House Hacking: Your Guide to Living for Free
Live for free? The ultimate life hack, this is Your Guide to House Hacking, Live for Free While Investing in Real Estate
Welcome to House Hacking, one of the popular ways to live for free or almost free. It is also one of the most effective methods to actually begin your journey into real estate investing. It is a method in which you will live for free or almost free by having a small multi-unit rental property as your principal residence.
The idea of House Hacking is simple. But when breaking down all of the steps and executing it to maximize your personal benefits, it can become a little bit confusing. How to identify a good deal for your house hack, getting the down payment, managing your tenants, property and income taxes, all while handling the property maintenance can be overwhelming. This guide is here to help you though that process.
What is House Hacking?
A house hack, in its simplicity, is a small multi-family property that you will live in, and while living there, the other tenants will pay for your mortgage. Bringing your costs to nothing. Live in one, rent out the others. The types of properties that could be used for house hacking would be a duplex, triplex, or even a fourplex. The income from the other units will be used to cover most of, if not all, the expenses while you live there. Once you move out of this property to your next, it will serve as a great rental property in your portfolio.
As someone who is extremely new to real estate investing, this is definitely one of the more attractive methods to get started. You can live for free in small multifamily properties while you save up a down payments for your next investment property. The goal is to create a pattern in which you will always live for free, from one investment to the next until you are prepared to buy your own single-family home.
This is the ideal choice for younger homeowners who are willing and wanting to learn how invest in real estate. If you decide to begin house hacking instead of renting or buying a single-family home at a young age you will be able to create long term wealth much easier. Housing is the biggest expense in your life, so you if you can house hack, you are going to be able to cut down that expense so you can now save and invest that saved money, you are looking at getting yourself a head start towards becoming wealthy and even possibly retiring early.
Now that you can see how powerful house hacking is, lets dive into even more benefits that it has:
Benefits of House Hacking
We have already discovered the first big benefit of house hacking. It will reduce and maybe even eliminate a monthly mortgage payment or rent payment, which is a huge part of your budget.
Here are the other benefits of house hacking:
Owner-Occupied Equals Better Interest Rates
Owner occupant financing has better interest rates and more attractive financing terms than a property that falls into the investment property category. Because you will be living in the property you are going to be getting better rates. This is a huge benefit of house hacking as this alone will save you thousands of dollars in interest paid.
Learn how to invest in Real Estate
Getting into your first house hack gets your foot in the door of real estate investing. House hacking kind of like a hybrid of your primary resident and investment. Through house hacking you are going to learn how to manage your property and deal with tenants. It’s a little easier to manage when you living your investment as well.
Smaller down payment options
Generally, for an investment property you need to bring 20% down. Luckily for you, since you will be occupying the property, you can put a smaller down payment. Your down payment now only needs to be 3.5% of the purchase price with an FHA loan an 5% with a conventional loan.
The Numbers of a House Hack
Remember that the goal of house hacking is to eliminate your responsibility of paying the mortgage. The goal is for your tenants to pay that for you. Unfortunately, it’s not that simple, there are many different factors that go into an investment property, not just the mortgage. You will need to take into account the vacancy rate, set money aside for repairs, common utilities, and any other possible expenses.
Fourplexes will typically have the best number as there are 3 other tenants paying for the mortgage, but duplexes and triplexes do well too.
Typically, when searching for a property you can use to house hack, it will be very hard to find a property that will cash flow while you are living in it. The reason being is that because you are taking up one the units in which a tenant could be renting.
You want to be able to establish what the rents are in your market to determine how much cashflow will be coming in from the tenants. While it is not necessary to get a deal on a property, although its always better, you definitely don’t want to overpay!
Calculating Your Payment
This is something you don’t necessarily calculate on your own, your lender can do this for you, but there are many mortgage calculators out there to help you that you can do it yourself initially.
Here’s how to estimate your payment:
- Estimate the Purchase Price
- Estimate what your Down Payment
- Subtract your Down Payment from the price of your loan
- Go to this Mortgage Calculator Online
- Enter the loan Amount, and the number of payments (360): Leave payments per year at 12 and leave the balloon payment and payment amount blank.
- Click Calculate
Once you have determined your payment, we are going to look at the big picture of the investment and take into consideration the rest of the numbers.
For this example, we are going to say that we bought a triplex with the monthly mortgage payment of 1500 dollars. The mortgage payment will include the property taxes and insurance.
