If you are new to real estate investing, you’ve probably found that getting into the stock market isn’t as easy as the stock market, for example. There is no robinhood for rental properties and you can’t start with just $ 1. But there is one way to get your foot in the door – house hoes.
How does house hacking work for investors?
House hacking is an innovative way to overcome the two biggest hurdles facing new property investors:
- Most popular investment property mortgage products do not allow borrowers without prior experience as a landlord or property manager.
- Investing in tangible real estate (as opposed to REITs) requires a substantial down payment or a cash transaction.
If you are new to home rentals or a truckload of cash, home hacking can work for you. House hacking means using your own home for rental income and learning to be a landlord. You can change your current home or buy one that is meant for hacking.
Hack your home
There are several popular methods for generating income from your personal home. Determine which one works best for you by comparing the pros and cons, costs, and revenues of these options.
Buy a duplex, triplex, or fourplex
Many buyers begin their rental careers by buying a property with multiple units, living in one unit, and renting out the other. This is a great way to get into the rental market as a first-time investor. Not to mention that many investors can live in their unit for free as the rent from the tenants can cover the mortgage or the investor can repay their mortgage quickly.
- As long as you live in one of the units, you can get an owner-occupier mortgage in lieu of an investment property mortgage. When you buy as owner-occupier, you get cheaper financing, a lower down payment, and less restrictive underwriting.
- You can buy an apartment rental with a government funded home loan (usually these options are only available to borrowers who live in the houses). That means you only need 3.5% for an FHA loan, or zero if you are VA-eligible.
- You have access to tax breaks that normal homeowners don’t get. At tax time, you may be able to deduct maintenance, depreciation, repairs, property taxes, and utilities (check with a tax advisor before purchasing).
- Managing your rental units gives you a legitimate, low risk landlord experience.
What if you sell or move? You could convert the entire property into rental properties and buy a new primary residence. Or, run a 1031 tax-deferred exchange with a 1031 exchange company to buy additional investment property. Many real estate empires started out as small investments that grew over time.
Qualifying for a mortgage isn’t particularly difficult, even as a beginner. Banks, mortgage lenders, credit unions and other providers offer different conditions. Of course, good credit and a stable income make the process easier. Some programs allow you to use the rental income (or potential rental income) to qualify for the loan.
Convert unused rooms
Homeowners near colleges have been hacking their homes for decades. In some parts of the city, almost every house has been converted into a mini-apartment building that can accommodate students.
Garages and basements become additional units with separate entrances. Larger houses with many bedrooms can be split between owners and tenants. You may just need a locksmith to make these changes. Or you can go further and install apartment-style balconies, parking spaces, and outside stairs.
Finished basements can create great living spaces if you brighten them up with windows, fresh paint on the walls, and good lighting. You also need to add kitchen and bathroom fixtures to make it livable. With just a few thousand dollars, a basement, attic, bonus room or loft can be converted into a cash-generating rent.
You can fund these improvements with a personal loan, a home equity loan, a payout refinance, or even credit cards (for smaller jobs).
Buy or build an ADU
Guest houses, casitas and mother-in-law quarters are additional residential units (ADUs). These are legal, permitted apartments on your property. Make sure you comply with zoning laws and building codes. And if you’re buying a home that already has an ADU, make sure it is allowed. If the ADU is illegal or unauthorized, you likely can’t fund it or you may have problems with your local government in the future.
Recently, many communities have changed their zones to allow ADUs as a solution to housing shortages. ADUs can be bought or built. Many prefabricated house manufacturers can deliver and install a small unit in a matter of days or weeks. Or, find a reputable local contractor who specializes in smaller projects.
Park model houses and tiny houses
Tiny homes or parking model homes that do not exceed 400 square feet are not real estate. They usually have wheels rather than permanent foundations. These units are defined by law as personal property. In many communities, you can buy them like cars or sheds and park them on your property.
Some people even choose to live in their tiny houses and rent out their main houses. Others rent out their tiny houses. Tiny houses are very popular vacation rentals in vacation areas. You may be able to make more money on a cute Airbnb than renting an apartment with a long-term renter.
Tiny houses in quaint locations or tourist destinations work well for Airbnb or Vrbo. Just make sure your municipality or homeowners association allows non-owners to move into apartments. Many locations have banned short term rentals. So double check before investing in a small store.
You can finance a tiny home with a home equity loan or a payout refinance against your main home. Alternatively, you can finance tiny homes with personal loans or sometimes dealer finance. And when you move, you can take your little house with you because it’s your own personal property.
Good real estate agents are crucial
Buying a house specifically for hacking is more complicated than buying a typical house. When interviewing agents, let them know that you want a house to live in that you want to use for rental income as well. Ask this person for help finding the best single or multi-family homes to hack.
Tips for new landlords
If you want more rental income and fewer headaches, determine who your potential tenants are and what they want.
Will your tenants be older people looking for economic opportunity and a quiet environment? Vacationers looking for something sweet and comfortable? Commuters who want public transportation nearby? Students who want to walk to class and (of course) bars, restaurants and gyms? Local demographic information is widely available on sites like areavibes.com and can tell you who your renters are likely to be.
If you’ve never been a rental company before, there should be a lot more things to do than put up a sign and collect checks.
Before hacking your existing home, make sure you are allowed to have short or long term tenants. They need adequate parking spaces, secure entrances, rules for living together and must cover maintenance and repair work.
Carefully screen your tenants to avoid damage, crime, default, and litigation. Tenant screening services are inexpensive and most landlords pass their costs on to applicants anyway. When viewing properties, follow your local coronavirus guidelines.
Require satisfactory home inspections in the sales contract. Seasoned property managers may be fine to buy “as is,” but beginners shouldn’t risk getting a bad roof or faulty wiring.
Consider requesting tenant insurance from your tenants. It is true that landlords are usually not legally responsible if tenant property is stolen or damaged. However, that does not prevent tenants from filing such lawsuits. It’s just easier to get insurance, and policies are pretty cheap.
Finally, you can choose your level of involvement. Can you handle midnight maintenance calls, tenant disputes, or deadbeats? If not, consider hiring a property manager. You would pay between 10% and 35% for this service (long term rentals are cheaper, while vacation rentals have higher management fees). Still, professional management can remove much of the risk and deterioration that newbies face. And that can be priceless.