House Hacking to Build Real Estate Wealth

Owning your own home can help you achieve your goals if you want to build wealth. House hacking is when you rent out your home. You can rent out a spare bedroom, a part of your multi-unit property, or live with a roommate. How do you get started with house hacking?

Real estate investing can be intimidating for young people because of the 20–25% down payment required to get a loan. However, with house hacking, a tiny down payment can work. If you qualify for USDA or VA, you have a great advantage. You can get away with 0% down payment although their upfront fees are high.

Other options include a conventional mortgage and FHA loans. Not all houses are “hackable” in equal measures. When buying a multi-family home, ensure that it will still be able to meet cash flow needs should you decide to move. Having roommates so you can cut down on expenses is a great idea but having negative-cash flow will not help much. It is not financially impossible for most people, but it is socially impossible. You need to be flexible and trust people.

However, think of the financial benefits. You will save so much on the mortgage. Even people with families (including kids) can successfully house hack. House hacking requires money. Save up money while living in the house. When you move out you should be able to convert the property into a cash-flowing rental. Consider the following calculations before venturing into house hacking.

According to the 1% rule, the gross rent of a rental property should be equal to 1% of the value of each property every month. If a house is worth $200,000, the fair-market rent should not be less than $2,000 per month. With you living in the property, the 1% rule is not that significant. Evaluate the house as though you are renting it all out.

The 1% may seem impossible. In this case, consider multi-family rental properties. You will have a higher chance of earning more income compared to the value of the house. If you want to rent it out on Airbnb, be realistic in your estimate. You cannot assume that you will have visitors every day of the month, each paying the full price.

If the property passes the 1% test, see it will have a positive net operating income. This is what you can expect after paying the mortgage. When calculating your cap rate, factor in the idea that you will be living in the house as well.

The cap rate you want to attain depends on your goals. If you love the cap rate, it is time to decide whether or not the house is perfect for house hacking. First, calculate the yearly cash flow based on the amount you expect tenants or roommates to pay as rent. The result may be negative. Now, calculate the cash flow based on what you would receive if you were not living in the house (imputed cash flow).

Originally published at https://financierpro.com on November 6, 2020.