There is one underestimated strategy that may help new real estate investors build wealth faster and more efficiently than they ever thought possible at the onset of their career: house hacking. A properly implemented house hacking strategy, for that matter, awards savvy investors the ability to fast-track their entrepreneurial efforts within the real estate industry unlike anything else. Not only that, but house hacking can also ease the transition into real estate for aspiring investors. There is really no reason house hacking can’t help you learn how to start a business of your own in the real estate industry.
House hacking is a strategy that will witness savvy investors maximize their return on investment by physically living in the same property they are using to generate passive income. More specifically, however, house hacking offers investors a way to reduce their overhead while simultaneously mitigating risk.
Aptly named, house hacking can easily turn the prospects of a good passive income investment into a great one. If for nothing else, living in the same property you intend to rent out comes with a number of inherent benefits, not the least of which may contribute to your overall bottom line.
House hacking a duplex, for example, will allow investors to live in one unit while simultaneously renting out the other. In doing so, the investor is oftentimes able to charge their tenant rent that is equal to or more than the mortgage itself. House hacking has become synonymous with a number of benefits, the most attractive of which allows the investor to not only pay down their mortgage with a tenant’s rent, but also live in the same home free and clear of making any payments of their own. Implemented correctly, with the right “numbers” in play, there’s no reason a proper house hacking strategy couldn’t allow investors to simultaneously pay down their mortgage with someone else’s money and save on their own housing expenses. Perhaps even more importantly, a good house hacking strategy may be implemented in a number of different types of assets. A smart investor will know how to house hack the following types of properties:
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The benefits of house hacking are well-documented, and have helped countless aspiring entrepreneurs test the waters of real estate investing without stretching themselves too thin. That said, in order to benefit from a proper house hack, you need to have the right property in your portfolio.
Here are five simple steps to help you find and procure your own property to conduct a house hack on:
Commit: What is house hacking, if not for a commitment in and of itself? House hacking will require a huge commitment on behalf of interested investors. Therefore, it’s in their best interest to commit to the idea as soon as possible. Before you even consider house hacking, commit to the idea. You need to remain convinced that house hacking is a strategy you will be comfortable living with for a prolonged period of time — literally. Even the slightest reservations may be a sign that you’re not ready. Simply put: don’t start house hacking if you aren’t ready for the commitment that will follow. If you are, however, move on to the second step.
Secure: Step two of a proper house hacking strategy will have investors secure financing. Be sure to line up financing before you even start looking at properties. In doing so, you’ll be given the exact amount you are approved to borrow. Whether it’s a traditional loan or from a private money lender, line up financing as soon as possible. That way you will know how much house you can afford, and avoid looking at those properties out of your price range.
Study: With financing in hand, proceed to mind due diligence and study accordingly. Get a feel for the market you intend to buy in, and where your funds will allow you to purchase. It is at this time that you’ll also want to lock down your exit strategy: Do you prefer a duplex? Perhaps you would like to try your hand at a triplex. Whatever the case may be, determine the type of property you want to buy and start running the numbers. More importantly, make sure they make sense. Remember, the idea is to live mortgage free while your tenants pay down your principal, so make sure the home you buy into can accomplish that.
Locate: Once you are aware of the profit margins you will need to work within and the cash flow to expect, search for a property that meets your criteria. Remember, there’s no point in buying a home that won’t get you one step closer to your goal of house hacking. Simply put, the cash flow needs to offset the mortgage enough for you to live in the home without making any payments of your own.
Act: Once you have done your homework and are certain that you have found a home that meets your house hacking criteria, make your move. Buy the house and prepare to move in. If everything goes according to plan, your tenants will be paying down your mortgage while you proceed to live without any mortgage payments of your own.
The single greatest benefit of house hacking, at least in my opinion, is the accessible transition it awards to aspiring real estate investors. If for nothing else, house hacking bridges the gap that exists between new investors and those that are fully committed to the industry. House hacking offers investors an “easy” way into the field of real estate investing. In fact, I would argue that it’s the easiest way to start investing. The idea of living in the same home you intend to collect rent from eases the financial burden many investors associate starting out in the industry with while simultaneously getting their feet wet. Think about it: it’s entirely possible to pay down your mortgage with other people’s money without having to worry about covering the mortgage out of your own pocket.
In addition to the idea of living mortgage free, house hacking can significantly reduce risk. The concept of a multifamily home inherently reduces an investor’s exposure to risk. In house hacking a multifamily property, for example, a single vacant unit won’t cripple your investment. The remaining tenants will at least provide investors with some cash flow, whereas a single-family home without a tenant will assuredly eat away at your bottomline.
A lesser-known benefit, but nonetheless important to account for, is the idea of shared “amenities.” Most multifamily properties share “big ticket” amenities like a single roof, yard and water heater. Multifamily investors could be collecting rent from as many as four units, but only have to worry about one roof to fix, one paint job to patch, and one driveway to maintain. Whereas the cash flow from a single tenant is typically expected to cover maintenance costs for these items in a single-family home, multifamily homes will provide investors with several rent checks to cover them.
There is no such thing as a house hacking calculator, but there are certain numbers that deserve your attention more than others. More importantly, if you want to house hack successfully, make sure you have a firm grasp on the subject property’s mortgage payment, net-operating income (NOI) and cash flow. These three metrics can go a long way in helping you make the right decision.
Despite its rudimentary name, house hacking has proven incredibly valuable for investors looking to break into the real estate industry. No other strategy, at least that I am aware of, allows investors to maximize their efforts quite like this simple strategy. The idea of having renters pay down your mortgage without incurring any additional mortgage payments of your own is more than enticing. What’s more, house hacking is a great gateway into the world of real estate investing; one that should make the transition into investing easier.