Home ownership is a major investment and commitment. It can be costly, with a mortgage payment, utilities, and all the maintenance resting on the homeowner’s shoulders.
House hacking is the process of buying a home and then turning it into a money-making machine by utilizing part of the property to bring in some extra cash.
House hacking is not easy, but it is possible with the right mindset and approach. In this guide, we’ll show you how to use your home to “house hack-away” at your monthly mortgage while building equity.
What is House Hacking
House Hacking Definition:
House hacking strategy is where the owner of a property rents out part of their home to pay towards their mortgage.
Many people think of house hacking strategy as purchasing a duplex or multifamily property, living in the property while you rent the other units to tenants.
But many investors get their start by purchasing a single-family, residential property for their primary residence and renting out a room.
House hacking can be a great way to make money.
Of course, there are a few things needed to deploy a house hacking strategy. These include:
- A property that has enough space to accommodate tenants; and
- That you as the owner are comfortable dealing with tenants and managing the property.
If you’re up for the challenge, house hacking can be a great way to make money and get started in the world of real estate investing.
Find a Property that You can House Hack
When looking for a property to hack, there are a few things you need to look for. The first is a property that has enough space to accommodate tenants. You’ll also want a property that is in a good location, with comfortable zoning laws and regulations.
Living with others is a challenge. People need their private space, so you will want to consider this in a potential property, its layout, the square footage, and common areas. How accommodating are these areas for more than one person?
If living with someone is tough, living on top of each other is unbearable.
This is why space—physical space—is so important.
If you’re looking at a duplex or multifamily situation the living arrangements are much simpler.
Condition of the Property
Another thing to consider is the condition of the property.
Will you need to do a lot of repairs or renovations before you can start renting it out?
If so, you’ll need to factor that into your budget.
Good Rental Neighborhoods
Also, keep in mind that some areas are more popular with tenants than others. You will want to appeal to higher-caliber tenants. This means your property needs to be attractive and functional, but also in an area with better-than-average rents.
A tenant can make or break what looks at the beginning to be a solid idea.
Good tenants pay their bills. Pay their rent. They take better care of things because they know everything has a value that should be respected. This would be the type of tenant you want to pursue and sign. Someone that possesses a character of responsibility.
If you’re not sure where to start, do some research on the best places to rent a property. Use sites like Zillow and Google Maps to understand the area around the potential rental property. Locations close to schools and amenities will be highly desirable for potential tenants.
Talk to other real estate investors and get their advice on where to buy.
The Benefits of House Hacking
There are a few benefits to househacking and these can change your life.
1. Get Started in Real Estate Investing.
For many of today’s real estate millionaires, this is exactly how they got into building up a rental property portfolio.
This is what Gary Keller did in launching his million-dollar-plus real estate empire. The founder of Keller Williams started by buying his first home and renting out rooms to friends.
This is one of the easiest methods to get into real estate investing as it allows you to use the compounding interest of time and consistent mortgage payments to build equity.
By purchasing a house, renting out rooms, making improvements, and building equity, they can leverage time by building equity and then borrowing against it later to further scale the number of their holdings.
2. Cover the Monthly Mortgage Payment
Imagine right now, having no mortgage payment. How would that make you feel?
You could make an extra mortgage payment, make improvements to your property, or use those extra funds for further investments.
By lowering your housing overhead through eliminating your mortgage payment, you have options to build your investment portfolio. It’s pure profit that can be used to improve your home, save for a rainy day, or reinvest into another property.
3. Learning While You Earn
House hacking allows you to learn many new things. Everything from home maintenance to being a landlord. Consider it hands-on learning that will ultimately allow you to scale and build a real estate investment portfolio.
4. Build Equity in Your Home More Quickly.
One option available to home hackers is doubling up on your mortgage payment. This works great in building equity as those extra mortgage payments go towards your principal, lowering your debt profile, and increasing net worth.
