Mastering House Hacking: Your Step-by-Step Proven Guide
Hi guys, I’m so excited to share with you a step-by-step process in modern house hacking. I will also explain to you why this process is a simple and low-cost or no-cost way to invest in your first house or your first investment property as long as you stay in the investment property. So let’s get right to it.
So basically house hacking is using your house to generate extra income or all of the income in that property. So house hacking is step number one. The first thing you need to do in any property that you buy, especially when you’re house hacking or want to house hack is to get pre-approved. This is very important because getting pre-approved property comes in in your territory or the area you’re looking at and if you’re ready to buy it then you already have an approval letter. But the other advantage of getting pre-approved, there are several. One is that the lender will tell you how much you can afford or what’s your capacity to buy a property. Whether you’re buying a house or a Duplex or a fourplex, you know the limit of how much you can buy. At the same time, you know how much your mortgage payments are or are going to be depending in your area and depending on the interest rate that you are getting at the time of your purchase because that makes a big difference. So once you are pre-approved, you know your limits of what you can purchase and how much down payment you’re going to need, then you are ready to buy. At least that’s step number one. Remember you are trying to buy this with no money down or as low as possible on your down payment. It’s part of your house hacking. Go in at a low down and have the cash flow or have a good positive return with its 10% to 20% cash on cash return. So let’s take an example. If you are looking for a $400,000 house I’m just giving a number, could be a Duplex or a triplex. And if you are a VA then you can get a 0% down. So obviously you have no money down payment to put down but you may have some closing costs. If you go with an FHA loan which is a government loan, you can go with as low as 3.5% down. So on a $400,000 purchase, let’s say, of a house, you only need $14,000 plus closing costs. But again, depending on your hyper-local market, some of the times you can negotiate with the seller to pay some of your closing costs or even some of your down payment. So you need $14,000 on a $400,000 house. Now, if you get a conventional loan and you don’t want to get the FHA loan because FHA loan, I won’t get into the details, but it does have an extra PMI or insurance payments, but it’s easier to qualify. But if you get a conventional loan, you can go as low as 5% down. So on a $400,000 purchase, you only need $20,000 down. So talking to a lender and getting pre-approved, you know all your numbers at the get-go and you are ready to go.
The second step in this process is deciding what kind of property you want to buy to house hack. So let’s start with your simple single-family residence or a condominium. If you are buying a condominium, let’s say two bedrooms and three bedrooms, and your goal or your intention is to stay in one of the rooms and rent out the other rooms, then you have the choice. If you’re single, it may not be too difficult to find your roommates or somebody who’s going to pay you. Usually, these are friends or relatives or people you know. It’s not a good idea to bring in strangers because you’re staying together. You’re going to be sharing the kitchen and possibly sharing bathrooms. If it’s a one-bathroom or two bathrooms, I would recommend at least two bathrooms. So you’re not sharing the bathrooms. But at any rate, you need to decide if you want to buy a house. If you’re married, your spouse may not be comfortable or may not like buying a house. In that case, your second option is to buy a Duplex. In a Duplex, there are two units so you can stay in one unit. And this is your private unit with your own bedrooms and bath. Whether it’s a one bedroom, one bath or two bedrooms and two bath. Could be a three bedroom and two bath. And then the other one could be, again, a one bedroom, one bath or two or three bedrooms. Whatever the scenario, you stay in one and rent out the other one. The third option is to get a triplex. Again, you’re going to stay in one and rent out the other two. And your fourth option is buying a fourplex or a quadruplex. In this, there are four units. So if you’re going to stay in one of these units and rent out the other units, that’s what you have to decide and we’ll talk about the rental income. So the way it works is you’re going to stay in one unit and you’re going to generate income from the other three units. They’ll pay rent and hopefully, the three rentals will be enough to pay your total mortgage payment. Similarly in your duplex and triplex. It’s not possible in the single-family home and the duplex where you’re going to break even. Most likely you’re going to have to pay the additional mortgage, but it’s still better than you paying the full mortgage. Let’s say your mortgage is $3,000 on a house and you are really stretching it. So you bought a house on the intention that you’re going to rent out one room or two rooms. Now you have $500 a month or $1,000 a month from that house to help you towards the $3,000 mortgage. So now you only have to come up with a $2,000 mortgage. So deciding on what type of home or units you want is your second step.
