What is House Hacking?
We’ve all heard about thousands of “life hacks” on the internet, such as marking the end of a tape roll with a paperclip, but have you ever heard of house hacking? House hacking is much more than a mundane life hack and it is a great place to start for rookie investors. If done correctly, you could potentially live where ever you want for free! You can do this while also making the first move toward generating wealth through real estate as a brand-new investor.
House hacking is a beginner investment strategy that involves buying a home, and living in one room/unit while renting out the other rooms/units. Your tenants’ rental payments will pay off the monthly mortgage and utilities. When done correctly, you’ll essentially be living for free and building equity in the property while you do it!
A single-family property can be house hacked by renting out the other rooms to tenants, but you must choose who you live with wisely. If you are a college student, a single-family house hack would be a great idea if you can find the right deal. On the other hand, you have the ability to rent out your additional units when house hacking multifamily properties. These types of properties are present in all markets at different price points in the form of a duplex, triplex, or quadraplex.
Purchasing a single/multifamily property and living in one room/unit with the others rented out can allow you to live for free and possibly profit through cash flow! Cash flow is your net balance after collecting your tenants rental payments each month and . A steady income, fair credit score, and savings will enable you to purchase a home. House hacking allows you to begin your real estate investment journey at the same time.
Start Your Journey Early!
House hacking creates a great opportunity for a college student to begin their investing journey while gaining valuable experience. Many US colleges allow students to live off-campus which creates a demand for affordable housing opportunities nearby. A tenacious college student can locate an investment property around campus, whether this be from a service such as Northstate Equity or an agent, and co-sign with a family member on an FHA loan. You will gain the experience of learning how to underwrite a rental property deal analysis in order to gauge profitability. The house hack will be your primary residence and a group of 2-3 friends can be your tenants, depending on how many bedrooms the property has. As an added bonus, after living in the property for 2+ years you’ll be exempt from capital gains taxes when selling. Although, I personally recommend you continue renting the property to students.
Locating a deal built after 1970, with 3+ bedrooms, and inexpensive value-add opportunities will help create a profitable house hack. Value-add opportunities consist of updating appliances and cosmetics (paint and carpet). This will allow you to increase the appraisal value and equity of your home. All the while, it can be completed while living in the property as a student. You will also learn property management skills as you live in the rental-property with your college friends. If you have good friends, maybe they will even help you paint! Finally, never let your age hold you back from getting started in real estate. If you find a good deal the money will follow.
Why House Hack with a Small Multifamily Property?
After sourcing a worthy small multifamily deal, your tenants monthly rental payments can pay for all of the property expenses and even allow you to profit.
Example:
You buy a triplex in Alamance County, NC and live in one of the units. You rent the two other units out for $700 a month and earn $1,400 per month in rental income. Your loan, insurance, taxes, utilities and other various expenses add up to $1,200 per month. After that, just by living in your home you would be making $200 a month in cash flow! Even if you decide to move out, you have the option to rent out the third unit and produce more income.
What Does a Good House Hack Deal Look Like?
Your primary goal with this investment strategy, like many others, is finding a good deal on a property. House hack properties with great cash flow are hard to come by so this is a crucial first step. You must be diligent in locating a property with numbers that fit your criteria, so take your time. Your cash flow is your monthly profit from the house hack. This means the key is locating a single/multifamily deal that will accumulate good cash flow.
A quick trick to determine if a property will provide adequate cash flow is the 50 percent rule. The formula is as follows:
- Total income of the property divided in half. This is the monthly expenses.
- Now subtract your monthly loan payment. Your estimated monthly cash flow is all of the remaining money.
( Total income from the property / 2 ) = Monthly expenses
( Monthly expenses - Monthly loan payment ) = Estimated monthly cash flow
Example:
There is a triplex for sale at $150,000 and each unit could be rented out for $700 per month. If you rent out two units the total income of the property will be $1,400 per month. Divide the total monthly income in half to account for expenses and you have $700 per month to pay off the mortgage. Say you take out a loan and your balance is $100,000 (after a $50,000 down payment) and it costs you around $500 per month. Finally, this leaves you with $200 profit per month from your house hack. You are getting paid just for living in your house! Once you locate a good small multifamily property, determine all of the expenses in order to understand the exact costs.
Where Can I Find House Hack Deals?
A great place to start is joining the Northstate Equity Buyers List! Fill out this form and say you are interested in multifamily deals and then you’ll be added to the list! Expect to be notified about our active off-market deals around North Carolina.
Speak with our COO and Licensed Agent Samuel Culpepper at [email protected]. He can refer you to the right agents around North Carolina to help locate you a small multifamily or single family property to begin your real estate journey.
Use sites such as Zillow.com, Realtor.com, and Trulia.com. It’s great because you are able to refine the search to only multifamily properties. Begin understanding the price points and areas you may want to purchase in.
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