There is a lot of buzz out there on social media from influencers that coach their followers on how to make money in real estate. And some of it is really solid advice.
“House hacking” is buying a primary residence with little money down and renting out part of it. The goal is to cover the cost of your mortgage by renting out the other rooms or unit/s and using a loan product that requires as little as 5% down so that your out of pocket investment is as low as possible.
Please note, you’d need to live in the property as your primary residence for at least 1 year. And ideally you’d live there for 2 years + so that when you sell you are not subject to capital gains tax. Or, you live there for 2 years, purchase another primary residence with another low down payment loan, and the first property becomes an income property.
This is a fantastic idea, short term inconvenience (roommates or being a landlord) for significant long term gain. But there are a lot of moving parts.
First, let’s talk about how the financing works. If you buy a residential property with an ADU (accessory dwelling unit) or a multi family property, like a duplex, or triplex, you can use 75% of the forecasted income from renting these units out to qualify for the loan.
This means you don’t have to have a salary, or personal income, high enough to qualify for the entire purchase price. You can use that projected income to purchase a property that wouldn’t qualify for typically.
If you plan to purchase a single family or a condo and have roommates, you need to qualify for the entire purchase price with your current income.
But is house hacking right for you? That depends on your lifestyle and financial goals. Here are a few things to consider before diving in:
1. Are you comfortable sharing your living space with tenants? This is an important question to ask yourself before taking the plunge. House hacking requires you to live in close proximity to your tenants, which may not be suitable for everyone.
2. Can you handle the responsibilities of being a landlord? Renting out a portion of your home comes with responsibilities such as screening tenants, collecting rent, and handling maintenance issues. Make sure you're up for the challenge before jumping in.
3. Is your home suitable for house hacking? Not all homes are created equal when it comes to house hacking. Make sure your home has enough space to accommodate tenants and that it's legal to rent out a portion of your home in your area based on HOA, city and possibly county guidelines.
4. Are current market rental rates and demand high enough to cover enough of your monthly mortgage payment to be comfortable. In hot markets with low housing inventory for sale, sometimes that isn’t the case. And typically rents vary greatly neighborhood by neighborhood.
5. Do you have some savings or a backup plan should it take some time to find tenants for roommates?
If you've answered yes to the above questions, then house hacking might be the right choice for you. By reducing your monthly mortgage payments or generating additional income, you can get closer to your dream of owning a home without being house poor.
House hacking is a great way to start building wealth with real estate without carrying the entire financial burden. But before you jump in, make sure to consider the responsibilities that come with being a landlord and ensure that your home is suitable.
AND speak with an expert Lender and Realtor to be sure the monthly payment, cash out of pocket needed, and projected rent all pencil out. That’s us and we’d love to chat with you!
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