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House Hacking: Everything You Need To Know

Educational Series

Introduction to House Hacking

House hacking is, without a doubt, the best financial decision you’ll ever make.

Why not live for free and get rich in the process?

In this article, I explain everything you need to know to use this super-powerful wealth-building tool.

I even tell you how long you’ll become a millionaire with house hacking! The first step is to understand how house hacking works.

We go through that using an example of a triplex. But keep in mind. It's something you can do with a single-family home as well.

Then we go through all the numbers and details using a four-plex listing from Zillow.

We discuss how much rent you could expect and the expenses. It becomes clear how easy it is to live for free.

Start with question “is it cheap or is it expensive.” Not “is the price going up or down.” — George Gammon (@GeorgeGammon) August 9, 2020

[ctt template=”3″ link=”509Kl” via=”no” ]Start with question “is it cheap or is it expensive.” Not “is the price going up or down.” — @GeorgeGammon[/ctt]

House Hacking: An Overview 

House Hacking is the practice of buying a property that has multiple units to rent, living in one of the units, and collecting rent from the other units to go ahead and pay the expenses.

Let's say there's a triplex for sale. So you would come in as a very savvy, sophisticated investor with a big smile on your face and buy the entire thing.

Then, you rent out units two and three and live in unit number one. Each month, you will collect rent from the two individuals living there and pay the expenses out of this rent money.

Here are some expenses you might want to think of:

  • Mortgage

  • Insurance, and

  • Taxes are all paid by your renters.

[ctt template=”3″ link=”8iyWc” via=”no” ]Live rent-free by buying a house and house-hacking it. #realestateinvesting[/ctt]

And it doesn't just apply to multifamily with duplexes or triplexes. You can buy a single-family home and rent out each individual room nightly, maybe on Airbnb, or if you want to take it to that next level, you could even do a hotel or a motel.

In 2014, I was very close to buying a small hotel-casino in Puerto Rico. I was going to take the entire top floor and turn it into an awesome penthouse.

I was going to live in the penthouse and just sit and collect all that money from the casino and those nightly room rentals.

[ctt template=”3″ link=”A538T” via=”no” ]Anyone can successfully execute a house hacking strategy. #househacking #realestateinvesting[/ctt]

This just goes to show you that you don't have to be a newbie to take advantage of house hacking. You can do it at any level.

Here is a real-world example of a property that was found on Zillow last year. It was a property in a place where I loved to invest.

I've got several rental properties in Kansas City, Missouri. That property is located in Blue Springs, which is a really nice suburb.

They offered a fourplex, which you can see in the pictures below, and they asked $400,000.

Of course, I would want to negotiate that, but let's just say that I pay $400,000 for that fourplex.

Going back to our previous example, you would want to live in unit number one and rent two, three, and four.

You can rent each unit out for about $850 a month, and you can see, based on that Zillow listing, that we're right in the ballpark there.

So you'd be collecting $2,550 monthly rent from your three tenants.

Now, thinking about the expenses there…

The mortgage payment for this property of $400,000 is roughly going to be $1700, at your mortgage payment. 

I'm getting to those numbers by assuming you'll give a 20% down payment and get a 30-year fixed-rate loan at 5%.

I'm not 100% sure that you can do a 30-year fixed on a fourplex, but we'll assume that you can for this example.

So, your mortgage would be $1700, your property taxes right around $375 a month, $200 for the property insurance, and then about $200 for maintenance. That brings us up to $2,475.

So you can see in this specific example you're not only living for free. You're actually being paid about 100 bucks a month to live there.

And if you look at the fine print on that Zillow listing below… You'll see, in 2016, this thing sold for $165,000.

That is crazy. Granted, the listing went for sale, then it was removed, then it went back on the housing market.

And this means there's something really wrong with the property. As an example, a really bad roof, or a foundation problem.

But the bottom line is they got it for $165,000. And even if you were to put another $100,000 into it, which would have taken care of almost any problem you can imagine, you'd still only be in it for $265,000.

So, if you rework the numbers at $265,000 you would be hugely cashflow positive, if your mortgage payment was only about $1000 a month.

This is to show you that if you really do a lot of digging, you can just get some smoking deals, and you can take house hacking from something that's a good investment to something that's an absolutely spectacular investment. 

