will provide rental income and occupancy rate estimates. Just keep in mind that you’ll have to account for the fact that you are living in one of the units when using tools and data of this kind.
To learn more about how we will help you make faster and smarter real estate investment decisions, click here.