house hacking

House Hacking 101: Your Definitive Guide To Living Free

Real estate investing, when done correctly, has helped out the lives of so many investors and entrepreneurs. On the surface, it can seem overwhelming and daunting to try and get started.

But fret not! You do not need to be an expert in order to get your foot in the door. In fact, with the primary method, we’re going to share with you today, you will essentially be able to live for free (or, at least almost free), by having tenants that pay your housing expenses for you.

The process of using a small multi-unit rental property as your primary residence in order to lease out the other units to tenants that will pay for your living expenses is known as House Hacking.

We’re going to show you exactly how to take advantage of house hacking from finding potential properties, running the numbers to see if it’s worth your while, securing a mortgage and down payment, and we’re going to help guide you through some objections and challenges that may pop up along the way.

House Hacking At A Glance

As we mentioned above, house hacking is when you buy a multi-unit property (typically a small one), live in one of the units, and rent out the others. It doesn’t matter how many units the property has on it, just as long as it has somewhere else for someone else or multiple others to live.

Here are some great choices for multi-unit properties for house hacking:

  • Duplex, Triplex, or Fourplex
  • Single-Family Home (With extra bedrooms!)
  • House With A Garage Apartment or Place For A Mobile Home On The Land

You can get as creative as you’d like. The specific type of dwelling simply doesn’t matter, as long as you’ve got somewhere to safely and legally move another person (or multiple people) into in order to collect some predictable, recurring monthly income in the form of rent.

The rental income you’d get from these tenants should be enough to cover a majority of your own living expenses, such as your mortgage, which would allow you to either live free or almost free. Once you decide to move out, you now have a potentially great long-term rental investment on your hands that likely also has some great equity built into it.

Start Young! Not everybody reading this is going to be considered a young buck by any means. But for those of you that are, you need to burn this into your brain: Start house hacking as early as you can. Avoid the renting and leasing of apartments and houses like your peers are doing.

Why You Should Start House Hacking

Did we mention yet that you can live for free, or at least almost free? According to the U.S. Dept of Labor and the Bureau of Labor Statistics, the average American will spend 37% of their annual income solely on housing expenses. This is just the average, some people could be spending half of their salary or more just on putting a roof over their heads.

The lending side of house hacking makes sense as well. Many people often wonder why they should share a dwelling with their tenants, and not just outright invest in a rental property. Well, if you actually live in the dwelling, you get much lower interest rates and better mortgage terms than if you were to seek our business or investment financing. Should you move out sometime in the future, you get to hang on to these great owner-occupant financing terms.

In addition to better mortgage interest rates and better loan terms, you may also catch a decent break when it comes to the down payment. Because you would be living in this dwelling, you may qualify for VA, FHA, and HUD programs that can have you with a down payment as low as 0%. Investment financing for houses usually requires at least 20% upfront.

One of the most important benefits of house hacking is that it gets you opened up to the world of real estate investing. Many individuals with little or no business experience are finding financial freedom from real estate. House hacking is like real estate investing with training wheels. Pretty soon you’ll start to understand mortgages better, you’ll understand what makes someone a good tenant and will know how to find them in the future, and you’ll know how a well-run rental property should function.

Great House Hacking Ideas

Duplexes: These are extremely common with young and beginning house hackers because the bank is much more likely to give out a mortgage on a duplex than they would be for something like a fourplex. You should at least have your living expenses cut in half.

Triplexes: Even better than a duplex. At least 2/3rds of your living expenses should be paid for whenever you properly run your triplex.

Fourplexes: A fourplex would be the ideal situation. You can collect a decent amount of rent from 3 separate tenants. A fourplex may not only have you living for free, but you may also end up profiting by the end of the month.

Single Family Homes: Rent out the spare bedrooms to Airbnb guests or by finding roommates. This works amazingly well for anyone that’s in a college town.

Accessory Units: Common in single-family homes are accessory units. These can oftentimes be converted to a room or a dwelling. Think along the lines of a basement, a garage, a garage apartment, a small on-site cottage, or other dwellings. Even a pool house would work.

These are just some of the more common setups for house hacking. What works in one location obviously may not work in another. Housing hacking takes initiative and drive because it is a form of entrepreneurship. You will need to get creative and a little passion wouldn’t hurt either.

Securing A Mortgage For Your House Hack

With the primary goal of house hacking being for you to live for free, then one of the top priorities should be finding a mortgage that has the lowest possible monthly payment options. Mortgage rates were already fairly low, but the Covid-19 pandemic has currently got them at historic lows (and there’s no sign of a rebound anytime soon). Use this to your advantage.

