It’s easy to see the allure of real estate investing. Passive income, tax benefits, paying off debt, and making money on your own terms. What’s not to like? Unfortunately, the dream often feels out of reach. The reality of down payments and costly repairs may snuff out your plans of becoming a landlord.
House hacking is one way to reduce housing expenses at your primary residence. House hackers rely on others — like roommates, tenants, or short-term renters — to cover their mortgage payment. It’s a lot more than an adventure into the world of real estate investing. For some, it’s also a path to homeownership.
“It’s an opportunity to save money and build wealth,” says Chad Carson, a Clemson, South Carolina based investor and blogger at CoachCarson.com. He has been a real estate investor for over 15 years and started house hacking with a four-unit multi-family property.
Carson says the biggest benefits of house hacking are slashing your short-term housing expenses and creating future cash flow. We spoke to real house hackers to learn the best tactics — and how to avoid the most common mistakes.
How to find the right investment property
When buying your first investment property, it’s critical to run the numbers. Carson says to start with some basic math. The “1% or 2% rule” says monthly rent should be more than or equal to 1 – 2% of your property’s total purchase price.
For example, if you buy a rental property for $200,000, your monthly rent should be at least $2,000. Otherwise, it may not be the right investment. Of course, the 1 to 2% rule is only one of many ways to analyze your property’s potential.
You also need to plan for ongoing property maintenance. Some folks budget for 10% of monthly rent for repairs, but every home is different. “Go to local real estate meetups and ask the old timers how to estimate the average expenses and repairs in your area,” says Logan Allec, CPA, and owner of Money Done Right.
Good real estate agents may help you dodge common mistakes and pitfalls. By tapping someone with house hacking expertise, you’re less likely to buy the wrong place.
“House hacking is great for a multi-unit property like a duplex, triplex, or quadplex. You can also make it work with roommates in a single-family home,” says Diego Corzo, a realtor and owner of House Hacking Club in Austin, Texas. To check your property’s income potential, look at similar rentals nearby. You can browse listings on Craigslist or ask your real estate agent for guidance.
Corzo says it may be faster to rent a newer or remodeled home, so if your investment property needs work, factor those repairs and vacancy time into your total cost.
How to look for the right mortgage
The next step is figuring out what you can afford and how to finance it. Looking for a mortgage is tricky enough, and house hacking adds a layer of complexity.
Allec hacked a quadplex in his 20s with an FHA loan. To qualify, you need to cover at least 75% of the mortgage payment with rent from the units. He says this is another decent rule of thumb to analyze a property, but it’s no substitute for running a more in-depth analysis.
Corzo agrees with seeking mortgages with low down payment requirements. FHA, VA, or 3-5% conventional loans may fit the bill. “You can qualify for another owner-occupied loan every 1-2 years. Be sure to take advantage of it,” he suggests. These loans are attractive because they require a smaller down payment than a more traditional investment property.
Regardless of which loan you choose, it’s always important to understand the risks. Failing to pay your mortgage could result in foreclosure, which will sabotage your credit history for years to come.
How to deal with tenants
Living with your tenants is another challenge of house hacking. Carson says buying a good property and making it nice attracts the best renters. It should be an equal exchange of value. From there, communication is key. “If you treat people fairly and communicate clearly, the landlord-tenant relationship can be very pleasant and rewarding,” he says.
Putting everything in writing may prevent future issues, too. Corzo says it’s essential to have a lease for every single tenant. He says living with friends without a lease or house rules is one of the biggest mistakes he sees. Always run a background and credit check. Ask for a security deposit. “If they can’t pay a security deposit, they can’t afford your place,” he adds.
Allec agrees with being firm on the ground rules. It’s important to show you are in control — especially when you are younger than your tenants. “Stand your ground and don’t let them push you around,” he says.
Is house hacking right for you?
If real estate investing captures your interest, house hacking may be worth considering, but it’s not something to jump into on a whim. “As great as a house hack or rental property can be, it’s easier to get into than get out of,” Carson warns.
Still, house hacking offers plenty of upside potential for the right person. Allec recommends trying it while you are young, single, and don’t have children. It could be a unique opportunity to build wealth — or even reach financial freedom.