With my first investment property I accidentally ended up doing something that I would highly recommend to first time investors. It’s a simple tool that’s gaining momentum in the self starter real estate investment world (people like you and me who are beginning their real estate journey from scratch).
It’s called house hacking and it was one of the best methods I used to kick off my real estate investing.
House hacking is kind of a buzzword of the bootstrapping real estate investment world. I hadn’t heard of it until I accidentally found myself doing it. And I would really recommend you do it, too.
What is house hacking?
House hacking is living in your property while renting out other bedrooms to cover your mortgage. It’s basically offsetting your cost of living through roommates.
And it’s an amazing way to get into real estate investing.
Some of the pros from my experience were:
- Learning skills for how to be a better landlord
- Getting a taste for property management
- Covering my mortgage completely with rental income
But there’s definitely a way to do it efficiently. And there’s a few things to consider.
1. The joys of having roommates
Depending on who you are, having a roommate may not be the ideal situation for you. Roommates can feel like a burden when you don’t have respectful, communicative relationships with them.
There’s also the added dynamic of being a landlord and a roommate. This dynamic can be different than previous house sharing situations you may have experienced. You may find yourself taking the lead on household responsibilities or being the fall back person for different tasks and issues because you are both the owner of the property and a roommate to your tenants.
If living with people just isn’t your thing, I would think really hard about whether this is the right step for you.
But if you like living with people and don’t expect it to effect your day to day happiness, house hacking can have huge upsides. And not just the financial benefits of covering your mortgage. Living with roommates that you have a good relationship with can allow you to split up house maintenance tasks like lawn care or snow removal. I personally loved sharing dog sitting and pet care responsibilities with roommates.
2. Making sense of the finances
If house hacking may be the right step for you, understanding what your monthly mortgage payments will be as well as what your expected rental income will be is essential to creating a good strategy.
When you make an offer on a property and decide on a price, your lender will be able to give you a good sense of your monthly mortgage statement (including estimates for homeowners insurance, taxes, and potentially PMI – depending on your situation and where you live). Use this as a good estimate of what your monthly costs will be.
The next step is to understand how much rent you can charge for the other bedrooms in your home that you are panning to rent out. This is where you need to do your research. You can do this research by searching through Craiglist, Zillow, or another housing platform to understand what rentals in your neighborhood go for. You’ll want to understand what amenities your rental has (in unit laundry, square footage, yard space) in comparison to other properties in your neighborhood. This will give you a good sense of the rental potential of your other bedrooms. and about how much income you can expect to pull in from these sources.
Be conservative and realistic in your estimates here.
If you think you can rent a bedroom for $750, do your financial planning based on $700. Planning for the worst case scenario will give you flexibility and greater confidence in your next step.
3. Long term options
If you think that living with roommates that help cover your mortgage is a good option for you, you should also be thinking about what your long term goals and strategy are for the property.
Thinking about your long term strategy will help you make a strategic investment now that will pay off in the long run.
If, for example, there was a pandemic or something that made renting out a property more challenging than normal, could you cover your mortgage independent of renters? How much flexibility do you have baked into your finances to decrease rent if the price you think you can charge isn’t unrealistic?
You also have to think about an exit strategy. Do you want to house hack for longer than a year? For the next 5 years? For some people, having roommates isn’t a long term solution. So would you be able to financially make the property work without roommates? Would the property be easy to rent to another group after you move out?
This is where you need to be thoughtful about the size and layout of your property. In some housing markets, renters are used to sharing one bathroom among a few renters. Or maybe having a back yard, or air conditioning, or a garage isn’t common in your market. But for some neighborhoods and real estate markets, there might be some essential things your property will need to rent easily and for the price you want. So do your research on the amenities, layout, and bedroom/bathroom ratio for your market so you can understand what a competitive property would look like. You can do this research on the housing search platforms discussed in step 2.
For example, I knew that reasonably priced 2 bedrooms are really desirable in my market. Couples or single people who want the option of a home office really like this set up. I also live in a city where dog-friendliness is key to renters. So I prioritize 2 bed/1 bath investments with fenced in yards. I’ve found it’s a good niche for me and rents out quickly and for a good price.
House hacking can be a really achievable way to get into real estate investing. I know some investors move from investment property to investment property living in one room while renting out others.
Why do some investors opt for this?
Because they can buy the property with a conventional mortgage instead of an investment property mortgage. This usually secures lower rates. There’s more to this topic, but for now, this is a quick guide to house hacking as an entryway to real estate investing.