The third step, and it’s very important, not just because I’m a Realtor saying that, but your third step in finding your property for house hacking is work with a Realtor. The reason I say that number one, statistically, according to NAR (National Association of Realtors), almost 92% of all the properties sold, are sold to real estate agents or Realtors. So there’s a reason why they do that. And the reason you want to work with them is, number one, they know the numbers. So you want to work with a Realtor who has sold units or income property. Some of them don’t sell income properties. So find a Realtor in your local area and if you don’t have one direct message me and I’ll find you a local lender or a local Realtor who knows income property, who knows the numbers, who knows how to calculate income return. So finding a Realtor that knows income properties, knows the areas, knows how to negotiate, has vendors for the inspection and the appraisals and the molds and all that. And the best reason is they will do all the work for you. They don’t get paid until you buy the property. And it does not cost you a penny to work with a buyer’s agent. So I highly recommend you work with a Realtor to find you a great property in a great area, possibly with a cash flow or at least you break even.
And the fourth step is, once you’re approved, you know the area, and assuming you have a Realtor, start shopping. Now, shopping for a house hacking deal versus just a house is a little bit different. The reason is when you want to buy a house, let’s say I’m looking for a house to stay in, of course, I’m going to look for the areas and I’m going to look for the yard or the open floor plan, or where the bedrooms are located, or if it has upgrades or certain features. If your intention is to rent out something, then your scenarios and your expectation may change. For example, if you’re looking for a house where you’re going to stay versus you’re going to stay and rent it out. You may want to find a house that has two bedrooms or two and a half bathrooms. Or you may want to find a house which has extra parking or extra yard so that the tenants have their own car, maybe one or two cars where they can park. Or they might have an entrance, a separate entrance. You may want to find a house that has a separate door or entry, or you can add a door or entry so your scenarios change. Same thing with a duplex. When you want to buy a Duplex, you’re going to like something to stain, something that you can rent it out. Also, by the way, remember that if you’re buying units, when you buy the property, make sure that at least one of the units is vacant because you have to stay in the property for at least a year to be a primary residence. Or if they’re staying there, you want to make sure that at the close of escrow, one of the tenants is going to move out so you can move in into one of the units to make it your primary residence for this to work. Going to a triplex or a fourplex. When you are shopping, you may not want to shop like your house because now you’re in a fourplex. You’re probably in a rental area. You want to make sure that the fourplex has parking, at least for you as an owner and also for the tenants, there’s enough parking and things like that. So shopping for the house where you’re going to stay versus shopping for a house where you have potential tenants is a little bit different. And I’m sure you get the point. And again, the realtor that you work with will help you with those decisions.
And this brings us to step number five, which is once you start shopping, once you are ready, you want to start making offers. And of course, making an offer on a house is different. Sometimes you want a specific house with a certain open floor plan or a yard and things like that. So you may want to pay a little bit extra because you really like the house, or it’s near your mom’s house or it’s near the school’s house. But when it comes to a rental, in this case, owner rental, and a ten joining you in your house or in your unit, it becomes a little bit different. One of the things you need to take care of is when you make an offer, let’s say it’s four units, you want to make sure that you’re not overpaying for it because you have four units, your payment has gone up versus a house because it’s going to cost you more. And then you want to make sure that you at least break even with you staying in there. And let’s say it’s a four-unit and you pay one-fourth of the mortgage because the three other tenants are paying your mortgage, let’s say you get a $5,000 mortgage payment. So you want to make sure that one-fourth of the mortgage payment is paid by you and the other three-fourths is paid by the tenants. And it comes to $5,000 a month minimum, or even more, so you can have cash flow. So when you make an offer, you want to make sure that you make a strong, confident, sometimes lower-than-expected offer so you get the price so your numbers match, and you want to break even. But remember, this is April 2023. We call it modern hacking for a reason. The rates have gone up, the insurance has gone up. You have to buy earthquake insurance, maybe you have PMI insurance. The rates have gone up, so your payments are going to be higher. So the lower the price, the lower the payments. And you want to make sure that again, I keep stressing it, you want to at least break even. So you have to be aggressive in your offers. You may have to write three or four or five offers to get the offer that you want to be accepted because this is a hot market and there’s a shortage of inventory nationwide, hyper-locally, maybe you have a lot of inventory or you want to go to an area that has inventory. So when you write an offer, there are not multiple offers, but currently, overall there’s a shortage of homes. And some of the homes, even fourplexes, are selling at the asking price and some of them are selling over the asking price. The other thing you have to remember when it comes to the Duplex, Triplex, and Fourplex, is that when sellers sell these units, and typically they’ve had it for three years, four years, five years, up to ten years, they become attached to the tenants in the sense they like the tenants and they haven’t typically increased the rents. Rents typically have gone up in the last five, or six years on a national average of anywhere from three to percent per year. So if these tenants have been there, 90% of the landlords don’t increase them by three or 4% a year. They become attached, they become bonded, or they care for their tenants. They don’t want any hassle, they don’t want any complaints. So typically if somebody has a house or of units for ten years, typically it’s lower than what the current rents are. So what I’m trying to get at is when they sell the property, let’s say the average rent is $1,500 a month and there is four units. So your rent is $6,000 a month. They will ask you for the price based on the $6,000 a month rent and not the $5,000 a month rent that they’re getting because they’re not charging them full rent. So you have to take those things into factor again.