How to Manage Your Property and Tenants
Once you’ve acquired a property and started renting it out, you’ll need to be diligent in managing both the property and the tenants.
1. Meeting With Tenants Regularly
Make a habit of meeting with your tenants regularly. This could be quarterly, bi-annually, or even annually. The important thing is to keep the lines of communication open and to check in on how things are going.
Regular communication with your tenants allows you to stay ahead of potential problems with the house or pending lifestyle changes with the tenant (new job, child on the way, etc).
2. Doing Regular Inspections
Inspecting the property regularly is one of the most important things you can do as a landlord. By catching any maintenance issues early, you’ll be able to prevent them from becoming bigger problems.
In the case of a duplex or multi-family rental property, it’s also a good idea to walk through the property and check on how your tenants are taking care of things. This will give you a good idea of how well they are taking care of your property.
3. Keeping Good Records
Another important aspect of being a landlord is keeping good records. This includes maintaining accurate records of rent payments, deposits, and any repairs or maintenance that is done on the property.
By keeping good records, you’ll be able to stay organized and on top of things. This will make it easier to manage your property and tenants.
4. Hiring a Property Manager
If you don’t feel like you have the time or energy to manage your property, you can always hire a property manager.
A property manager will take care of all the day-to-day tasks associated with being a landlord. This includes things like collecting rent, doing inspections, and dealing with maintenance issues.
While hiring a property manager will cost you money, it can be well worth it if it means freeing up your time to focus on other things.
Crunch the numbers before considering a property management company and do your research. Many property management companies only do the minimum and give very little value back to the property owner. Do your homework before giving any management company control.
Mistakes to Avoid when House Hacking
When house hacking, it’s important to be aware of the mistakes that can be made to avoid them. Here are four mistakes to avoid when house hacking:
1. Not Doing Your Research
It’s important to do your research before buying a home that you can’t afford. Make sure you know what the market is like in your area and what you can realistically expect to earn from renting out part of your home.
2. Not Having a Plan
Don’t just buy a house and start renting it out without a plan. You need to have a clear idea of what you’re doing and how you’re going to make money from it. Otherwise, you could end up losing money.
3. Not Being Prepared for Repairs
If you’re renting out part of your home, you need to be prepared for the possibility of repairs.
Things like plumbing and electrical problems can arise, and you need to be prepared to deal with them. Set aside some money each month so that you can cover the cost of repairs as they arise.
4. Not Being a Good Landlord
If you’re going to be a landlord, you need to be prepared to deal with tenants. This means being available to answer their questions, handle their concerns, and deal with any problems that may arise.
If you’re not prepared to be a good landlord, you could end up with unhappy tenants and a lot of headaches.
Is House Hacking Illegal?
In general, house hacking is not illegal.
There are a few things to keep in mind, though, when house hacking.
First, it’s important to make sure that you are aware of the local laws and regulations regarding renting out property. Make sure you are familiar with zoning laws and any restrictions that may apply to your situation.
Second, it’s important to have a clear and well-written lease agreement in place. This agreement should outline the rights and responsibilities of both the landlord and the tenant. It should also cover things like rent, damages, and other important topics.
Finally, it’s important to be a good landlord. This means being available to answer questions, handle concerns, and deal with any problems as they arise. If you’re not prepared to be a good landlord, you could end up with unhappy tenants and a lot of headaches.
In general, as long as you are familiar with the laws and regulations in your area and you are a good landlord, house hacking is not likely to be illegal.
House Hacking Can Open Doors…
House hacking can be a great way to make some extra money and gain experience as a landlord, but there are some things you will need to consider before getting started.
Make sure you understand the benefits of what is house hacking and what is involved in becoming a landlord. Through improving the property and learning how to manage a rental with tenants, you’re on your way in becoming a real estate investor.
Next step, if you are ready to take the plunge into investing in non-owner occupied properties, contact Cogo Capital today for help funding your next real estate investing project. We look forward to working with you!