What Is House Hacking? (Beginner Real Estate Investing Strategy)
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Many people hesitate to invest in real estate because they’re either afraid of making a 20% down payment or they simply can’t afford to. Today, I’m going to explain a real estate investing technique called house hacking that can absolutely change the way in which you invest in real estate without you having to put 20% down. This strategy can help you to start investing in real estate with significantly less money. Some of the best known real estate investors got started in this strategy. Without further ado, let’s dive in. [Music] What is house hacking? House hacking is a strategy where you buy a house, live in a part of it, and rent out the other parts to cover your mortgage, or even make a profit. For example, you might buy a duplex, live in one unit, and rent out the other. So, let’s talk about the pros and cons of using this strategy. Smaller down payments. One of the most important pros of house hacking is that you don’t need to put 20% down in order to buy a rental property. Why? This is because lenders often will let you put significantly less money down if you’re going to live in the property. For example, if you get an FHA loan, you might only have to put down as little as $3.5% to buy the property. To help you understand how significant this is, let’s look at an example. Let’s say that you’re interested in buying a multif family property that’s going to cost you $400,000. If you did not do house hacking, then lenders would most likely require you to put 20% down, which would translate to $80,000. However, if you did do house hacking and if you got an FHA loan, then you could buy the property with just 3.5% down or $14,000. This means that in this case, using the house hacking method could allow for you to acquire the multif family property and keep $66,000 of money that you would have had to give over to the banks in your pocket. This is a huge difference and it makes the process of acquiring your rental property significantly easier and it reduces your housing costs. By renting out parts of your home such as basement, apartments or units in a duplex or triplex, the rent you collect from your tenants can cover most if not all of your mortgage payments or property taxes or the insurance and utility bills. This allows you to live very comfortably, sometimes for free. And this frees up your income for savings so you can make more investments or other financial goals that you have. Beyond lowering your housing costs, house hacking lets you step into real estate investing with less risk. As you’re living in the property and learning how to manage tenants firsthand over time, as your property grows in value and your mortgage gets paid down, you’re building equity and creating a strong financial foundation, all while keeping your living expenses as low as possible. Let’s talk about some of the tax benefits. House hacking comes with valuable tax benefits that can save you money and boost your financial gains. When you live in the property and you rent out the rest, you may be able to deduct a portion of expenses like mortgage interest, property taxes, insurance, utilities, maintenance costs, and based on the percentage of the home used for rental purposes, even depreciation. For example, if you rent out half of the duplex, you might be able to deduct half of these costs I just mentioned, including depreciation. Additionally, you claim depreciation on the rental portion of the property, which lowers your taxable income without affecting your cash flow. If you make repairs or improvements to the rental areas, these costs may also be deductible as business expenses. These tax breaks can significantly reduce your tax bill, making house hacking not only a great way to live affordably, but also a smart strategy if you’re building your wealth. Always, always, always consult a tax professional to ensure you follow local tax laws and that you’re maximizing your benefits correctly. Now, let’s talk about the cons of house hacking. Lack of privacy. I mean, let’s face it, sharing a building with tenants isn’t for everybody. Also, some people might find it awkward to live right next to the people who are paying them rent. If any disputes come up about the rent or the property, then it can be a little extra stressful because you will have to see those tenants on a regular basis, if not every single day. What about the landlord responsibilities? You’re a landlord now. And as a landlord, you will be responsible for fixing things like broken sinks and toilets, water leaks, all the things that come with being a property owner. You will also be responsible for collecting the rents, finding tenants, advertising the property, and a lot more. When you’re a landlord, you automatically assume a certain amount of responsibility. It’s just how it goes. This is the price you pay to access the rental income and tax benefits you want. So, for many people, these responsibilities are well worth it. However, for some people, they aren’t. Choose your camp. You must live in the property for a period of time. Now, in order to access the low down payments, most lenders require that you live in the property for a specific period of time. However, usually this period is just one year. This can be an inconvenience if you want to live somewhere else or perhaps you want to move out of the area. But for most people who are serious about house hacking, 1 year is not that bad. Then once you move out, you can get a tenant to occupy the unit that you were living in. This can increase your rental income substantially. So, how