If you would love to find a way to buy a real estate property, have someone else make all or most of your mortgage payments for you, and build up your investment equity, house hacking might be for you.
To “house hack” is a way to cut out all or most of your home payments by buying a home where you rent out a room or other section of your home, or buy a multi-unit apartment building and rent it out to tenants, in order to use their rent payments to pay for your mortgage. And it’s a great way to start out with real estate investing.
This method could end up being your full time income, just a part of your income, be the start of your investment portfolio, or just pay for most of your housing costs. Each scenario would be a win for you if you plan to house hack.
What is house hacking?
It is a method that was coined by Bigger Pockets to help people learn how to invest in real estate and allow more financial freedom in their lives. House hacking can work for anyone but works best for people that can handle having a “second job” as it is quite a bit of work, but it is doable and can be rewarding.
The work in house hacking is that of being a landlord and involves everything – marketing to attract tenants, interviewing potential tenants, and sometimes evicting someone if necessary. You’ll also learn firsthand the ins and outs of what a property manager would do, should you decide to move out and hire one later.
It is a lot to take on and you’ll have to decide if the benefits outweigh the work that comes with hacking your home. For many, house hacking is the perfect solution.
Why you should try house hacking
The biggest reason why someone would decide on house hacking is that it can cover your housing costs, either partially or completely – either one is a great benefit. Housing costs are the number one reason anyone has trouble saving money and therefore growing their savings or investments. If you are able to buy a property that allows you to rent out parts of it to tenants that will cover your mortgage payments, your income from your day job will be freed up to set aside for your future.
As we talked about in How to Buy a Home with Student Loan Debt it can even be a great way to help pay your mortgage payments while you are paying down your debt with your day job.
The way to start out with house hacking to save the most money is by living on the property, at least for the first year. Property owners that live on the property get the best financing terms. You’d get lower interest rates than you would with investment financing. If you decide to move out after the first year but keep renting it out to tenants long term, you can keep your low-interest loan in place after you move out.
Another great reason to start house hacking is that it is a great introduction into learning how to invest in real estate as well as what goes into managing a property first hand. When and if you decide to move out later on after being able to save up the money to invest in an even better property, you’ll know exactly what goes into property management and what to look for when hiring property managers to take care of it for you later on.
When you shouldn’t try house hacking
If you’re not open to doing the work of being a landlord, house hacking is probably not for you. Taking care of tenant calls in the middle of the night and possibly having to evict a tenant who is not paying rent can be more than a little uncomfortable. However, there is a learning curve for all of that that you will come around to should you decide to house hack. Those things will get easier and it will likely get to the point of a tenant calling you in the middle of the night simply means you call a repairman, cut him a check, and it’s taken care of.
Another issue is that it might also be hard to find the best deals in your area’s real estate market. You’ll need a good Realtor when you’re starting out for sure, and likely you’ll choose to work with a Realtor over your career of house hacking. But if real estate numbers don’t interest you and learning to crunch financial numbers isn’t your favorite thing to do, that is something to consider when deciding if it will be worth it for you to house hack.
However, if you decide to commit to house hacking as a real estate investment you’ll get the benefits of lowered mortgage payments (or no mortgage payments) and more control over your financial life. Especially if you incorporate this into a more long term plan of eventually selling the property and reinvesting into an even greater home.
The steps of house hacking
Before you start looking for a property, take some time to figure out your goals for your house hack – like if having your mortgage paid for you every month is the goal. Or if house hacking will be worth it if you just have your mortgage payments reduced instead of completely taken care of.
Then put together a financing strategy to work into your goals and how you will buy the house hack and pay for any renovations, business fees, utilities, etc. Decide if you’ll pay with cash or use a government-backed loan or a conventional loan.
Next, study the market and begin searching for viable candidates to buy. When you find one you want, make sure to discuss property details and the projection of the real estate market in its area carefully with your Realtor, so that you’re as sure as you can be that it will be a good investment in your future.
If you’re looking for a property in Sacramento, make sure to see Should You Buy a Home in Sacramento During COVID-19? to see the real estate trends in the area and what kind of tenants may be wanting to move into your house hack.
How to work with a Realtor to house hack
You’ll need a great Realtor that knows the area you’re in and how to find the best properties. In order to find great real estate deals, it will take patience and work and a Realtor who is able to catch them quickly once they hit the market. Know ahead of time what kind of property you’re looking for and can afford. Be ready to invest a fair amount up front for the right deal.
A good Realtor will be able to estimate the value of the property you choose, and from that you should be able to estimate your future mortgage payments.
An important part of making sure you get the most out of house hacking is obtaining the best mortgage loan you can get. Discuss your loan type preferences with your Realtor so they can help you negotiate the best deal possible.
VA and FHA loans are government-backed loans that allow you to pay a lower down payment and have lower monthly payments than conventional loans. This would allow you to have a higher monthly income from tenants and allow you to put more of your money towards savings and investments, if that is your goal.
If you’re new at investing in real estate, it does have a learning curve and you need a good Realtor on your side to walk you through the processes and help you find the best deals.
On a side note, the way homes are bought and sold right now is changing due to the ongoing pandemic and the need for safety measures. If your community is currently using social distancing measures, check out Coronavirus Real Estate Guide to see what you can expect when working with a Realtor right now. As things are always changing, don’t forget to ask your Realtor what current guidelines are before you begin looking at houses in person.
If you’re looking to buy a home in the Sacramento area, contact us at Quantum Real Estate and let’s get started.