When you think of successful real estate investors, the thought of multi-millionaires sitting on yachts probably crosses your mind. While those people do exist, many more people are living rent-free thanks to house hacking!
These landlords typically occupy one of the rooms in their house or units in their multifamily property and rent out the rest. The tenants pay rent, and the real estate investor lives for free! In many cases, the owner can generate cash flow to save up for their next investment.
How Does House Hacking Work?
Buying a house hack is much like buying a regular investment property. You research listings, compare mortgage options, check for cash flow, and then close the deal. In the best-case scenario, you find a duplex or triplex that, when rented out, will cover your mortgage and expenses. In the worst-case scenario, you live for a substantially lower rate than you would if you simply rented the place.
However, multifamily properties aren’t the only way to live for free. You can rent out rooms in your house, an in-law suite, or even a converted garage. Moreover, some people don’t like the idea of sharing their home with full-time tenants. In this case, they might use a service like Airbnb to generate income with less stress!
Perks of House Hacking
This idea sure sounds great, right? But don’t investors need a 20% down payment? Not in this case! And there are some other benefits of house hacking that we’ll outline below.
Great financing options: Since the home is owner-occupied, most people qualify for low down payment mortgages with low interest rates. With just 3% and some reserves to get started, you can quickly close on a house and start renting it out! Even better, if you move out after 3 years, you can avoid capital gains taxes should you sell the property.
Build landlord experience: Being responsible for a property and managing tenants for the first time is daunting. With a traditional rental, you never know what is happening inside and can only inspect the property so often. By renting out an owner-occupied building, you can interact with your tenants frequently and become comfortable with the duties of a landlord.
Flexible lifestyle: Since you are not the only person responsible for the mortgage, you don’t have to feel compelled to stay in your home. You can take time off to travel, look for a new job, or move to another area. Simply rent out your room or unit, and the property should pay for itself. At this stage, you’ll have to decide if you want to be a landlord or hire a property manager.
Save and grow: Housing is the largest expense for almost everyone. Luckily, you can eliminate or reduce this cost and put the money into other investments. Within just a few months, you’ll be amazed at how easy it is to save for your next down payment or dream vacation. Once you start acquiring more properties through this method, you’ll truly see the snowball effect as you generate cash flow.
Drawbacks to Consider
Is house hacking worth it? From the looks of things so far, it sure seems that way. However, let’s go over some other factors to consider before finalizing your purchase.
Duties and demands: You will be the landlord. Be prepared to handle responsibilities to keep your tenants safe and happy. That might include settling disputes, conducting repairs, or ensuring that the grass is cut. While this may sound bad, just remember that it is the price of living for free.
Shared living space: For some house hackers, you will have to share the kitchen, bathroom, laundry facilities, etc. These areas can become dirty or damaged quite quickly. Be sure to place a list of rules and expectations in these rooms and review them with tenants to avoid problems.
Vacancy expenses: You cannot guarantee that your units will always be full, so it is a mistake to rely on this income to make a deal work. Calculate your expenses and add two months of vacancy into your figures to gauge your annual revenue projections. Make sure you buy a property that you can afford when no one else is living there. This way, you won’t feel pressured to rent to risky tenants or put yourself in a bad financial place.
Get the Most from Your House Hack
To maximize your profitability, you need to plan ahead and treat this property as a business. Research laws and codes in your area to ensure you’re up to par. Work with a Realtor or experienced investor to help you find a profitable deal. Make sure that property cash flows like a standard rental because you will likely move out after some time.
For managing tenants and working with vendors, visit Burbz. We offer a la carte property management software that will help streamline your process. With Burbz, you can collect rent, draw up leases, coordinate maintenance, and carry out many other functions that are crucial for being a successful landlord.