for Every Homebuyer
The Plan:
“House hacking” is a modern label that’s been attached to an old concept: purchasing a property as a primary residence, and renting out the remaining empty rooms (or remaining units, if you acquire a duplex, triplex, quadplex, or a property containing an ADU) while you yourself also occupy the property. House hacking has become firmly entrenched in the world of real estate investing since its inception; this method presents one of the safest and most informative routes of entry into the world of real estate investing for entry-level investors seeking to remain within safe harbors.
Often times, house hacking isn’t even used to begin one’s career as a real estate investor. It is a solid method of simply reducing housing expenses, which is more than enough of a reason for many to utilize it, especially for young professionals living in HCOL (high cost of living) areas.
However, it can be a great way of entering real estate investing at a slower, safer pace. Investors utilizing a house hacking strategy will benefit from the lowered cost of experimenting with a primary residence (lower mortgage rates for a primary residence versus a second home or investment property), coupled with the opportunity to gain valuable experience managing a rental property, all while having tenants build equity for you the entire time. While rare, a well-executed house hack can even allow the property owner to live almost or entirely free of housing expenses. However, in certain economic periods or regional housing markets, this will not be possible, so don't count on it.
Process Breakdown
Step 1: Investor Obtains Financing
This step would only be slightly more involved than any other regular primary home purchase, if at all. Just know that the requirements for financing a multi-unit property (duplex, triplex, or quadplex) are somewhat stricter than a SFH/SFR (single family home/single family residence). Contrary to popular belief, a multi-unit property to be used as a primary residence can be purchased with as little as 3.5% down. A single family home can be purchased with as little as 3% down if you are a first time homebuyer (no ownership of property within the last 3 years).
Step 2: Investor Purchases Home
Hire a realtor to guide you in this process, and make sure you understand what benefits your home would have to offer to prospective tenants or housemates. If you do not already have a trusted agent to guide you, we can pair you with a knowledgeable agent operating in your desired area of purchase.
Easily the most important aspect of your house hacking property will be its location. Will it be located only a few minutes from great restaurants or popular shopping centers? Are there schools or universities close by, and if so, how well-regarded is the school district or university? How about grocery stores or other vendors of necessities? Are large employers nearby that would attract professional tenants? Is the area safe? Are there parks or hiking trails? Gyms? Bus stops or other modes of public transit? Pharmacies? Movie theaters? Are there future development projects in the area that stand to either potentially raise or lower the desirability of your neighborhood? There are many different factors to consider when selecting a suitable location. Ensure that you leave no stone unturned.
Step 3: Investor Seeks Out Tenants/Housemates
Note that it’s safer to execute this strategy if you secure housemates before purchasing your home, with each housemate (likely a friend or professional acquaintance) committing to the plan and understanding their potential monthly payment. However, even if secured after the fact, tenants should not be too difficult to find so long as you offer a reasonable monthly rent, and are located in the right area. You can theoretically do short term rentals as well, just check your local laws and HOA rules (if any) to ensure that running a STR operation will not violate any codes and leave you at risk of fines or other punitive actions. Note that a fair few STR customers will likely find renting out an owner-occupied home undesirable unless it is a multi-unit property that can provide a clear barrier between both parties.
Step 4: Investor Manages Property
This will be your test run of your management capabilities. You will have to collect rent, perform repairs (or pay for the skills of a contractor), have proper liability insurance in place, and resolve any disputes. In exchange, you’ll be building valuable experience and equity, which can serve as a foundation for a more ambitious strategy down the road. As previously mentioned, depending on prevailing economic conditions and the area in which you execute this strategy, you may even have your entire mortgage payment covered by your tenants or housemates if you play your cards well. This goal should never be prioritized over charging a reasonable rent payment and conducting your property management activities in an ethical and responsible manner.
Summary
Pros:
Significantly more attractive financing terms and easier qualification process as a primary home.
Can greatly reduce housing expenses and potentially even cash flow if executed well.
Great first step to building management experience, which will be extremely useful as an investor.
Ability to branch out into more advanced strategies using the equity built through house hacking.
Cons:
Whenever tenants or housemates, even friends, are involved, there’s the inherent risk of unreliable tenancy. Vet your home’s occupants well. Ensure that income and credit history are adequate.
You have to be a landlord. This requires you to understand the landlord laws and tenant’s rights of your area, in addition to you having to cross that boundary between friendship and business if there are disputes. This happens often in subleased apartments, so this may not be new.
You’ll lose access to parts of your home, as tenants are entitled to privacy in the areas they rent. Violating this privacy can have severe consequences in certain states. You also will have less control over your home, as you should be considerate of your housemates' quiet hours, storage space, ability to bring guests over, etc.
Conclusion:
Overall, house hacking is easily among the greatest strategies for beginner real estate investors who aren’t confident enough to manage a property that they can’t have direct control over at all times. By combining the more attractive financing of a primary home loan and the monthly rent contributions from tenants (who can be people you know and trust), you can find yourself with powerful experience and decent home equity in a relatively short amount of time. It is safe, slower-paced, and can be an enriching (and enjoyable) experience.