What Is House Hacking?
You’re not alone if you’ve wondered how you will ever be able to buy a house, let alone investment properties. According to Apartment List, roughly 70% of millennial consumers cannot afford a home.
For a first-time investor, “house hacking” could be a good idea. It has the potential to have a significant impact on your finances and your household’s financial future if done correctly.
You may live for free by hacking your house and making money while doing it. While there are several ways to get into the house-hacking game, acquiring a multifamily home and renting it out to tenants is the most common.
What Is House Hacking?
The phrase “house hacking” refers to the process of devising strategies for profiting from one’s own home. House hacking often entails purchasing a multifamily house, living in one of the two units, and renting out the rest so that the tenants assist in paying your mortgage while you build equity. House hacking can work on different types of real estate properties, including:
- Single-family homes
- Mobile homes on SFH property
- Properties with garage apartments
The best thing about house hacking is that you can afford to live in a more expensive home than if you were not hacking, or at least have someone else pay some or all of your mortgage for you. If you can afford to buy or rent a property with more rooms than you need, you may rent out the extra spaces. It can enable you to live in an affluent area while still paying your daily expenses, vehicle loan, and even fund other expensive projects.
Better still, if you choose to move out in the future, the “house hacked” home can also be an excellent source of long-term rental income.
Guide to Hacking for Newbies: What Is the Best Way to Begin?
House hacking options are plentiful. The best choice for you, however, will depend on many factors, including:
- Your future income objectives
- Your family size
- The property type you choose
- The location of the property
- Rules and regulations in the property’s location
Nevertheless, any housing hack should seek to reduce your reliance on other streams of income while simultaneously making a significant contribution to your financial stability.
If you’ve never tried house hacking before, here’s how you can get started.
Prepare Your Finances
Any significant type of investment requires some form of financial organization. House hacking will demand that you prepare your finances just like you would be expected to with any other form of investment.
You may also need to organize some money to pay for the expected extra costs of running the rental property. Ideally, your cash reserves should not go below three months’ worth of rental earnings.
Get in Touch with a Reputable Lender
Figuring out how to fund a house hacking activity can evoke a myriad of serious questions such as:
- How big of a loan do you qualify for on your own?
- Will you qualify for a bigger loan if you have a tenant ready to rent?
- Can you rent out a unit if you qualify for and get an FHA loan?
- Can a VA loan be used to purchase a fourplex home if you are a veteran?
- Does the lender provide any down payment assistance programs?
These are a few good questions to ask a lender. However, the answers are not simple. Aside from the qualifying requirements for a relevant mortgage, each option for house hacking has advantages and disadvantages.
It would be best to find a friendly lender who honestly explains your financing options. They will help you find the best home loan that fits your unique circumstances.
Choose the Right Property to House Hack
After putting your financing options in order, the next step is to find a suitable house. Make sure that your decision will allow you to achieve your financial goals quickly.
The 1% rule of real estate investing can help you out here. This may be used to estimate an investment opportunity’s profit and cash flow quickly.
This maxim states that the gross monthly rental revenue should equal or exceed one percent of the property’s value after repairs. The rent amount should meet or exceed the monthly mortgage payments.
However, some house hackers ignore everything and find it a worthwhile investment if the rental income is sufficient to pay the mortgage.
It is also essential to understand the government rules and regulations that guide real estate activities in the area your house is located. For example, the Fair Housing Act has outlawed any form of discrimination when choosing tenants. However, while this law applies to renting separate housing units, it does not apply to tenants intending to share a living unit.
Choose Your Tenants Wisely
The worst error you can make when house hacking is renting to people who don’t fit into your way of life. Before handing over the keys to your house to someone, especially if you want to live there too, you should be very sure of a few things. Devise a plan for:
- Accepting applications from tenants
- Arranging interviews with prospective tenants
- Screening potential tenants thoroughly
Your best fit will be someone who, among other things, has:
- a lifestyle that is compatible with yours — if you tend to live quietly, you don’t want a college kid in a punk band moving in
- a strong credit score — make sure they can afford the rent
- no criminal record — who wants to live next to an axe murderer?
- compatible pets — if you are allergic to cats and dogs, you don’t want pets living in your house
House Hacking Strategies to Get You Started Today
Here are some great ways to live free in a house and even earn from it.
Buy a Multifamily Home
Traditional house hacking is acquiring or constructing a multi-unit home, occupying one or a few units with your family, and renting out the rest. You’ll have enough money to take care of both your family and any debts you may have as long as you have enough renters to cover your expenses and your mortgage. Just make sure the total mortgage is close to what you are paid in rent.
Find a Roommate
While house hacking may involve surrendering your privacy and dealing with things like lifestyle or cultural differences, it may be a terrific method to boost your savings. Financial independence and long-term investment opportunities may also become possible. Having a roommate might let you save up for a multifamily unit down payment in the future.
Rent Out Storage Spaces
There are plenty of people who might be interested in renting out your garage space to keep their excess stuff. Best of all, the tenant will have access to your storage unit, but not to your house. This option may guarantee some level of privacy and security.
Add an Apartment to Your Basement
Do you know what the majority of people do with their basements? Most use them to store holiday decorations and accumulated trash.
As an alternative, you may turn your basement into a rental unit. A separate entrance to the basement is a must for practicality’s sake. A complete bathroom may be required, and a kitchenette (or kitchen) will probably be needed.
If your basement doesn’t have temperature control, do not worry about it. A space heater may help warm up a naturally cold basement more than the main house, even during winter.
Setting up a separate basement suite may be time-consuming and expensive. Ensure there is a market for it in your area before going through the trouble.
Add an Apartment to the Garage
You may even turn your garage into a rental unit. Like a basement apartment, some garages are more suited for this use than others. A large, well-insulated garage is the most effective for this project. Also, the unfinished part of the garage may sometimes be used as a foundation for a new apartment.
You’re probably familiar with the drill, aren’t you; you’ll need a separate entrance, complete washroom, and kitchen. However, do your math well as construction of this type can quickly drain anyone’s savings without careful planning.
If your existing garage is well insulated, installing either a traditional split AC unit or even a ductless mini will make it habitable. The biggest cost will most likely be the plumbing. Hopefully there’s a hose spicket nearby and the plumber can run the water in there, and then tie into the sewer for the toilet drain. Add some drywall if needed, and you have a perfect studio apartment.
Be Mindful of Zoning and Ordinances When Hacking!
House hacking might get you into legal problems if you’re not careful. A classic example of improperly doing things is failing to obey local government restrictions, particularly zoning laws, and attempting to rent out space that you are not authorized to. Be careful!
Another example is renting out a garage as a living space without first making the necessary and legally required modifications. You may also try to convert a single-family property into a multifamily house in an area where such conversions are forbidden.
House hacking is lawful as long as you follow all local zoning restrictions.
House Hacking May Give You the Most Bang for Your Buck
House hacking is gaining popularity as a creative way to earn money while lowering your living expenses. All you have to do is accept the idea of sacrificing part of your privacy (roommates) or laying out some additional time and money (buying a multi-unit and modifying the current property, and then dealing with tenants) to increase your financial strength in the future.
Even if the subject first seems unappealing, there is nothing to lose by spending some time researching it. Saving money, doing your homework, and keeping an open mind are requirements of any significant investment.
A good house hacker generally starts with a specific aim in mind and then works backward from there. When done properly, you will either live expense free or even make enough each month to put toward your own dream house or next rental unit!
Happy house hacking, readers!