If you are thinking of buying your first home today, why not do the smart thing and use the property to earn rental income? Sound intriguing? Then house hacking might be the right real estate investment strategy for you. This article will explain what house hacking is and show you how to get started with this strategy right now.
What Is House Hacking?
House hacking is when you purchase a multi-unit property, reside in one unit, and rent out the rest. The multi-unit property could be a duplex, triplex, or fourplex. If you don’t want to buy a multi-family home, you could also house hack a single-family home with a rentable space like a basement, guest house, garage, or RV.
Is House Hacking Legal?
To determine whether house hacking is legal in your area, check the local zoning ordinances. In some jurisdictions, you are not allowed to rent out any space in your primary residence. If you violate this rule and the local municipality finds out, you will be slapped with a fine.
How Can You Benefit from House Hacking?
There are many benefits to implementing the house hacking strategy.
- Live for free – Wondering how to live for free? Consider house hacking. If done properly, this real estate investment strategy will eliminate or minimize your housing costs. The money collected through renting out the other units will pay your mortgage, taxes, insurance, and other costs.
- Better financing terms – With this strategy, landlords get access to owner-occupier financing with favorable terms like a low down payment.
- Learn to be a landlord – When you live close to your tenants, you will quickly learn how to be a landlord. This will give you the much-needed skills for managing your growing rental property portfolio.
- Rent out on Airbnb – In many locations, like the Las Vegas real estate market, renting out a whole property or unit on Airbnb is prohibited. However, you may still be allowed to use the short-term rental strategy if you house hack.
- Grow your wealth – The revenue collected through house hacking will help you pay down your mortgage fast, and then you can start working towards your next income property.
- Tax benefits – Owning rental property lowers your taxable income through depreciation and mortgage interest tax deduction.
Related: A Guide to House Hacking an Airbnb Las Vegas Investment Property
How to Get Started with House Hacking
Study the real estate market
Plan on buying an investment property to house hack in your hometown? Or maybe you are a remote worker who has the option to live anywhere in the US housing market next year? Either way, be sure to conduct real estate market research. Where you house hack will determine how successful this strategy is.
Here are some of the statistics you should look at in your market analysis:
- Population growth
- Employment and unemployment rates
- School district ratings
- Median income levels
- Crime rates
- Education attainment
Be sure to also conduct a neighborhood analysis which will show you if a specific area is ideal for a cash flow investment.
Find the right investment property for sale
Income properties that generate the best return on investment for house hacking are usually foreclosed homes, fixer-uppers, HUD homes, short sales, and bank-owned homes. To find such off market properties, you need to use a tool like the Mashvisor Property Marketplace. This tool allows you to narrow down your search using filters like miles, location, budget, type of property, rental strategy, number of bathrooms/bedrooms, listing price, cash on cash return, and cap rate. Once you’ve narrowed down your options, you can analyze the properties using Mashvisor’s Investment Property Calculator. Using estimated rental property expenses and rental income, this tool will show you what cash flow you can expect from a rental property for sale.
Related: A Guide to House Hacking with a Fourplex
Explore financing options
Here are some of the investment property loans you could consider for house hacking:
- FHA loans – FHA loans are designed for first-time buyers. They require a credit score of 580 or higher and a down payment of only 3.5%. Borrowers with a credit score below 580 can still get approved for the loan if they put down 10%. The only disadvantage of FHA loans is that you might have to pay a mortgage insurance premium (MIP).
- Fannie Mae homestyle renovation loans – If you have a credit score of 680 or more, you could qualify for a Fannie Mae homestyle renovation loan. This loan is ideal for distressed property, and the down payment required is only 5%.
- VA loans – As the name suggests, the Veteran Affairs loan is designed for veterans. The interest rates are very low, and a down payment might not even be required. However, you must have a credit score higher than 620.
- FHA 203k loans – If you want to buy an investment property that needs a lot of fixing up, FHA 203k loans are ideal. You can borrow up to $35,000 to cover the necessary repairs. A 3.5% down payment is required, as well as a credit score of 620 or higher.
- Conforming/conventional loans – For such loans, a down payment of 5% or more is needed, and a credit score of 620 or higher.
Find good tenants
Once you’ve secured financing and closed on your new home/rental property, the next step is to find good tenants. Since house hacking requires you to live in the property, you will want to find renters that will make your stay bearable. You can get referrals from family and friends, post your rental property on social media, or even place ads in newspapers. When someone shows interest, ask them to complete an application with details such as:
- Applicant’s full name
- Social security numbers
- Job title and employer contacts
- Contact details for previous landlord
- Number of pets and their breeds
- References (not family members)
Conduct a background check on the applicant’s employment, criminal records, evictions, bankruptcies, and credit history. If everything checks out, you can do a quick phone or in-person interview with the tenant. However, you must remember that the Fair Housing Act prohibits you from discriminating based on national origin, color, disability, sex, religion, or race.
At the end of the screening process, the tenant should sign a lease agreement that sets the terms and conditions for living in the property.
Related: The House Hacking Guide for Millennials
Conclusion
Whether you choose a long-term rental strategy or Airbnb rental strategy, house hacking can be a very lucrative venture. But let’s address one final question: How long do you have to live in a house hack? In most places, you are required to be an owner-occupant for at least one year. This means you can hack your housing for about a year, move out, and then rent out all of the units to generate even more rental income. So if you were reading this guide and worried about finding your dream home that doubles as a cash flowing investment property, fear not. House hacking doesn’t have to be a permanent living arrangement for you. Instead, think of it as a great way to get your foot in the real estate investing door!
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