I’ve written about the “brrrr” real estate strategy and the live in flip strategy… but there is also another AMAZEballs real estate strategy that I think new real estate entrepreneurs should take advantage of and it’s called house hacking.
I’m super excited to talk about house hacking because we’re doing it right now with a cute little fixer upper.
House hacking is when you purchase a 1-4 unit property and rent out a portion of the property and move into one of the other units (or if a single family you rent out a room or two.) The best part is your housing expenses are drastically reduced and in some cases totally free or even getting paid to live somewhere.
Did you hear that? You can use house hacking to live for free and maybe even get paid.
Real estate can offer all that and more and that’s why I love it so gosh darn much.
So house hacking can happen a couple different ways.
One way being to purchase a single family house and rent out rooms to roommates to help offset the costs of living there, ya know, things like mortgage, insurance, water, sewer, trash, utilities… all the adult things that come with owning a house.
But if you’re not the roommate type, you might prefer the option of purchasing a small multi family property and living in one unit and renting out the rest. Yes, you’d be a landlord which can be scary but do some reading (I highly recommend checking out the Biggerpockets forums and Podcast) and learn yo’self up on the laws and basics of landlording and give it a shot.
The Pros of House Hacking
Someone else is helping pay down your mortgage
The most obvious benefit of house hacking is that someone else is helping you pay your mortgage!
Say you purchase a single family 4 bedroom 2 bathroom house for $200,000 with 3.5% down and your payment is $1,400 a month. After you take the nicest room in the house, you offer for rent the other 3 bedrooms at $500 per month each. If you do the 3rd grader math on that, you’d be receiving $1,500 from your tenants every single month.
So you’re payment is $1,400 and you’re getting $1,500… so not only are you not putting out any money of your own for the mortgage, but you also have $100 to put towards maintenance, utilities or groceries!
If you get a multifamily property your mortgage would most likely be a bit higher, but you can also rent out the other units for more money which may offset the extra mortgage expense.
Guys, seriously. I think this point alone could convince someone to house hack… but I’ll continue.
It helps reduce living expenses
Everyone has to live somewhere. And most everyone has to PAY to live somewhere. And for those still living at home with mom and dad not paying rent but saving for a house, good for you! I say more power to ya!
While most all of us have to pay to live somewhere, the house hacking method greatly reduces living expenses. Not only does house hacking offer the ability for others to pay down your mortgage but if you’re lucky enough to bring in more than your mortgage it can help with other living expenses like electric, cable and internet! Or better yet, paying extra on your mortgage every month or saving for a down payment on a new investment.
Living expenses are the most expensive part of, well, LIVING! So why not have others chip in to your living expenditures while they pay to live somewhere? Can I get a hell to the yes!?
You have multiple exit strategies
I love exit strategies. Frankly, having only one exit strategy in any investment scares me, even in house hacking!
So what do I mean by exit strategies? It basically looks at what options you have with the investment. Can you sell it (hopefully for a profit?) And who would you sell it to?
Can you keep it, rent the whole thing out and still be able to buy something else when you need to move?
Can you refinance it and pull equity out to do another deal?
Like Brandon Turner always says, you should always have multiple tools in your tool box – or something like that.
Landlord Experience
Did you know you have to be a landlord for 2 years before a lending institution will consider rental income as part of your total income on an application?
Being able to claim rental income as part of your overall income could greatly affect your chances of getting approved for a mortgage (or some other loan.)
The Cons of House Hacking
Yes you read that right, there are some downsides to house hacking. I don’t want to give the wrong impression that house hacking is all roses all the time. I can’t lead you to believe there aren’t any negatives when it comes to house hacking, how I could I live with myself?! No but seriously, there are a few major things to consider when you’re considering the house hacking investment route.
Below I’ll go over some items that should be considered before you decide if house hacking is the right real estate strategy for you.
You have to be a landlord
You don’t really have much of a choice. Whether you get roommates or rent out an entire unit, you have to act like a landlord.
Not only do you have to act like a landlord but you need to be a legal landlord. Like I said earlier, make sure you do some reading up on your local laws and make sure your lease agreement would be enforced in court! That means either getting it reviewed by an attorney or buying a pre-approved for your state landlord lease packet.
Being a landlord also means you have to fix shit. Fixing shit costs money which means you always need to have reserves in the bank for when that water heater explodes, because it will.
House hacking also means you take the risk of having to evict non-paying tenants. Talk about awkward since you co-exist in some shape or form and unless you’re a hermit and never leave your room or house, you’re bound to run into them.
Which leads me to my next point.
You live near or with your tenants
I find it hard to live near tenants. There’s a fine line of being friendly and running a business. The added pressure of not looking like a rolled out of a garbage is always on, I gotta look half presentable.
There’s also the fact that they know where you live and can knock on your door at any time of day or night. We’ve only had this happen twice but when it’s right in the middle of dinner after an already exhausting day, you remember that it sucks.
All of this is magnified if you’re house hacking rooms in your home, you’re literally living with your tenants.
(Side note: I have a friend in Baltimore who is house hacking and has had the absolute best roommates. She has incredibly close relationships with them and even when they move out they stay in touch. I would say this is rare but it’s something to consider as a “pro” to house hacking rooms because she’s made life long friends.)
You will most likely live in a small-ish home while house hacking
We were lucky enough to find a house with an apartment above the garage so we have an entire house to ourselves. But more common house hacking properties are duplexes, triplexes and quads where most aren’t bigger than 1300 square feet (near my neck of the woods anyway.)
And with a small-ish home sometimes comes a small-ish driveway. So you also could be sharing a driveway where it might be a tight squeeze for multiple cars (that’s our current situation.)
Continuing with the small-ish theme, there may also be a small-ish yard. It’s up to you how to designate the outdoor space, but you may also wind up sharing a small backyard. This obviously shouldn’t be a deal breaker, especially if the house hacking is a short term goal.
IMO (did you guys know that stands for in my opinion? I JUST FOUND THAT OUT) house hacking is a great technique for newbie real estate investors. It’s lower risk than other real estate investment strategies and can open doors to bigger and better real estate investments in the near future!
It’s like the gateway real estate strategy.
That’s all I have on house hacking for today but in the meantime check out these other articles.
What’s a HUD Home – I believe HUD homes are a fantastic opportunity for new real estate investors who want to house hack! They usually allow owner occupants first opportunity to bid on homes before investors are allowed… which is fantastic because you aren’t in competition with their cash offers.
How to Get a Good Deal on a House Through the MLS – Wouldn’t we all love to know more tips on how to save on houses? In this article I write my top tips on scoring a deal on the MLS (which most people say is hard to do!)
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