You may be saying to yourself, “Okay, George, I get it, I get it. I see how I can live for free with house hacking, but how is it going to help me get rich?” I'll explain it to you in the next section.

How To Get Rich With House Hacking 

1. House Hacking Helps You Invest The Money That You Save

The largest expense that most Americans have is the rent or mortgage payment.

So if you can take that money and invest it instead of giving it to someone else, over time, you're going to be very wealthy. 

Let's assume that your monthly housing cost is $1000. Well, if you can take that each month and invest it. At even a decent return of let's say 7%, over 28 years, those $1000 a month are going to be over one million dollars.

2. House Hacking Helps You Build Equity

Remember, your renters are paying you every single month, and you're taking that money to pay off your mortgage.

So a part of that mortgage payment, every single month, goes to the principal payment.

House hacking de-risks the home purchase because you subsidize your monthly costs of homeownership (principal, interest, taxes, and insurance (aka PITI) and maintenance).

So at the end of 30 years, you own the house, and your renters have paid for it.

3. House Hacking Lowers Your Taxes

You own an asset that's valued at, let's say $400,000. You can take that, put it on a depreciation schedule of around 28 years, and take that prorated amount and deduct it from your taxable income every year.

4. House Hacking Hedges You Against Inflation

Remember, if inflation goes up at, let's say 3% to 5% per year, you're adjusting your rents accordingly. Which means your rents are going to be going up.

So at year one, if you're at a break-even if you're just living for free, every year that you adjust those rents up, that will be more money in your pocket.

How Long Does It Take To Become Millionaire With House Hacking?

I'll use the same example of that fourplex that we looked at before. And let's assume that you're putting aside $1000 a month from your income that you can put into investing because you don't have that monthly housing payment.

I'm not going to give it to you yet, but during the span of a mystery number of years, you would have made $686,000 roughly from your investments.

As shown in the image below, your tenants would have built about $200,000 of equity in your asset.

Mortgage Calculator

You would have saved about $50,000 in taxes, assuming that you're making about $50,000 – $60,000 a year, and you would have made about $70,000 as a result of inflation from bringing up those rents.

Also, keep in mind that I haven't even talked about appreciation or leveraging the equity in the asset that you have.

The bottom line here is that the numbers are extremely conservative. 

So how many years will it take you? 

You ready? Drum roll, please!

It will take you approximately 23 years.

Qualifying for Owner-Occupancy Financing and Smooth Transition to Rental Property Ownership with House Hacking

If you're looking to invest in rental property but don't have the funds for a large down payment or struggle with high mortgage rates, owner-occupancy financing could be the solution for you.

With this strategy, you purchase a multi-unit property and live in one unit while renting out the others. This allows you to qualify for lower interest rates and put less money down.

To make the most out of owner-occupancy financing, it's important to do your research and find a property that meets your needs.

Look for properties with multiple units in desirable locations with strong rental potential.

You'll also want to consider the condition of the property and any potential repairs or upgrades needed.

Once you've found the right property, it's time to consider your financing options.

Owner-occupancy financing typically requires a lower down payment and offers lower interest rates than traditional investment property financing.

Be sure to shop around and compare rates from different lenders to get the best deal possible.

House hacking is another strategy that can help make the transition to rental home ownership smoother.

This involves renting out rooms in your primary residence to generate income and reduce living expenses.

This extra income can then be put towards your down payment or mortgage payments on your rental property.

In summary, owner-occupancy financing and house hacking are great ways to get started in rental property ownership with less money down and lower interest rates.

Just be sure to research, find the right property, and consider all your financing options to get the best deal possible.

Single-Family Rental vs. Multifamily Home: Which is Better for House Hacking?

One question many aspiring house hackers have is whether to invest in a single-family rental or a multifamily home. Both have pros and cons, so it's important to consider your goals and priorities before deciding.

Single-family rentals offer more privacy and typically have lower purchase prices than multifamily homes.

This makes them a good option for those who want to invest in a property with a lower upfront cost and don't mind managing the property themselves.

However, single-family rentals often have higher vacancy rates and maintenance costs, which can eat into your profits.

On the other hand, multifamily homes provide the opportunity to generate more rental income with multiple units. They also tend to have lower vacancy rates and lower maintenance costs per unit.

However, multifamily homes typically have higher purchase prices and may require more management due to the higher number of units.

