House hacking is an investment technique that involves buying a multifamily property and living in one of the units. When you rent out the other units, you can pay for your own. In this article, we’ll discuss what exactly house hacking is and how to do it.
What is House Hacking?
As we’ve mentioned, house hacking is a term used to describe buying a multifamily property and living in it while renting out the other units or rooms. You can house hack with any type of rental property, including your current home.
House hacking is a real estate investment strategy that can help you pay for your mortgage without taking up another job. You can even charge enough to cover the cost of your mortgage and utilities while making a little extra money on the side.
House hacking can also help you buy a new home, especially since the median sales price for single-family homes hit an all-time high in 2021. For example, if you’re purchasing a house and want to lower your financial burden, you can take on a tenant. It can also offer you the chance to see if being a landlord is something you’d be interested in doing long-term.
How Does House Hacking Work?
House hacking works similar to buying any other house. However, you’ll be purchasing a multi-unit property instead of a single-family home in this case. Of course, you can also house hack with a single-family house, as long as you’re okay with having a roommate. Maybe even consider a property that features a living space above the garage where you can rent it out as a garage apartment. Here’s the house hacking process broken down.
Understand Financing Options
Much like buying a house, you’ll have to get a mortgage loan. First, you’ll start with the preapproval process to better understand the properties you can afford. Having a preapproval can help you become more credible with property sellers.
Look for Properties
Once you have a lender, you’ll look at properties. There are many different properties, including single-family homes, apartment buildings, and duplex homes. Once you know what type of property you want, you can start looking at options. Of course, you can also let your real estate agent know you’re looking for a rental property, and they’ll be able to find options in your price range.
Make an Offer
Once you find a property you like, you can determine if it makes sense for house hacking. You’ll need to use this property to make a passive income, so you should continue with your search if the mortgage is higher than you’ll want to charge for rent. Once the math makes sense, you can offer the property.
Once the seller accepts your offer, you’ll close on the property and move in. Before you start looking for tenants, make repairs around the home to find the best tenants and price your rent appropriately. The more updated the home, the more you can charge for rent. However, you shouldn’t go overboard with repairs or renovations. Check the rent prices in the area to figure out how much people in the area are willing to pay for a rental.
Find Your First Tenant
Once your property has been repaired, you can start renting units out to tenants. Once you get your first tenant, you’ll officially become a landlord.
Financing Your Property
Unless you’ve recently sold a property, you might not have enough money to purchase a property in cash, so you’ll need to get a mortgage loan. Luckily, you should have a variety of loan options available, including government-backed loans for people who are purchasing their primary residences. Here are other types of financing options:
If you’re house hacking with your first home, you’ll be eligible for an FHA loan, which allows lenders to have flexible standards for a conventional loan. In addition, FHA loans offer borrowers the ability to make a small down payment.
If you’re a veteran, you may qualify for a VA loan backed by the Department of Veterans Affairs. These loans allow borrowers to finance all of the purchase prices.
Conventional loans are the most common types of home loans. They typically offer the best interest rates but stricter requirements.
Deciding If House Hacking is a Good Investment
As we’ve already discussed, you need to ensure you can actually make a passive income on a property for house hacking to work. That being said, you should know about the two calculations to make to determine whether an investment is a good investment.
- Net Operating Income (NOI)
NOI helps you determine how much rental income you can earn before mortgage payments and property taxes, telling you how much a mortgage will be paid each month. You can determine your NOI by subtracting operating expenses from total income. If you’re not sure how much rent to charge, you can ask your real estate agent.
- Mortgage Payment
Once you’ve figured out your NOI, you’ll need to calculate your mortgage payment to ensure you can pay for your mortgage through house hacking. Finding how much your mortgage payment will be will depend on your loan and lender, but your lender can give you some figures. You can also use an online mortgage calculator.
Next, you’ll subtract the mortgage payment from the NOI. Again, if you get a positive number, your house hacking initiative will be a success, and your entire mortgage will be covered by rent.
Should You House Hack?
Anyone can start house hacking as long as you’re able to purchase a multi-unit property, but if you’re just starting out, you can also rent out a portion of your home, such as the basement. House hacking can be a great way to reduce or eliminate your housing cost, but it might not be right for you. House hackers must be okay with becoming landlords.
Even if you’re simply house hacking, becoming a landlord requires rental agreements and taxes. It also comes with responsibilities, such as making repairs and ensuring your tenant is safe to avoid lawsuits and ensure they won’t break the lease. If you’re already busy and don’t want to live in close quarters with at least one other tenant, house hacking might not be suitable for you.
Marné Amoguis holds a B.A. in International Business from UC San Diego. She is a contributing writer at 365businesstips.com where she loves sharing her passion for digital marketing. Outside of writing, she loves traveling, playing music, and hiking.