Vacancy Rate 5%: 18000/ year for mortgage, $900 must be set aside for vacancies in the other units. (5% of 18000) You will take that $900 on the year and it would come out to a monthly expense of $75.
Maintenance 3%: 18000/ year for mortgage, $540 must be set aside for repairs. It will come out to a total monthly expense of $45.
Common Utilities: Generally, the owner of the property will pay for trash, which is typically about $35 a month.
Mortgage (Includes Insurance and Property Taxes): $1,500
Common Utilities: $35
Total Expenses Total: $1,655
Goals for our House Hack Example
If you were to find a triplex, that means you would live in one unit, and rent out the two others. Taking the numbers that we just ran, you would need to be able to rent the two other units out for about $825 each. This would cover all your expenses while you live there and be an amazing property when you leave turning it into an investment property.
If you need help identifying properties that would fit these types of numbers read : Key to Cash Flow, The 1% Rule
How to get a Mortgage and Down Payment for your House Hack
The hardest and most important part of obtaining your first house hacking property is obtaining a good mortgage. A good mortgage should consist of the following:
- Interest Rate as low as possible and fixed long term. (30 years preferred)
- Small down payment
- Monthly Payment is as low as possible (30-year loan)
- No balloon payments, or any weird conditions.
Types of Available Financing with a Small Down Payment
The FHA loan requires the smallest down payment on the list if you weren’t in the military. You can put as little as 3.5% percent down on the property. The only downside to an FHA loan is that you will also pay Private Mortgage Insurance (PMI) for the life of the loan.
The VA loan is the best loan on this list, however it is only available to those who served in our military. With the VA loan you can put as little as 0% down, and there is no Private Mortgage Insurance.
A conventional loan seems to be the most practical loan for house hacking. You can put as little as 5% down on the property and the PMI will fall off the loan as soon as you obtain 20% equity in the property.
*5% required for SFR, 15% down required on duplex. Ask your lender if the HomePossible loan is available to you as that only requires you to have 5% down on a duplex.
Seller-financing is extremely powerful especially when you don’t have enough for a down payment. The key is to find a seller who would accept the terms that come with seller-financing. The goal is to find a seller who will do seller financing and after 3-5 years you will give them a balloon payment to fulfill the price of the mortgage. I will cover more in depth on this topic on future articles.
If you are struggling to find ways to come up with a down payment, you might want to look into a side hustle to save up for your down payment. Check out this article about side hustling for your down payment.
There are going to be challenges during your house hacking journey, and a lot of people never even start house hacking because of excuses and objections. Let’s put those objections to rest.
“I don’t want to live directly next to my tenants”
Being a landlord is challenging, and there is nothing more challenging than doing it your first time. Some people may say that house hacking is not for them because of this, but in my personal opinion, living right next to your first tenants makes it easy to learn! Imagine your tenants being able to communicate you so effectively because you are literally living next door to them.
“I am afraid I won’t be able to rent out the other units”
Another common objection is that first time house hackers are too afraid to enter the house hacking world because they won’t be able to rent the other unit/s out. Speak with local real estate agents to help determine market rents, list it on every possible rental listing service, and they will come! Make sure to vet your tenants.
“I can’t find a good deal where I want to live.”
This is probably the hardest part about house hacking right now. In 2019, especially California, a property that fits the 1% Rule is very hard to find in decent areas. Finding a real estate deal is like finding a needle in a haystack.
You will need to go through every little piece of hay in that stack to find that super rare needle, if you don’t have time to look for a deal, maybe look somewhere else for your investments. It recently took me 6 months to find a house hacking deal for a friend.
Depending on your market, you may have a harder or easier time find a great house hacking deal. For me, living in California, it’s very difficult to find deals to house hack. Other parts of the US are easier. The concept and principle of house hacking remain the same though.
Even though you may not find the same deal in California as you would Texas, you can still use the rent from your tenants to REDUCE your house payment and save more money. In the end, it is nicer to live for free, but if you can’t, living at a discount is the next best thing.
I hope this section helped calm your excuses or objections, if you have any others feel free to email me at email@example.com
Most Importantly: Take Action!!!
If you are looking to be a future house hacker take action! The longer you wait, the longer you are the only one paying for your mortgage or rent. Make others pay it for you. Start by looking for those deals, asking your lender how tenant rental income can help you qualify, go to meetups to network, and go get yourself out there! DO ALL OF THAT, and I can almost guarantee that you will find a house hacking deal within the next 6 months.
I hope everyone enjoyed this guide to house hacking and may your house hacking journey create long term wealth!