When deciding between a single-family rental and a multifamily home for house hacking, it's important to consider your personal goals and resources.

A single-family rental may be a good option if you're looking for a lower upfront cost and don't mind managing the property.

However, a multifamily home may be the better choice if you have the resources to invest in multifamily property and want to generate more rental income.

In conclusion, both single-family rentals and multifamily homes can be great options for house hacking. It's important to weigh the pros and cons and consider your goals and resources before making a decision.

With careful planning and smart decision-making, you can successfully house hack and achieve your financial goals.

Why House Hacking Works Great for First-Time Home Buyers

Here are some of the reasons why house hacking is an excellent option for first-time homebuyers:

Lowers Housing Expenses: By renting out a portion of your property, you can reduce your housing expenses, sometimes even eliminating your mortgage payments entirely.

Builds Equity: House hacking allows you to start building equity in your property immediately. As you pay down your mortgage, your equity in the property grows, which can be used to finance future investments.

Provides Rental Income: With house hacking, you can generate rental income that can be used to offset your living expenses or reinvest in future properties.

Great Investment Strategy: House hacking can be a great long-term investment strategy for first-time homebuyers looking to build wealth through real estate.

To start house hacking, first-time homebuyers can look for properties that offer separate living spaces, such as duplexes, triplexes, or homes with a mother-in-law suite.

Additionally, consider your financing options, such as FHA loans, which allow you to qualify with a lower down payment and occupy the property as your primary residence.

House hacking is a smart investment strategy for first-time homebuyers looking to build wealth through real estate. By reducing housing expenses, building equity, generating rental income, and providing a great long-term investment strategy, house hacking can help you achieve your financial goals.

Avoiding Cashflow Negative Properties in House Hacking

House hacking can be an excellent way to achieve financial independence and build long-term wealth.

However, it's essential to be mindful of cash flow when choosing a property to house hack. Cash flow is the lifeblood of any investment, and if you invest in a property with negative cash flow, you risk losing money in the long run.

Here are some ways to avoid cash flow negative properties when house hacking:

Calculate your cash flow: Before you invest in any property, it's crucial to understand the numbers. Calculate your expected cash flow by subtracting your monthly expenses from your monthly rental income. If your expenses are higher than your rental income, you may want to reconsider the property.

Choose the right property: Not all properties are created equal, and some are better suited for house hacking than others. Look for properties with multiple units, as they tend to generate more rental income than single-family homes.

Consider the location: The location of your property can have a significant impact on your cash flow. Look for properties in desirable neighborhoods with high demand for rental units.

Minimize expenses: To maximize your cash flow, minimizing your expenses is essential. Look for properties that require minimal maintenance and repairs and try to negotiate lower property taxes and insurance rates.

Screen your tenants: A non-paying tenant is one of the biggest risks to your cash flow. To avoid this, be sure to screen your tenant thoroughly and only rent to those with a good rental history and stable income.

By following these tips, you can avoid cash flow-negative properties and set yourself up for success with house hacking. Remember, investing in real estate is a long-term game, and your approach must be patient and diligent.

Organizing Your Finances for House-Hacking Success

Organizing your finances is a critical step towards house-hacking success.

House-hacking can be an excellent way to build wealth through real estate, but it requires careful planning and management of finances.

Here are some tips for organizing your finances for house-hacking success:

Set a Budget: Before you start house-hacking, it's essential to set a budget.

Determine how much you can afford to spend on a property and how much you need to set aside for expenses like repairs, maintenance, and utilities.

Keep Track of Expenses: Keeping track of expenses is critical when house-hacking.

You need to know how much money is coming in and going out each month to make sure you're staying on track with your budget.

Create Separate Accounts: Create separate accounts for your personal finances and your house-hacking finances. This will help you keep track of your income and expenses more easily, and avoid confusion.

Automate Payments: Automating your payments can help you stay on top of your bills and avoid late fees. Consider setting up automatic payments for your mortgage, utilities, and other expenses.

Plan for Future Expenses: It's important to plan for expenses like repairs and maintenance. Set aside money each month to build up an emergency fund that can be used to cover unexpected expenses.

Following these tips can better organize your finances for house-hacking success. Staying on top of your finances and planning for the unexpected is important to ensure your house-hacking experience is positive.