If you’ve never had to shop around for a mortgage then you may be a little surprised at just how many options there are. It’s a different world from something like student loans or getting a new car. Because you are trying to get a monthly payment that’s as low as possible, you will want to look for a 30-year term with a fixed interest rate.

It’s fairly easy to secure a mortgage with these terms in the U.S., even if you’re a first-time homebuyer. Your credit score doesn’t even need to be perfect to buy your first dwelling. In fact, your debt: income ratio is going to be one of the primary determining factors.

When shopping for a mortgage, there are three primary types that you want to keep an eye out for. We’re going to focus on these types of loans first because they will allow you to purchase a dwelling with a downpayment of just 0%-5%.

1. Traditional Conforming Mortgages

A conforming mortgage is one that meets the funding criteria of underwriting giants Freddie Mac and Fannie Mae. A conforming mortgage also must conform to financing limits set by the Federal Housing Finance Agency (FHFA). These two sets of guidelines will allow mortgage lenders to offer you a lower interest rate. In most parts of the country, the conforming loan limit is $512,400. It’s higher in other parts of the country. San Francisco, for example, has conforming limits of $765,600 (limits are as of May 2020)

In addition to lower interest rates, conforming loans will typically have a much more flexible down payment structure. These down payments will be based on a number of variables, such as your credit history, your income, how much debt you owe, and how much the dwelling you want to purchase is worth. The amount you have to put down up front will range from 3%-20%. While that may seem higher than the other two loan options below, they’re still much lower than investment financing or a non-conforming loan.

This type of loan is what a majority of readers will qualify for, depending on where you are financially and geographically. Just about any mortgage lending company you go to offers conforming loans. You can likely even find them by walking in to speak with the mortgage officer at your local bank or credit union.

2. FHA Loans

The federal government put together a program that allows those with less cash on hand and/or less-than-stellar credit to go through the process of owning a home. FHA loans are federally insured and typically have more lenient qualifications when compared to conforming loans and non-conventional loans.

FHA loans are great for house hacking because they typically only involve a down payment of 3.5% and will have a fixed interest rate with loan terms of 30 years. What makes them even better for house hacking is that single-family homes, duplexes, triplexes and fourplexes are all potentially available for FHA mortgages.

You can expect to pay higher fees for these loans since they are aimed at borrowers that may carry a little bit more of a risk when it comes to paying their mortgage on time. You will also need mortgage insurance and you can expect the approval process to be much slower than other lending options. Just like the conventional mortgages, you can find many FHA lenders through various mortgage lending companies and your local banks and credit unions.

Finally, what really seals the deal on FHA loans being great for house hacking, is that HUD offers what they call a 203(k) deal that lets you buy a dwelling that’s in need of repair or renovations. This is a great way to get an inexpensive unit that’s in need of repairs, get it fixed up, and start renting out the extra space. Read more about HUD’s 203(k) program.

3. VA Loans

If you, your spouse, or your cosigner are military veterans, then a VA loan may be just what your house hacking project needs. Non-veterans may qualify after jumping through some hoops, but veterans will get some preferential treatment.

There are no down payments with VA loans and your mortgage will come with a fixed interest rate on a 30-year term. Single properties are available, as are duplexes, triplexes, and fourplexes. Properties that require work, or those that are considered ‘fixer-uppers’ are not going to qualify for a VA loan, so don’t get your sights set on something that needs a lot of work.

The VA loan process is going to be slow, so don’t expect to fill out paperwork and move into a new place 30 days later. As with the other types of loans, VA-approved lenders will likely be found at most major banks and credit unions, as well as many online-only mortgage lenders. Although they likely won’t be as easy to come across as conforming lenders and FHA lenders.

House Hacking: Step-By-Step Process To Buy Your First Property

First-time homebuyers and house hackers reading this have probably already had a lot of new information to take in. Don’t worry, just because there’s a lot of new information doesn’t mean the house hacking process is hard. Here are the steps you can take to purchase your first house-hacking property!

1. Do Your Research

If you’re reading this article then you’ve already made a great first step towards learning as much as you can. If you’re just skimming through the article and happened to have stopped here, then you need to scroll on up and start from the beginning.

House hacking takes commitment. You need to be committed to learning as much as you can, and committed to following through with the process. You can’t just decide to take a sick day if one of your tenants has a leaky pipe. You can’t just decide to give up halfway through renovations after signing loan papers. You need to be fully committed.

2. Get Your Finances In Order (even before finding a property!)

One of the biggest letdowns (and biggest wastes of time) is doing research, finding a property, and then not being able to secure adequate funding for it. Start with the three loan types that we suggested above, and work your way through your local bank, credit union, or a mortgage lending company to get a preapproval.

