The house hacking strategy in 7 steps
Would you like to enjoy the benefits of house hacking? Here are the steps that you need to follow in order to implement this strategy in your own life.
1. Choose the type of opportunity
House hacking comes in all shapes and sizes – there is no one-size-fits-all approach. It allows you to choose the opportunity that best suits your lifestyle and goals.
- Single family houses: A single family home is an easy place to start hacking homes. You can rent out additional rooms for income. Typically, this option requires you to share common areas such as the kitchen or living room with your tenants.
- Multi-family houses: Apartment buildings comprise multiple units within the same property. For example, a duplex or triplex would qualify as an apartment building. With this option, you don’t have to share interior spaces with tenants. However, an apartment building can be more expensive to purchase than a single family home.
- Replacement rooms or finished basements: A guest room or a finished basement is the perfect space to rent out to tenants. If you have space available in a property, consider whether this is a potential source of income.
- Additional residential units (ADUs): A ADU is a separate building on your property that could be rented out to tenants. The extra privacy that an ADU offers provides an option for house hackers who don’t want to share common spaces with their tenants.
- Apartment: Depending on the area, Conversion of your houses into a short-term rental via Airbnb or Vrbo can be a lucrative opportunity. Although there is more work involved with the higher turnover rate, it might be worth the reward.
2. Conduct market research
Before you venture into your home and assume that you can cover your entire mortgage, take the time to do some market research. You should look at property values in the area, consider how much you can expect from renting space to tenants, and estimate the size of the mortgage that you can realistically afford.
It is important to be realistic about your mortgage expectations. Remember, house hacking is a great option. However, there will likely be months of vacancy, which means you will have to collect the entire mortgage payment. Do not overwhelm yourself.
Take a look at our guide to The best cities for real estate investment to begin your research.
3. Do the math
The math behind house hacking can be a powerful way to transform your financial future. Here are some of the numbers to keep in mind while exploring a potential house hack:
- Net Operating Income (NOI): Net operating income can help you calculate the potential return on investment in real estate. Essentially, you are simply subtracting all general property maintenance costs from any income generated by the property. As a home hacker, you can use this to understand the profitability of a potential deal.
- Upper limit: The Cap rate, also known as the capitalization interest rate, puts the profitability of a property in the context of the purchase price. This allows you to weigh the potential income you can get from a property against the up-front costs of buying the property. When considering your hacking options, a higher cap rate reflects higher risk associated with higher rewards.
- Cash in circulation: The cash flow of a property can be determined by subtracting your monthly housing costs from the income generated. As a house hacker, the goal is to lower your monthly housing costs. In some cases, you may be able to break even or even get positive cash flow. But in other cases, you may be content with negative cash flow that still allows you to lower your housing costs.
- The 1% rule: The 1% rule is a common way of looking at real estate investment deals. Basically, you want the monthly rent to be at least 1% of the purchase price. If you are a house hacker, you can use this calculation to take into account the market rental price of your unit to see if the property meets the 1% rule.
- Estimated Monthly Mortgage Payments: A monthly mortgage payment is an inevitable expense for a homebuyer without the capital to buy a home for cash. Hence, it is important to understand the cost of your mortgage before diving into the business. Although it can be difficult to calculate an accurate monthly mortgage payment in advance, ours can Mortgage calculator to get the best estimate possible. As a home hacker, you should know this number in advance to see how much you can expect in monthly housing costs.
4th Shop financing options
One of the biggest misconceptions about investing in real estate is that people assume that the down payment is similar to that when buying a home.
However, if you’re buying an investment property that you don’t want to live in, most lenders require a minimum of 20-25% down payment. By purchasing a primary residence and renting a room / other unit, you gain access to credit options that may otherwise not be available. This will give you access to credit options that are not available to most investors.
For example, you can rent your home through Airbnb or some other short-term rental. You must submit your most recent tax return including Appendix E. You will also need a host report for the past year. With a HomeReady® Lending company Fannie Mae can also use income from a long-term limit that also lives in your primary residence for qualification.
When considering your financing options, take the time to find the best deal.
5. Be aware of your limitations
Home hacking presents an opportunity for home buyers. However, there are some limitations associated with this strategy. Not everyone FLOWER or the local community is kind to host hackers. A HOA or municipality could limit your ability to rent rooms to tenants.
In addition, some housing markets have low demand. This can make it difficult to find tenants. As you explore house hacking as a strategy for your life, consider the barriers that may exist in your unique situation.
6th Renovate and repair
When closing a property, it is important to renovate and repair the spaces that you plan to rent out. Although you will be perfectly happy with an outdated space, the best renters will be looking for a better space.
If you take the time to create a welcoming space for future renters, you can own yours Return on investment.
7th Find and check tenants
The success of your home hacking strategy depends on the tenants you find. With no tenants paying rent, you are just a normal homeowner. But not every tenant will. Many new house hackers are rushing to fill the apartment with a tenant who is applying. But that can lead to disaster down the line.
It is important to Screen tenant before they move in with you. The screening process can be as extensive as you want it to be. However, it is important that you do some sort of screening to work with tenants that will suit your space well. Some common steps include hiring an agency to do background checks, doing a credit check, and verifying a potential renter’s income. Once you’ve found a tenant to pass your screen, it’s time to draw up an official lease agreement. Make sure that the rental agreement is signed before the tenants move into your premises.
While finding good tenants is the key to success for most real estate investors, it is essentially important for home hackers. The tenants you want to work with share the same property as you. With this, you want to make sure you find a good fit beforehand to save yourself headaches down the line.