do you actually get started with performing house hacking? If house hacking sounds appealing to you and if you want to get started, then you’re going to need to know the steps to get started. Step number one, you’re going to have to get pre-approved for a mortgage. So, you’re going to secure your preapproval from a lender to understand your purchasing power and strengthen your offer. Focus on owner occupied loans like FHA loans that allow the 3 and 12% down for 1 to four unit properties or conventional loans that support house hacking by requiring you to live in the property for at least one year. If you provide documentation when you’re going through this process, like your pay stubs, your tax returns, and your bank statements to the lender, then your pre-approval should happen a lot faster. Pre-approval signals to sellers that you’re a serious buyer, and it helps you narrow down properties within your budget. Compare lenders also to find favorable terms as the loan will be the foundation of your house hacking strategy. Step number two, it’s time to choose the right property. We’re going to select a property that suits house hacking, such as a duplex, a triplex, a forplex, or a single family home for extra rooms. But you want to look for properties in areas with strong rental demand, good school districts, and amenities to attract tenants. Make sure the property’s layout allows for privacy between your living room space and the rental units. For example, a duplex with separate entrances is amazing. Use online tools like Zillow, Redfin to analyze rental rates and property prices. Work with a real estate agent familiar with investment properties to find a home that balances your living needs with also providing rental income potential. Step number three is to buy the property. Once you’ve identified the right property for house hacking, it’s time to buy it. So, submit a competitive offer based on your pre-approval and market research. Work with your real estate agent to negotiate terms. For example, a duplex in a high demanding rental area could be ideal for living in one unit and renting out the other. So, we should conduct a thorough inspection to uncover any issues and ensure the property meets the lending requirements for owner occupied loans. Also, finalize your mortgage, complete the closing process, prepare to move in while setting up the rental portion to generate income, and bring your house hacking plan to life. Step number four is move in and rent the property. After purchasing your property, move into your designated living space and prepare the rental property for tenants to start house hacking. Set up the rental, whether it’s a separate apartment in a duplex or extra room in a single family home, ensuring they’re clean, functional, and compliant with local housing codes. Also, advertise the rental on platforms like Zillow or Airbnb. Make sure you set up a competitive price based on local market rates. Screen tenants carefully, verify their credit, verify their income, and try to get some references or use a property management service if it’s more convenient for you. Once the property is leased, now it’s time to collect rents to offset your mortgage and turn your home into a wealth buildinging tool that it was meant to be. Let’s go over one more house hacking example so you can see how powerful this is. Let’s say that you buy a triplex for $300,000 with a $15,000 down payment. Your monthly mortgage payment is $1,700 and taxes, insurance, and maintenance adds another $400, making your total housing cost $2,100. By living in one unit and renting out the other two, you can cover most of this expense. You rent each of the two units for $900, earning $1,800 monthly. This lowers your out-of- pocket cost to $300. $2,100US $1,800. Compared to paying $900 to rent a similar unit, you save $600 monthly or $7,200 yearly. And while building equity later, if you raise rent to $950 per unit, you earn $1,900, reducing your cost to $200. If you move out and rent your unit for $900, you’d collect $2,700 monthly, which will cover all of your cost and give you an additional $600 in profit. Cha-ching. Local market research is essential for this type of success. So, what’s the bottom line that I’m trying to nail here with house hacking? The bottom line with house hacking is that it’s an amazing way for people who are new to real estate investing to get their feet wet. It lowers the barrier to entry. It makes it so much easier for people to have the money to afford to buy a property as opposed to putting 20 to 25% down to get into investment real estate. That’s why house hacking is so popular. Then down the line when you have more money, you can switch to alternative investing methods. Now, before we wrap up this video, I want to give a quick reminder that the taxfree wealth challenge is just around the corner. This is an exclusive digital tax event specifically for high-income earners. I’ll be sharing powerful tax strategies that can help you cut your tax bill by 50 to 100%. So, if you’re a business owner earning over $300,000 a year or W2 earning over $300,000 a year, this challenge is for you. I’ll be walking you through the exact strategies used by some of the wealthiest families in the country to save a fortune in taxes. So, if you’re interested, click the link below in the description to reserve a spot. And that’s it for today. As always, don’t forget to like, comment, subscribe. You know what it is. I look forward to seeing you on the next video. Cheers.Welcome to Big Money Investing – Your Ultimate Destination for In The Money Facts!
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