The Official House Hacking Guide – How to “Hack” Your House (Live for Free) and Start Investing in Real Estate
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You are interested in real estate investing! So, you’ve done some online searches and have heard the term “House Hacking” but you aren’t quite sure what it means or how to get started? Well, you’ve come to the right place. This is the Official House Hacking Guide!
What is House Hacking?
Traditionally, “House Hacking” meant that you purchase a property that you live in while you also rent out part of the property. The most common types of properties used for house hacking are duplexes, triplexes and 4-plexes! However, it is possible to house hack a single-family residence by renting out individual bedrooms. You can even house hack a single-family home through Airbnb, foreign exchange students, renting out the garage for storage or any other way of generating income from your home.
Why House Hack?
In my opinion, house hacking is best and easiest ways to get started in real estate investing. It is the best method to live for free or almost for free by purchasing a small multi-family rental property as your principal residence. In this way, your tenants will basically pay for all or most of your housing expenses. Additionally, since it is your primary residence, you can buy a property for just 3.5% down and finance the rest using an FHA loan, as long as you qualify for the loan. For example, if you buy a $200,000 triplex, you’ll only need to put down $7,000 plus a bit more for closing costs. Using an FHA loan, you can get lock in a great low interest rate on a 30-year fixed rate mortgage.
Benefits of House Hacking
I’ve already mentioned the first big benefit of house hacking. You can get started in real estate investing with a very small down-payment – requiring just a few thousand dollars. The restriction here is to focus on duplexes, triplexes, and 4-plexes. Why? Because properties with four or fewer units are considered residential properties. Once you get to 5 units or more, the classification changes to commercial real estate, which requires a larger down-payment and a commercial mortgage. Additionally, most lenders will not allow the owner to live in one of the units. This is a completely different world and it is not recommended for a newbie interested in house hacking. Following are some of the additional benefits:
- Live for Free
It can reduce or wipe-out your housing costs, which are a major part of most personal budgets. A U.S. Bureau of Labor Statistics report for 2017 shows that 19.8% of the average U.S. household’s total expenditures were spent on shelter. The actual average is $11,895 per year, which breaks down to $991 per month. The amount spent on housing has increased each year from 2015 to 2017 and predictions are that it will continue to rise as cost of living and housing prices continue to rise. Naturally, these expenses will vary from state to state and even between cities in any state due to local market conditions. However, this make house hacking very important as it can save you almost 20% of your monthly expenses.
- Cash Flow
This is another one of the main benefits of house hacking — the extra cash left over each month after paying all the expenses, including the mortgage. Use my free Official House Hacking Calculator to crunch the numbers on how much cash flow you’ll get when house hacking! You can use this extra cash flow to either pay down your mortgage or to invest in additional properties. Remember, after living in your first property for 1 year, you can move out to another similar property and rent out this unit to get even more cash flow. You can repeat this every year to grow your rental investment portfolio.
- Learn how to be a Landlord
House hacking is a hybrid method of getting started in real estate investing. Many first-time real estate investors gain valuable experience as a landlord while reducing the risk that comes with any new venture. Everyone will make mistakes while learning, but it’s easier to recover from these mistakes when you live on site and are personally involved.
- Transition to rental properties
Once you realize the benefits of real estate investing, I am sure you will want to investment in more rental properties and even purchase larger multifamily properties. When you start looking for conventional financing, traditional lending institutions (think small, medium, and large banks) like to see that you have experience owning and managing rental properties. This valuable experience will increase your chances of receiving larger loans.
House hacking is one of many strategies to achieve your passive income goals. To learn about other strategies read my article titled: The Top 11 Real Estate Investment Strategies. You must understand that house hacking is not a way to get rich quick. Not every deal will provide positive cash flow. As with anything new there are risks and it is possible to lose your money, even have your property foreclosed if you do not pay the mortgage. However, if done correctly, house hacking can be very rewarding and be your first step to financial freedom. You must be careful and do your homework when researching, financing, and acquiring real estate investments. There are always bad deals out there, so make sure to spend the necessary time and energy in taking the right steps. To learn more, I recommend reading: The House Hacking Strategy: How to Use Your Home to Achieve Financial Freedom. See my helpful resources page for more reading material. This will increase your chances of success and achieving financial freedom. Now you have a full understanding of what is house hacking, are you ready to get started? If you are, read my next article Easy Guide to Buying Your First House Hacking Property (coming soon).