Are you looking for a way to get into real estate investing in spite of not owning a home yet? Do you realize the many benefits which buying an investment property offers over buying a home? If you are eager to start your career as a real estate investor early on, house hacking might be the solution to your dilemma.
Is this the first time you hear the term house hacking? Would you like to learn more about it? Do you want to find out if you have what it takes to hack a house?
Then you’ve come to the right place. In this article we will explain what house hacking is, what its advantages are, how to finance it, and how to find the best real estate property to hack.
To learn more about this key concept in investing in real estate, make sure to watch our video on the topic, available right below.
What Is House Hacking?
To hack a house means to buy a small multi family home so that you live in one housing unit while renting out the rest. Duplexes and triplexes are usually the ideal property type for this real estate investment strategy.
In this sense, to do a house hack means to become a real estate investor and a homeowner at the same time. The best thing about this approach is that you get to live in your own home for free while generating rental income from the part of the investment property which you rent out.
How so?
The trick is that you use the rent which you receive from your tenants to cover the monthly mortgage payments. If you do your real estate market analysis and investment property analysis right, you can even end up with positive cash flow, which is calculated as the difference between the rental income and the rental expenses. Owning positive cash flow properties means that you are actually making money in real estate.
Another major benefit of house hacking is that buying a single property is easier and faster than buying a home in addition to buying a rental property. You only need to get pre-approved for a mortgage and apply for a loan once. You have to do property search and conduct comparative market analysis just once. You hire a single real estate agent and close one deal. There’s no need to repeat the process associated with buying a real estate property twice.
How to Finance House Hacking 101?
To learn how to hack a house properly, beginner real estate investors need to learn how to finance the purchase as well. Buying a single real estate property is always easier to finance than buying two separate properties: a home and an investment property.
As mentioned above, when going for house hacking, you only need to apply for one mortgage loan. This means that you need to prepare a single package of documents and get pre-approved once. Just as with buying rental properties, it is recommended to get pre-approved for a mortgage before starting your investment property search. This will make you look like a reliable, prepared property buyer in the eyes of property sellers and seller’s agents.
In addition, once you’ve purchased your first house, you have to cover a single monthly mortgage payment. The best part is that the money for this is provided by the rent paid by your tenants. With house hacking, you live in your own home for free while building equity in your real estate property. Renters cover the mortgage payments as well as many of the other costs associated with owning a home and running a rental property.
One of the major expenses related to buying a home or buying an investment property – including hacking a house – is the down payment. If you want to buy a home and a rental property, you have to pay two down payments. For real estate investors, the minimum required down payment for a conventional mortgage is 20% of the sale price, so this can add up to a hefty sum.
However, when hacking a house, in some cases you might qualify for an FHA loan. This means that you can pay a down payment as low as 3.5% of the home value and pay a lower interest rate on a monthly basis. That’s why house hacking is one of the best answers to the question “How can I buy a building with no money or little money?”
Thus, when it comes to financing, this is one of the best real estate investment strategies because of affordability.
How to Start Hacking Houses?
1. Set Up Your Budget
The first and one of the most important steps when conducting a real estate transaction – whether buying a home or investing in rental properties – is to decide on your budget. Although financing a house hack is very affordable, you still have to make some initial payments including the down payment, the closing fees, any needed repairs and fixes, furniture, and others.
To avoid a bankruptcy and a foreclosure which would mean losing both your own home and your income property, you should budget very carefully. Take into consideration the amount of your current savings as well as how much you would be able to spend on mortgage payments and other expenses until you find your first tenants.
Once you’ve prepared your budget, you can start looking for rental properties for sale within this price range.
2. Conduct Thorough Property Search
Looking for real estate listings is the next step in starting hacking a house. When performing property search, you should stay within your budget.
The best property type for house hacking includes duplexes and triplexes, but depending on your budget, you might also look into slightly bigger multi family homes.
Remember that you will have to live with people you don’t know in your property. That’s why you need to search for investment properties for sale which allow for a few different families to live together without getting in each other’s way. This means houses with separate entrances, different garages, and any other features which make for independent housing units.
To start hacking houses with high profitability, you should use Mashvisor’s real estate investment software platform to search for properties for sale among MLS listings, foreclosures, bank-owned homes, short sales, and off market properties. Mashvisor’s real estate investment app has all the features and filters that you need to narrow down your property search based on your budget, preferred property type, and other factors.
Related: Mashvisor Review: The Real Estate Investment Tools That You Need
3. Perform Rental Property Analysis
Once you’ve selected a few homes for sale which match your criteria, you need to conduct detailed investment property analysis on them. This is needed in order to make sure that the rental income which you can expect to receive from tenants will be enough to cover the monthly mortgage payments and the other recurring costs.
When house hacking, you should aim for positive cash flow properties, just like with other real estate investment strategies. This means that you are making money from real estate, while living in your own home for absolutely free.
Once again, Mashvisor has all the real estate investment tools which you need to do rental property analysis. Our investment property calculator will provide you with accurate estimates of the rental income you can expect from your property, the one-time startup costs, the recurring expenses, the cash flow, the occupancy rate, the cash on cash return, and the cap rate. All these numbers are based on rental market analysis and traditional and Airbnb rental comps.
Related: How to Find Reliable Traditional and Airbnb Rental Comps
4. Decide How to Rent Out the Extra Housing Unit(s)
While many beginner real estate investors associate house hacking with renting out on a long term basis, this strategy can be applied to Airbnb rentals as well. Many investors have been able to optimize their rental income as well as their rate of return in terms of both cash on cash return and cap rate by turning the extra housing unit(s) into vacation home rentals.
Nationwide real estate market analysis conducted by Mashvisor shows that in the majority of US housing markets, short term rental properties are more profitable than traditional rentals. So, once you decide on a house to hack, you should consider which rental strategy will yield a higher return on investment.
Related: Cap Rate vs. Cash on Cash Return: How to Calculate Rate of Return in Real Estate Investing
There are many different ways to get into real estate investing, and house hacking is definitely one of the top options for aspiring investors who don’t own a home yet. If you think that you have what it takes to hack a house, sign up for a 7-day free trial of Mashvisor to start searching for properties for sale across the US.