Smaller Down Payment Requirements for House Hacking

House hacking can be a great way to enter the housing market and start building wealth. One of the benefits of house hacking is the ability to take advantage of smaller down payment requirements.

Here are some options to consider:

FHA Loan: The Federal Housing Administration (FHA) offers loans with a low down payment requirement of 3.5% for those who qualify. To be eligible for an FHA loan, you must plan to live in the property as your primary residence for at least one year.

VA Loan: If you're a veteran or currently serving in the military, a VA loan may be an option for you. VA loans require no down payment and offer favorable terms, making them a great choice for those who qualify.

Conventional Loan: Conventional loans typically require a down payment of 5-20%, depending on the lender's requirements and your credit score. If you have a good credit score and a low debt-to-income ratio, you may be able to qualify for a conventional loan with a smaller down payment.

USDA Loan: If you're buying a house in a rural area, you may qualify for a USDA loan. These loans require no down payment and offer competitive interest rates.

Keep in mind that while a smaller down payment can make it easier to get into the real estate market, it also means you'll have a higher loan balance and monthly mortgage payment.

Make sure to carefully consider your budget and financial goals before deciding on a loan type and down payment amount.

Finding the Right Tenant for Your House Hack

Finding the right tenants for a house hack is crucial for ensuring a successful experience.

Here are some tips to help you find the right tenants for your property:

Advertise the property on various platforms: Advertising your property on different platforms, such as Craigslist, Zillow, and Facebook, can help you reach a broader audience and increase your chances of finding the right tenant.

Screen potential tenants: Conduct a thorough screening process to ensure that the tenants are financially stable and have a good rental history. This can include checking their credit score, income, employment history, and rental history.

Conduct interviews: Take the time to meet with potential tenants and ask them questions about their lifestyle, work, and rental history. This can give you a better idea of whether they will fit your property well.

Check references: Ask potential tenants for references from previous landlords or employers to understand their rental and employment history better.

Use a property management company: If you don't have the time or expertise to manage your property and tenants, consider hiring a property management company. They can help you find and screen tenants and handle any maintenance or repair issues that may arise.

Remember, finding the right tenants is essential for a successful house hack. Take the time to screen and interview potential tenants, and don't be afraid to seek professional help if needed.

Find a good tenant. People who are house hacking and being landlords for the first time should take care to understand the state landlord-tenant laws and the Fair Housing Act to avoid breaking the law or discriminating against a tenant.

Planning Your Exit Strategy and Next Steps for House Hacking

First, it's important to consider your long-term goals for your real estate investment portfolio.

  • Are you looking to accumulate properties for passive income? Or do you eventually want to transition to flipping properties for short-term gains?

    Once you clearly understand your goals, you can start planning your exit strategy for your house-hacking property.

One common exit strategy is to use the equity built up in the house hacking property to purchase additional properties.

You could refinance or sell the property and use the proceeds to purchase another property.

Alternatively, you could convert the property to a long-term rental and use the cash flow to finance the purchase of additional properties.

Another option is to sell the property and use the profits to invest in a different type of real estate, such as commercial or industrial properties.

When considering your next steps as a real estate investor, it's important to continue educating yourself on the market and investment strategies.

Consider attending real estate seminars or networking with other investors to gain insight and knowledge.

Additionally, consider seeking a mentor or coach to guide and support you as you navigate the real estate industry.

A successful house-hacking exit strategy and long-term real estate investment plan require careful planning, education, and a clear understanding of your goals and objectives.

Final Thoughts on House Hacking

House hacking is an excellent real estate investing strategy and is a way for new real estate investors to get started because it allows them to generate income and build equity while living in the property.

By renting out the other units, a house hacker can often cover their mortgage and even make a profit.

Additionally, because they are living in the property, they can save money on living expenses and put that money towards their future investments.

A successful house hacking strategy also allows investors to get hands-on experience with property management, tenant screening, and maintenance. This experience is invaluable for new investors who want to build a successful real estate portfolio.

Finally, house hacking can be a low-risk way to enter the real estate market. Since the investor is living in the property, they have a vested interest in its success and are more likely to take care of it.

Plus, if the property doesn't perform as expected, they can simply move out and rent the entire property.

House hacking can be a smart and strategic real estate investing strategy for new real estate investors to start building their portfolios and generating passive income.

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