Thanks for joining me back on the Real Estate Roadmap Podcast. Today we continue our real estate foundation series.
Our destination this week is to find the lowest barrier to entry method of investing in real estate. There is a broad term for this strategy, coined by BiggerPockets I think, and that term is House Hacking. House Hacking refers to several sub strategies that I’m going to dive into with you today.
A shortage of investable capital, i.e a lack of funding, and analysis paralysis or always trying to get a little more info instead of taking action, seem to be the top two barriers that prevent people from investing in real estate. This foundational series aims to help with the latter and today we are going to specifically target the former.
House Hacking - as I would define it, is utilizing your personal residence as an investment vehicle to help springboard you forward financially and to accelerate your real estate investing career.
As a real estate agent, this is one of the most common investment strategies that I see new investors and even seasoned investors that want to speed up their portfolio growth implement. Pensacola and the surrounding areas have a very large military presence and this is a very popular strategy with service men and women who utilize their VA loan to get started. Don’t worry, it also works with FHA, conventional and any type owner occupant loan you want to use. Typically loan terms are more attractive & downpayment requirements are lower for owner occupied loans which is one of the things that makes house hacking such a powerful and accessible strategy.
So what are some house hacking strategies that you can use along your path to real estate investing success?
You can rent out rooms in the home that you occupy to lower or eliminate your personal living expenses
I personally did this from the time I bought my first home at 23 up until I relocated to Pensacola and met my wife. I was interested in real estate investing back then but I hadn’t started investing yet and that wasn’t why I rented the rooms but the effect on my finances was the same. The extra money that I made from renting 1 room, and occasionally 2, in my house allowed me to invest in my 401k and still afford to have a good time in my 20’s. Investing in the stock market through my 401k during the post 2008 bear market was a great financial move and only possible for me because I had implemented this particular house hacking strategy.
You can rent rooms out to long term tenants, short term tenants or to mid term tenants like traveling nurses that typically stay from 1-3 months.
You can buy a multifamily property and live in one unit and rent out the others, again lowering or eliminating your personal living expenses
To really get things moving you can combine these two strategies
You can rent out other rooms and or other units either as long term rentals or short term rentals. Short term rentals are generally more work but offer more income upside.
This is the strategy that helped me quit my job, move to Pensacola and begin working in real estate full time as an agent and investor. While living an hour away in Mobile, AL and working a full time job, I bought and renovated a fourplex, then refinanced it to pull my money back out. At that point I had a four unit property where three tenants paid $700 per month and my mortgage was just under $1000, I was living for free and bringing in $1100 more than my mortgage every month. Because I had just renovated the property I had very few expenses or repairs which was an added bonus of combining the BRRRR strategy with my house hack on this property. I also had money to live on when I quit my job because of that refinance. This was probably the single best financial decision that I made and it allowed me to pursue a career path, real estate, that I was more interested in than the career I had in management and ultimately that was more lucrative.
Between single family & multifamily properties are properties that include an accessory dwelling unit, ADU for short but more commonly known as an in law suite. These can be attached or detached units that are self contained from the rest of the home and allow you to occupy the main home or the ADU and rent out whichever you do not occupy. ADU’s can make great short, medium and long term rentals.
Instead of selling your home when you move you can keep it as a rental and use another low down payment loan to buy your next home. It’s important to run your numbers as if you were not living there before buying a home if this is your planned exit strategy. You want to ensure that it will cash flow when you move out.
Many military members do this at each duty station and end their military career with a portfolio of rental properties across the country that were all purchased with low or even no downpayment.
This strategy does have a few shortcomings including that if you have gotten attached to your home then it will be harder and more unpleasant for you if a tenant trashes it. If you did not buy your home specifically with the idea of keeping it as a rental in mind there is also a chance that your home is more expensive or has more high end features than a typical rental. Renting out a home that is more expensive or has expensive upgrades can offer more risk because they are more expensive to fix if a tenant were to cause substantial damage and the negative impact to the market value is more substantial than it would be for an entry level property.
You can buy a fixer upper, move in and fix it up and sell it after two years. This allows you to use a low down payment loan to purchase the home and put your additional funds toward fixing it up. After two years you can sell the home and your first $250k in profits for a single person or $500k for a couple are free from income taxes. This is also sometimes referred to as a Live In Flip but I still consider it squarely in the house hacking category. Before I was married I intended to utilize this strategy and move every 2 years. As some of you listening probably know, having a family can change your willingness to endure inconvenience just to make a bigger profit. Interestingly enough I have a repeat past client that has moved over 40 times, sometimes simply for their career, but often motivated by buying a good deal and/or clearing their profits from the last house without paying taxes.
Personally I have used most of the house hacking strategies and sometimes a combination of them. Househacking in general can be a springboard for your real estate investing and financial success, combining more than one house hacking method at a time is a nice added boost.
A step by step guide to house hacking and my top tips for you if you are considering the house hacking strategy are:
Find a good real estate agent that is familiar with real estate investing and can guide you through the process. Other investors are a great source for agent referrals. I have a pretty large network of investor friendly agent so if all else fails just reach out to me and I can connect you with a great investment savvy agent wherever you are home shopping.
Get your finances in order and get pre-approved for a mortgage. Talk to your lender to see which loan type is best for you based on your goals and financial situation. If you need to be connected to a good loan officer your Realtor should be able to help with that.
Work with your agent and lender to set up a home search criteria and start learning the market where you want to buy. Do you want something that is turn key or do you want something that will qualify for your loan type but has room for cosmetic updating so that you can create some sweat equity? Single family or multifamily? Price, area, size and features should all be included in your home search criteria but be sure to separate your must haves from the things that are just nice to have.
Run the numbers on any property that you think might be a good fit for you. Ask your agent or another investor to take a look at your numbers and give you feed back. You can run the numbers as they will be when you live in the property but for most investors the most important thing will be what are the numbers going to look like when you move out and the property is used as investment only. Those are the numbers that I believe matter most unless you will sell the property when you move out. Note: the numbers on most homes stink, which shouldn’t surprise you if you really think about it. Every home on the MLS isn’t going to be a good investment, you are looking for the few that are a good investment or that you can make into a good investment. If you need help with your numbers, Be sure and check out my bonus episode on how to run your numbers for house hacking.
When you find properties that you like and think are a good investment it’s time to go see them in person or with a virtual tour from your agent. Check the age of the major systems, does the home appear to be well maintained, are there immediate repairs needed, is it likely to qualify for financing based on the condition? You’ll want to take note of these and other factors as you tour the property for the first time. If your agent is an investor, ask them what they look at when they tour a property.
Next you’ll work with your agent to get a property under contract. Many investors that house hack self manage at least the property that they are house hacking so by the time you have something under contract, if not earlier, I recommend that you take some time to familiarize yourself with the landlord/tenant laws for the area where you are renting.
The process from contract to closing varies by state and even by city so I’ll leave the particulars of that up to your agent but, If you make it through the inspection period and on to closing you’ll want to have lease paperwork and a plan for rent collection ready so that you can manage any existing tenants after closing or find new tenants if necessary.
To summarize, connect with a good real estate agent and lender, get pre-approved, set your criteria, analyze deals, negotiate, prepare to be a landlord and finally close on your house hack!
I hope that learning about house hacking has shown you how easy it can be to get started in real estate investing and that you now have the confidence to go buy your first or next deal!