Picture this: you already have a lot of money and you want to make more. So you look all over town for the perfect real estate investment. You find it, buy it, and then you have several options: renovate and flip it, make it a rental property, or furnish it and turn it into a short-term rental.
But what if you don’t have investment capital? Is real estate hopelessly out of reach for you? Not necessarily. If you’re a homeowner or a homebuyer with living space to spare, then there’s a strategy you can use right now to start making passive income without buying a rental property. It’s called house hacking, and if you’re willing to share your house, it can be a lucrative way to establish a passive income stream.
What is house hacking?
House hacking is a real estate investing strategy that involves renting your primary residence’s extra living space like you would rent a single-family residence or a multiplex. The only difference is that you’ll be living in the house with your tenant. Initially, this idea might not seem appealing, but there are a few key benefits to consider before you rule it out.
First, just because you’re sharing your house, that doesn’t mean you have to share your living space. There may be some low-cost renovations you can do to create separate entrances to the house. Secondly, just because you’re renting, that doesn’t mean you have to rent to a stranger. If you have a friend who needs a place to live, you can rent a portion of your house to them.
House hacking is also a great strategy to consider because it can help cover your mortgage payment, property taxes, and other housing expenses. If you price the rent the right way, you can even establish a monthly cash flow and give yourself some degree of financial freedom! Of course, house hacking may not cover all your living expenses, but it can greatly reduce them, making home ownership more affordable.
For example, if the interest rate increases that defined 2022 have made home ownership too expensive, house hacking can reduce the barrier to entry or even remove it. By helping you pay a significant amount of your monthly mortgage payments, house hacking may make home ownership a real possibility.
Buying a property for house hacking
If house hacking seems like a great way to start investing in real estate but you’re not a homeowner yet, then you’re in luck. You actually have more options than existing homeowners. As we’ve discussed, house hacking can turn home ownership from a nice thought into a distinct possibility by making it more affordable. As an added bonus, knowing that you want to house hack before buying also gives you the chance to choose the perfect property.
If you already own a home and want to house hack without giving up your privacy, you’ll likely need to make renovations. This usually isn’t too expensive or time-consuming, but it does add an extra layer of work that you’ll need to tackle before you can start making money. But if you’re not yet a homeowner, you can focus on finding a house that you can easily prepare for a multi-family situation. This means that you’ll look for homes with multiple entrances and natural barriers that you can close or seal off to separate parts of the house.
For example, you might look for a house that has a basement with an exterior entrance. Then you can separate the upstairs and the basement with a lockable door to create separate living spaces. You may also look for a property with a loft that you can separate from the rest of the house with a door.
If you get creative, the possibilities are endless. Creativity is also a great skill to build for other real estate endeavors. Real estate investing relies on resourcefulness, problem solving, and spatial analysis, so figuring out how to house hack is a great way to get hands-on experience.
Financing your house hack
If you don’t own a home and you don’t have the money to buy one, you might think house hacking is another real estate strategy for people who already have money. But there are several options that will allow you to buy a house even if you can’t afford to put 20 percent down.
The first option is a government-backed housing program loan. There are several to choose from, but the most popular are VA, USDA, and FHA. A VA loan is only available to military personnel, veterans, and their spouses. It lets these individuals buy a home with no money down and no mortgage insurance.
A USDA loan is for people buying property in rural areas, and it doesn’t require a down payment. It’s also fairly lenient; in most areas of the country, you can qualify for a loan if your household income is less than $91,000 per year.
Finally, an FHA loan is designed for first-time and low income home buyers. It doesn’t require a down payment, but it will require private mortgage insurance, aka PMI, until you’ve paid back a certain percentage of the principal.
If your credit score is low or you don’t want to borrow from a lending institution, there are several creative financing options you can use to buy a property. The most common is seller financing. In this scenario, the seller acts as the lending institution and holds the house as collateral for their loan to you. Instead of paying a bank every month, you pay the seller. However, if you default on the loan, the seller can repossess the house.
Another creative financing option you can use is a lease purchase option. In this scenario you’ll lease the house, meaning you won’t own it, but you’ll have the option to buy it later when you have more money. However, if you’re going to use this option as a house hacker, you need to read your lease agreement carefully to make sure it doesn’t prohibit you from making renovations or subleasing a portion of the property.
House hacking isn’t the traditional way to buy an investment property. However, it’s a great option for aspiring real estate investors who need a low-cost way to get started. Since you’ll be living in the property, there are multiple ways to secure financing and the rental income you make will most likely cover your housing expenses, including the PMI that comes with some government-backed loans.
House hacking doesn’t even have to be an uncomfortable experience. With a few renovations, you can create the perfect multifamily property out of your home. And if you haven’t bought yet, then house hacking is as simple as choosing a home that you can easily modify to accommodate another occupant.
You probably won’t want to live with your tenants long term, but the beauty of house hacking a single family home is that you don’t have to. If you’re willing to be patient, you can build equity and save money without paying a dime for housing. In a few years, you’ll be able to do a cash out refinance or use the money you’ve saved to make a down payment on a new property. Then you’ll have multiple living spaces that you can rent, meaning you’ll be well on your way to building a real estate portfolio.