One of the ways people can make wealth over time is by buying a home. However, house hacking is a popular but often overlooked method of increasing money through real estate.

House hacking is a good way to learn the ins and outs of being a landlord while gradually entering the real estate industry with a property that people already own.

In this blog, we will deeply discuss 5 strategies to be successful in house hacking!

What does it mean to house hack?

A real estate investing method called “house hacking” involves buying a home and renting out a portion.

The generated rental revenue can reduce the mortgage balance and increase the property’s value. The owner can carry out a cash-out refinance when the timing is perfect to convert the built-up equity in the home into cash and utilize the money as a down payment for buying another rental property.

Another house-hacking strategy real estate speculators use is purchasing a modest multifamily building. In a multifamily building, house hacking occurs when the investor or borrower resides in one portion while renting the others out.

The benefits of house hacking

House hacking might be useful for those wishing to invest in real estate. Financing a primary home is often less expensive than funding an investment property, with fewer down payments and lower interest rates.

Because the renter lives down the hall or directly next door, house hacking can also be a good method to get used to becoming a landlord. Any development challenges can be addressed immediately, and many new investors learn to establish a solid foundation for someday becoming full-time real estate investors.

How to successfully house hack a property

Whether you are house hacking a single-family home or a small multifamily property, the process will be the same. Follow these five general steps:

1. Understand financing options

Conventional, FHA, and VA loans are three popular methods of financing a primary residence through a bank or credit union.

Interest rates are frequently competitive, especially for borrowers with poor credit, and down payments may be as little as 5%. Veteran borrowers can even get 100% financing on a property through VA loans backed by the Department of Veterans Affairs.

Borrowers should, according to the Consumer Financial Protection Bureau (CFPB), before searching for a mortgage:

• Examine their credit report.
• Examine how their spending patterns will alter as a result of a mortgage.
• Plan for unexpected or changing expenses.
• Determine the amount of down payment required.
• Choose a home’s buying price.
• Make a loan application packet with personal and financial information such as pay stubs, W-2 forms, copies of recent tax returns, bank statements, and identification.

2. Search for a good property to house hack.

A viable candidate for house hacking may have qualities that differ slightly from a home that the owner will reside in year after year.

As their portfolio grows, most house hackers convert their principal dwelling into a rental property. Choosing a home that will be an excellent renter straight away makes sense.

Here are the common factors that real estate investors should keep in mind while choosing a good rental property:

• The neighbors directly influence the type of tenants and the rent they can afford.
• Property tax rates vary greatly from place to place and can substantially impact the total return of a rental home.
• The quality of the school system, the crime rate, and the neighborhood ratings all impact occupancy levels and the home’s total value.
• The job market and population growth are two factors that real estate investors use to forecast future tenant demand for rental properties.
• Other indicators investors use to forecast rental property demand include the Housing Price Index (HPI) and the Housing Affordability Index (HAI). When housing costs become exorbitant, more people may rent rather than buy.
• Average rents and growth influence where to buy a home-to-house hack because rental money will cover a portion of the mortgage and other expenses.
• The quantity of rental home listings and vacancies in the area also reveals the strong or weak demand for rental property, as high vacancy rates may result in lower rentals and worse investment returns.

3. Study the Numbers before making an offer.

Before offering a home-to-house hack, investors study the math to comprehend prospective profits better.

Even if a house-hacked home isn’t wholly in use as a rental, investors typically look forward to the day when the property may be refinanced. The equity was converted into cash for another rental property to use as a down payment.

A spreadsheet makes it simple to see the prospective financial performance of a certain property. It can be used to forecast a property’s probable return. Add some information to see important ROI measures such as cash flow, cash-on-cash return, net operating income, and cap rate.

4. Close escrow, move in, and make repairs.

In addition to the down payment, closing expenses on a primary house typically range between 3% and 5% of the loan amount. Origination charges, appraisal fees, home inspection, title search, lender insurance, prepaid (such as homeowner’s insurance and prepaid interest), and title insurance are all fees for closing escrow on a home.

After obtaining the title and moving in, the owner must prepare the rented property for a renter.

Whether you only rent a bedroom in the home, you should transform a basement or attic into a studio apartment or upgrade extra units in a multifamily property according to the required repairs.

5. Find a good tenant.

To prevent breaching the law or discriminating against a renter, first-time house hackers and landlords should learn state landlord-tenant legislation and the Fair Housing Act.

When the space is ready to rent, the following are the main processes investors use to screen tenants:

• Establish minimum tenant requirements, such as credit score or income-to-rent ratio.
• Pre-screen tenants by discussing monthly rent, security deposit, rental application cost, and background checks with them in advance.
• Gather and analyze prospective tenants’ applications, obtain authorization to run a credit report, do a background check, and contact current and prior employers and landlords to verify tenant information.
• Select the ideal renter and sign a lease agreement.

Wrapping up

House hacking might be an excellent way to start real estate investing without making a large down payment on a rental property. House hacking can transform an existing home into a rental property by renting out an extra bedroom or units in a multifamily property.t

If you need more insights about real estate investment and help make the right decision, TBC Real Estate Investment and Construction Agency is here to clarify things!