Are you looking to dive into real estate investing but unsure where to begin? House hacking might be the perfect starting point.
This strategy allows you to live on a property while renting out part of it to cover your living expenses. Imagine having a place to live and getting paid for it. House hacking offers a way to enjoy a desirable property while earning passive income.
This approach is gaining popularity among young investors who see the benefits of living in their investment property. In this blog, let’s explore what house hacking is and why it’s a valuable strategy for real estate investors.
What is House Hacking in Real Estate?
House hacking is a real estate strategy where you live on your property and rent out extra space to generate income. This method, often involving multifamily homes like duplexes or triplexes, allows you to significantly reduce or eliminate housing costs.
For example, if you buy a duplex for $300,000 with a monthly mortgage payment of $1,500, you can live in one unit. Then, you can rent out the other unit for $1,000 each month.
This rental income covers two-thirds of your mortgage, leaving you with only $500 to pay your monthly rent. House hacking has been popular among real estate investors for years. This strategy offers a practical way to enter the real estate market with minimal upfront costs.
By adopting this strategy, you not only reduce your living costs but also build equity and wealth over time. You are making it an effective and sustainable approach to real estate investing.
Types of Properties Suitable for House Hacking
- Single-family homes with separate living spaces, such as finished basements or accessory dwelling units (ADUs), are suitable for house hacking.
- Multi-family homes like duplexes and triplexes are ideal as they offer multiple income streams from one property.
- ADUs, such as garage apartments or guest houses, provide additional rental income and increase property value.
7 House Hacking Strategies
House hacking offers several strategies to maximize your investment and generate income. Here are the 7 house hacking strategies you can start with:
Invest in Multifamily Homes
Purchase duplexes, triplexes, or fourplexes. Live in one unit and rent out the other unit. This strategy allows you to cover your mortgage with rental income from the other units.
Utilize Short-Term Rentals
Use platforms like Airbnb to rent out extra rooms or units on a short-term basis. This can generate higher rental income compared to long-term leases. Short-term rentals also offer flexibility if you need to reclaim the space for personal use occasionally.
Rent Out Individual Rooms
Rent out spare bedrooms in your home. This strategy works well for single-family homes and helps cover your mortgage and other living expenses. This is an easy way to start house hacking without buying a multifamily property.
Build Accessory Dwelling Units (ADUs)
Build an ADU on your property, such as a granny flat or a tiny house. Rent out this separate living space to generate additional income. ADUs increase property value and provide privacy for both you and your tenants.
Execute Live-In Flips
Buy a fixer-upper, live in it while renovating, and then sell it for a profit. This strategy combines house hacking with real estate flipping. You can benefit from both rental income and increased property value after renovations.
Convert Spaces into Rental Units
Transform basements, garages, or other unused spaces into rental units. These areas can be converted into livable spaces for tenants. This method maximizes the utility of your property and generates extra income without needing a separate building.
Apply the BRRR Method
The BRRR method (Buy, Rehab, Rent, Refinance) helps you get into a property with less money out of pocket. Buy a fixer-upper, renovate it to increase its value, rent it out to tenants, and then refinance it to pull your original investment back out.
Why Should You Consider House Hacking?
House hacking offers several compelling benefits that make it a smart real estate investment. Here are the three reasons why you need to consider this investment strategy:
Financial Benefits
House hacking can significantly reduce or even eliminate your housing expenses. By renting out extra space in your property, you generate income that can cover your mortgage and other expenses.
This extra income can help you save money, pay off debt, or invest in additional properties. Over time, the reduced living expenses can lead to substantial financial savings.
Lifestyle Flexibility
House hacking provides greater flexibility in your living arrangements. You can choose the type of property that best suits your needs. It can be a duplex, triplex, or single-family home with an accessory dwelling unit (ADU).
This strategy also allows you to adjust your living situation as your needs change. For instance, you can move to a larger unit or downsize without the hassle of selling your property.
Building Equity and Wealth
House hacking helps you build equity faster. As you pay down your mortgage with rental income, you increase your property’s equity. You can use this growing equity for future investments or as a financial safety net.
Additionally, real estate typically appreciates over time, further increasing your wealth. House hacking can be a stepping stone to building your real estate portfolio, providing long-term financial stability and growth.
How Do You Get Started with House Hacking?
