What is House Hacking?
House hacking is a phenomenal real estate investment strategy that can eventually lead to living in a home without having to pay a single dollar. Additionally, house hacking may even help you make some money every month that you can keep for yourself.
Traditionally, house hacking requires you to own a multi-family rental property. To make it work, you have to live in one of these units yourself. You then need to find qualified tenants to live in the other units. Once you have these tenants, they can help you to pay for your mortgage. For example, let’s say you buy a three unit multi-family and the mortgage for this property is $1500 per month plus $200 in expenses. Let’s assume you occupy one of the units. You can then make the other two units available for $1000 a month. If you can find two tenants willing to pay this rent, you will be able to pay cover your monthly mortgage payment. In this scenario, you would also make an extra $300. This is called positive cash flow.
But the beauty of house hacking is it doesn’t have to just be in multi-family rental properties. It can also work in single-family homes. If you were to rent out a bedroom, basement or any other part of your home to a tenant, they can also help pay for your mortgage and help you live in your own home for less money or even for free.
There are of course a number of problems that could go wrong with house hacking, just like evertying in life, something can always go wrong. Be sure to avoid the following mistakes to get closer to being a successful house hacker.
- Not having rules in place for your tenants can be problematic. Especially when you are living in the same property, as you do when house hacking. Write down a couple of key policies you want tenants to follow while living in your property. All the rules for the property should spelled out in the lease. Make sure to consult an attorney to ensure that these rules are enforceable and legal.
- Not taking your landlord job seriously is not uncommon. Getting too comfortable with your tenants can sometimes be harmful. Your tenants may think that since you are friends, they can get away with missing payments and breaking some of your rules, so make sure to take your landlording job seriously. This does not mean you cannot have good relationships with your tenants but also make sure it doesn’t get out of hand. Though, you should always treat your tenants with respect if you want respect back.
- Spending all of your money can really create a mess while owning a property. In a situation where a wall breaks or a roof collapses, how are you going to repair this if you have no money, and what tenants are going to want to stay in a home that has noticeable damage? To avoid this, set aside some money that can be used strictly for taking care of potential emergencies and repairs.
- Ignoring the law may be an obvious thing to avoid, but many do forget to follow it. If wanting to change or add something to a property, verify that it is legal in your town or state before doing it. Breaking the law can impact your property value negatively.
- Not having the right rent prices can either, fail to help you make enough money, or fail to attract tenants. You need to find a rent price that is similar to others in the area, and that is enough to pay off your mortgage. Finding your property’s capitalization rate is great for this. So try to find that sweet spot that is in the middle. Something that is not too cheap or too expensive.
Finding out if an investment is worth it
One of the goals of house hacking is to be able to pay the least amount of money towards your mortgage. To be able to do this, you need to find out your cash flow. To start, you want to first find out your NOI or net operating income. To find your NOI, you must take the amount of money you make from a property and subtract from it all operating expenses. The next thing you need is your monthly mortgage payment. A mortgage calculator can be used to help you find your monthly mortgage. In the last step, subtract your monthly mortgage payment from your NOI, to end up with your monthly cash flow.
If you end up with a positive number, this represents positive cash flow. Positive cash flow means that you are making enough money to live in this house for free, and make some profit too. If you end up with a negative number, this represents negative cash flow. Negative cash in this instance isn’t always bad. It is still money that can help reduce how much you pay for your mortgage. But if your goal is to live in your house for free, positive cash flow is what you should aim for.
Picking a great property
To attract potential tenants, you want to offer them a nice place to stay. Also, location is important, and therefore it’s a big factor in determining how much you can charge for rent.
Inside the property, here are some items you should consider when choosing a location that will be attractive to renters or increase your potential income:
- Open living spaces
- Extra bedrooms
- Finished attics
- Finished basements
- Rooms that can be converted into bedrooms, bathrooms, or kitchens
- Homes with separate entrances and exits
- An enjoyable view
Lastly, renovate or rehab the rooms your tenants will be staying in. Even if you don’t mind if your room is a little outdated, your tenants will. Try to make the other rooms as welcoming and as modern possible. Even adding small details can make the rooms more attracting for the tenants. But if you feel some rooms need major renovations, go for it.