House Hacking 101
House hacking… what the heck is that? In our article 6 Ways to Invest in Real Estate, one of the ways discussed was house hacking. I did not expect to receive so many private messages on Facebook or even text messages from some friends and family wanting to know more about this real estate investment strategy. So, I decided that’s what the next article would be about. House hacking in general terms is relatively easy. Depending on your market and the type of loan you take out on the property, you will essentially live there for free. You can do it a few different ways. We will discuss four different ways here.
1. Multi-Family House Hacking
This is the most common method and also known as traditional house hacking. Using this method, you would buy a multi-family property (duplex, triplex, or quadplex) and live in one of the units and rent out the others. Since you are living in the property, you can take out a low down payment loan such as an FHA loan and put 3.5% down. If you have served in the military, this is a great opportunity for your VA loan. If you are single, this type of house hack can get even sweeter. Get a roommate too! Let’s say you purchased a triplex; you are now collecting rent from the other two units and from a roommate. I’m pretty sure that will cover your mortgage and then some.
Something to consider… If you are in a high price tiered market, even doing this might not be enough to cover the mortgage. Where you buy matters…
Even if you are just breaking even, you will still build appreciation on your property. The beauty of appreciation is that you start to build your wealth without even knowing it.
2. Single Family & Renting out Rooms
If you are living in a decent sized home, this can be a great option. I had a friend of mine renting a room from someone out here in Hawaii. He was renting the room for about $850 a month. Rent out here in Hawaii is a bit high, so the going rate for a single room is between $700-$1,100.
So, while you may not be able to get that kind income on a room rental, you can see where I am going here. If you purchased a three-bedroom home and rent out two of the rooms, or even all three (with you sleeping in the living room; that has some good potential. Where you purchase matters… For something like this to work, you are looking at purchasing in a college town, near a military base, or in a dense population area.
Remember how we talked about appreciation on the multi-family homes? Guess what? Single family homes actually appreciate better. So, consider this if you are single and just getting ready to start in real estate investing.
3. Rent Out Your Primary Residence
I really like this one. You may be asking, if I rent out my primary residence, where the heck will I live? This is actually an idea my wife and I have thrown around a few times. Not sure if we will do it in the future, but its on the table when I retire from the Navy.
So, the premise of this would be to rent out your primary residence and then live in an RV or a supped-up van. There are actually a few people that do that and with great success.
Depending on the location, you can park on your property while renting it out. With Hawaii being such a high cost of living, this would save us a significant amount of money and allow us to live essentially anywhere we want on the island.
4. Building an Additional Dwelling Unit (ADU)
Another venture my wife and I discussed was finishing our garage and making it an ADU. By doing this, we would turn our garage into an apartment. Our driveway can already park four vehicles and for folks that live on Oahu, you know that parking is prime real estate!
This path can take a bit of work and be more costly than anticipated. The reason why we haven’t pulled the trigger on something like that is simply the cost for our specific unit. We estimate it would cost us around $50k to make it an ADU worth renting out. It would most likely rent for around $1,800 per month. That means it would take us 28 months to pay it off if there was 0% interest or we used hard cash for it. That’s a long time and we could put that $50k into something that will return better and right away.
So now that you see four different ways to house hack, you can see how you can really reduce your largest living expense significantly. Here are some takeaways:
- You can essentially live in your house for free.
- Option to buy an investment property with a low down payment.
- You can build appreciation on your property as you pay your mortgage down and the home value goes up.
- Being a homeowner, you will be able to save more in taxes
This is just a bird’s eye view to help you figure out if this may be a path for you.
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