Here’s another reason why you want to work with a realtor. So the step was making strong offers. Step number six is similar to step number five is getting your offer accepted. As I mentioned to you earlier, you want to write an offer where your principal, your interest, your tax, and your insurance, all that is covered. Then you have utilities. Is your water in the unit a single meter, or is it one water? Then you have to pay for the water. You cannot charge tenants for water if there’s only one connection because there’s not equality in the distribution of the water bill or gas bill. So you want to make sure that you look at these things into consideration. So you want to make sure that all these little numbers, principal, interest, tax, insurance, any utility bills that you have to pay, or maintenance that you’re going to pay, all those numbers match and get your offer accepted. Of course, you want to do the due diligence as well. And the due diligence is, of course, you want to make sure that there’s no rent control in the city or the county. Rents that you can charge, are they already at the peak rent or is there room for you to increase the rent once you move in because your mortgage is newer? Have you done the appraisal? Is the bank going to give you the loan based on the appraisal? Have you done an inspection? You want to make sure that all the units are inspected. Sometimes tenants give a hard time getting in. Make sure that if you’re in escrow, once your offer is accepted and within the contingency period, you do a thorough inspection. Hire a professional inspector, get everything inspected, and if there are some issues, get it fixed. If the seller fixes it. Of course, as I mentioned earlier, this is a hot market. Seller may sell as is, they may not do any repairs. So be prepared going in if there’s any other repairs to be needed. Once you buy, are you going to be able to fix it? Are you okay with spending the $3,000, $5,000, up to 10 to 15, maybe more, to fix up the units? So it depends on the price. So getting your offer accepted is crucial because you want to make sure the numbers match. And also if you have a certain limit on your down payment or cash, make sure that when you move in, you have enough money to maybe potentially change the carpet or maybe the paint or air conditioning to be changed. So you have to take those into consideration. All those numbers are very important. Again, work with a realtor. They will help you with these things. They know what to expect. They’ve done it before, and they will guide you in the right direction.
And step number seven is now you are ready to move in. Now you may say, why am I talking about moving in? It’s so simple. Well, I wanted to mention a move-in because, again, if I was moving into a house, my own house, where I’m going to stay with my wife and kids or family, whatever, I may want to change the carpet and the paint to my taste, or change the appliances, change the colors. But if I’m buying a condo, a two-bedroom or three-bedroom condo, or a house that’s three bedrooms or four bathrooms, knowing that I’m going to rent those rooms out, you may want to consider not making all the upgrades, not making all the changes that you want to your taste. I may like pink colors or blue colors or purple colors in the rooms, but will your tenant like it? So once you move in before you change things, you have to think about, will the tenants that I’m going to bring, whether it’s your friend or your relative or somebody you don’t know, are they going to be okay with the upgrades that you’re going to make? Or if you tight on money as a house and you may not want to change the stuff that’s kind of dirty or not working. Now that you can have tenants, you may have to change it so it goes up or down, make improvements or don’t overdo it, or you don’t want to do improvements, but the tenants are coming in and the second bathroom is not working properly as you want it to. So you may have to upgrade the bathroom for the tenants. So moving in for the tenants’ minds is different than moving in as just my house. So a couple of things you have to worry about.
Which brings us to step number eight, the last step. And the last step is, of course, congratulations to you. You have stayed there for a year now. You moved in a year ago. Now it’s one year and legally it’s your primary residence because you stayed a year. And you can officially move out and buy another one if you want to. Maybe you have some extra cash and you want to repeat this process again, maybe buy another house or another duplex or a fourplex. You have some extra cash, or it might be three or four or five years, and now it’s time to repeat what you did. So you want to keep your units, buy another four units. Now you have eight units with a low, low down payment and with the cash flow and tenants helping you pay for it. So congratulations to you, by the way. If you do purchase something, please consult with your lender, your realtor, or your attorney or accountant. This is just some information because there are tax implications that may affect you.