3. Figure Out Your Ideal Market Location

While waiting on your preapproval you can start to look in and around your ideal location(s). Start strongly considering just where you want to live, even if it’s only for the next few years.

Your next step should be to reach out to a well-established realtor from your ideal market or ideal location. Make use of popular consumer review websites to find a realtor that has the resources to help you find your perfect property. Do not try to go this route without help from a licensed professional.

Let your realtor know exactly what you are doing. Tell them you want to see small, multi-unit properties and dwellings, and possible even single-family dwellings with multiple bedrooms and/or extra amenities like a garage, basement, or on-site cottage/pool house. With a preapproval in hand from a lending company, your realtor should bend over backwards to help you out along the way.

Depending on your target area you may need to reevaluate your goals and expectations. Just because you like an area and have funding secured doesn’t mean that a multi-unit dwelling will just magically become available.

4. Take A Hands-On Approach

You can read plenty of articles just like this one. You can look for properties on websites all you want. You can email, text, and call your realtor a hundred times a day. But none of this matters if you don’t put your boots on the ground and get out into your target area.

If your realtor was able to find some potentially good properties, then get out and go check out the areas. Don’t just look around the street that the property is on, go look at all of the surrounding areas. Remember, you’re going to be renting this place out, so you want to find something that’s in an area where people will actually want to live.

Also, the better the area, the more you can likely charge (obviously). But sometimes that point just needs to be reiterated for first-time home hackers. You can take a nice drive around the neighborhoods and surrounding areas. Get out, talk to the neighbors nearby. Tell them you’re thinking about purchasing a property in the area, ask them what their thoughts are

5. Complete The Purchase and Find Tenants

After doing your due diligence on the property and the area, and after having the bank finalize the mortgage, you now own your property. What can you do to make this property more appealing to tenants? Even if you were only able to secure a two-bedroom unit and are going to use Airbnb for the second bedroom, there is still always room for improvement.

Can you afford to furnish the area that you will be renting or leasing? Are there any safety improvements you need to make? Try and make this place as appealing as possible by whatever means will work with your current budget.

Now it’s time to find some tenants. Get some For Rent signs out in the front, put your ads on Craigslist (and/or Airbnb and other rental websites), get the word out on social media, and then tell all of your friends, family members, and coworkers because word of mouth is one of the single-best marketing tactics for real estate.

6. Maximize Your Income

Even with tenants properly in place, it is entirely possible to squeeze a few extra dollars out of your new property.

TIP! Rent out your unused space to store your neighbors’ belongings at Neighbor.com — it’s easy, safe, and free. For instance, renting out your basement could make over $2,000 a year.

7. Be Prepared To Overcome Objections

There will undoubtedly be challenges involved with any type of real estate deal, and house hacking is certainly no exception to this rule. Whether it’s your very first day with starting the house hacking process, or if you’re a month into the buying process, it’s common to have objections along the way. We’re going to wrap up our guide here with some common objections that you may come across internally throughout this process and I’m going to try and provide some reassurance about why none of these are good arguments for giving up on house hacking.

“I don’t have the credit/income needed to get started.” You’d be surprised what kind of magic that a determined mortgage lending agent can work for you. They often work on commission and have it in their best interest to get you approved. Having said that, there’s nothing saying you can’t spend some time getting your credit in order before trying again in the future!

“I don’t have the experience needed to be a landlord.” Nobody goes to college to get a degree in how to be a landlord. If anything, house hacking is the best way to learn how to be a proper landlord because you will be living on site with your tenants! They will be forgiving when they know their landlord is right there on the same property as them.

“Is living right there next to the tenants a good idea?” Just like with being a landlord, the best way to learn about tenants is with house hacking because you live right there with them. You will respect these tenants because they are paying your bills for you. Your tenants will respect the fact that you are right there on-site with them. They know that should anything go wrong, you will be right there to fix the situation.

TIP! Share your car whenever you’re not using it and earn an average of $700 per month on Turo, the world’s largest car-sharing marketplace.

Final word

Let’s echo something we said at the beginning of this guide: House hacking is not easy. It’s not a walk in the park. And it’s far from being some sort of get-rich-quick scheme. However, house hacking is a practical way to get introduced into the world of real estate investing without needing to actually be an investor or someone that has a business or real estate investing experience. The most important thing you can do for yourself is to learn as much as possible, and reading this guide was an amazing first step for you to have taken!

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Please note that under no circumstances should any information from this blog be used as replacement for professional financial advice.

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