House hacking can be a profitable and practical way to enter the real estate market. Start by following these steps:
- Assess Your Financial Situation: Start by evaluating your current financial status. Determine your budget, credit score, and how much you can afford to invest.
- Choose the Right Property: Select a property that suits your needs and goals. Consider multi-unit properties like duplexes or triplexes, single-family homes with rentable spaces, or properties with accessory dwelling units (ADUs).
- Financing Options for House Hacking: As an owner-occupant, you have several financing options available.
- Conventional Mortgages: These are a popular choice for multi-unit properties. The down payment ranges from 15% to 25%, depending on your credit score and lender preferences. Once you reach 20% equity, you can eliminate private mortgage insurance (PMI), saving you money monthly.
- FHA Loans: Ideal for first-time buyers or those with less-than-perfect credit, FHA loans require a down payment as low as 3.5%. They are available for properties with up to four units. However, you’ll need to pay mortgage insurance premiums (MIP) for the life of the loan unless you put down at least 10%.
- VA Loans: If you are a veteran or active-duty military member, VA loans offer excellent terms, including no down payment and no monthly mortgage insurance. These loans can finance properties with up to four units, providing great opportunities for house hacking.
- Calculate Potential Returns: Analyze the potential rental income versus the costs. Ensure the rental income will cover your mortgage and other expenses.
- Plan for Renovations and Repairs: Budget for any necessary renovations or repairs to make the property suitable for renting. This can increase the property’s value and rental income.
- Finding and Managing Tenants: Advertise your rental units and screen potential tenants carefully. Good tenants are crucial for a successful house hacking venture.
By following these steps, you can successfully start your house hacking journey and build wealth through real estate investing.
Potential Challenges of House Hacking
House hacking, while beneficial, comes with its own set of challenges. Below are some common challenges house hackers face and tips on how to overcome them.
Common House Hacking Mistakes
Many first-time house hackers make mistakes like underestimating expenses, not researching local rental laws, or failing to screen tenants properly. Avoid these pitfalls by doing thorough research, budgeting for unexpected costs, and carefully vetting potential renters.
Managing Tenant Relationships
Building good relationships with tenants is crucial. Communicate clearly, address issues promptly, and maintain professionalism. Happy tenants are more likely to stay longer, reducing turnover and vacancies.
Dealing with Vacancies
Vacancies can hurt your cash flow. To minimize them, market your property effectively, set competitive rental rates, and keep your property in good condition. Offering incentives, like a free month’s rent, can also attract tenants quickly.
Maintenance and Upkeep
Regular maintenance is essential to keep your property in good shape and retain tenants. Set aside a portion of your rental income for repairs and maintenance. Respond to repair requests promptly and perform routine inspections to catch problems early.
By anticipating these challenges and addressing them proactively, you can ensure a smoother and more successful house hacking experience.
FAQs about House Hacking
Q1: How to House Hack a Single-Family Home?
To house-hack a single-family home, start by renting out extra rooms or creating separate living spaces, like a finished basement or an accessory dwelling unit (ADU). This way, you generate rental income to help cover your mortgage and expenses.
Q2: Is House Hacking Legal?
Yes, house hacking is legal, but you must follow local zoning laws and rental regulations. Check with your city or county to ensure compliance with all legal requirements.
Q3: What are the risks of house hacking?
The risks of house hacking include dealing with troublesome tenants, property damage, and potential headaches from shared living spaces.
Q4: Is House Hacking Worth It?
Yes, house hacking can be worth it. It helps reduce or eliminate your housing costs, build equity, and generate additional income. It’s a practical strategy for both new and experienced real estate investors.
Conclusion
House hacking is a powerful strategy for building long-term wealth through real estate. By living in your investment property and renting out a portion of it, you can significantly reduce or eliminate your housing costs, generate passive income, and build equity over time.
This method offers a practical and sustainable way to enter the real estate market with minimal upfront costs, making it ideal for both new and experienced investors.
Throughout this guide, we’ve explored various house hacking strategies, from investing in multifamily homes to leveraging low-down payment loans and creative financing options.
We’ve also discussed the benefits, such as financial savings, lifestyle flexibility, and equity growth, and provided actionable steps to get started, even with little or no money.
House hacking comes with its challenges, including managing tenants and maintaining the property. However, the potential rewards make it a compelling option for anyone looking to dive into real estate investing.
Ready to start your house-hacking journey? Schedule a FREE consultation with eFunder Capital to get personalized advice on making the most of your investment.
