House Hacking: A Beginners Guide to Hack Your Housing and Live for Free
Yes, house hacking is a thing. Are you surprised?
The internet is full of “life hacks.” I’m sure you’ve seen them, with clever tricks like storing your pancake mix in old ketchup bottles or dipping your Oreos with a fork through the frosting. Sure, those are fun little tricks—but how much do they really improve your life?
House hacking, on the other hand, is epic, life-changing stuff. When properly implemented, this can have a dramatic effect on your wallet and the financial destiny of your family.
I’m talking about hacking your housing and living for free. I’m talking about building wealth automatically and getting paid to do it. I’m talking about buying an owner-occupied multifamily property and having other people pay your mortgage.
You heard me—it’s often called an “owner-occupied multifamily property,” but you probably have heard other names for it like “duplex,” “triplex,” or “fourplex.” These are properties that have more than one unit but don’t quite fit the “apartment complex” category. There is a good chance you’ve even rented a unit in one of these places in the past or know someone who has.
They exist in every market, in every neighborhood, and at every price point—and by purchasing a small multifamily property, living in one unit, and renting the other units out, you can live for free and even make money on top of it.
House Hacking: How to Buy a House and Live for Free
When I bought my first house, I took a hammer and put a giant hole in a wall—just because I could.
You see, buying a home was exciting because it was mine. I could do what I wanted, when I wanted to, and no landlord was going to tell me “no.” For me, owning a home is one of the greatest feelings there is.
However, buying a home is not for everyone.
If you’re flat broke, up to your eyelids in debt, switching jobs every 2.5 weeks, and can’t seem to avoid calling those late-night informercials for crap you can’t afford, then maybe it’s best to get your life and budget in order first. Buying a home is not a light-hearted, flippant decision.
However, I also don’t believe buying a house needs to be a task only for old, boring people. If you have decent credit, a stable job, and a small amount of savings, you can enter the world of homeownership. And if you’re smart about it, you can enter the world of real estate investing at the same time and start hacking your living expenses.
Why Small Multifamily Property Is Perfect for House Hacking
By purchasing a great small multifamily deal, the rent that your tenants pay each month can cover all of the expenses for the property (and more). For example, if you buy a fourplex, live in one unit, and rent each of the other units out for $500 a month, you could be making $1,500 per month in income.
If your loan, taxes, insurance, utilities, and other expenses come to just $1,200, you could get paid $300 a month just to live in the home. Even better, when it comes time to move out into your future home, you can rent that fourth unit out for even more income.
However, I’m getting ahead of myself a bit. Let me explain first how to buy a small multifamily property.
Where to Find Small Multifamily Properties
Trust me: These properties are everywhere.
The easiest way to find them is by speaking with a real estate agent. An easy way to do this is by visiting the BiggerPockets agent directory, finding an agent in your market, and simply starting up a conversation. The best part about working with agents is that it’s totally free for you! The seller of the property typically pays for the agent, which means you can ask a thousand questions and get a thousand answers without needing to pull out your debit card.
Use this to your advantage!
Related: 5 Reasons the Fourplex Is the Perfect House Hack
Keep in mind, however, that you are only looking for properties that have two, three, or four units. Once you hit five units or more, the entire world of real estate changes into something you don’t want to mess with if you’re a newbie—commercial real estate. So, for now, focus on the duplexes, triplexes, and fourplexes.
If you want to just start looking, you can also use sites like Realtor.com, Zillow.com, Trulia.com, or the BiggerPockets Real Estate Marketplace (which features properties specifically for investors). With each of these sites, you have the ability to limit your searches to only multifamily properties. Start looking at the cheapest properties in your area, and try to find neighborhoods that you would want to live in.
Don’t be scared of homes that are a little “ugly” or have been foreclosed on. Although they may require a few weekends of painting with your buddies, you can often get substantial discounts because everyone else is scared away. In fact, my favorite feature in any property I am considering is the smell. The worse, the better.
Why? Because smell is the easiest and cheapest thing to fix (usually just by installing new carpet and re-painting) but drives 99 percent of home buyers from even considering the deal.
What Makes a Killer House Hack Deal?
If there is only one lesson you learn from this post, it should be this: Find a killer deal.
You see, if you are trying to “hack” your housing, not just any deal will work. In fact, I’d wager that 90 percent of the small multifamily properties out there are not going to give you the results you are looking for—which is cash flow.
Cash flow is the extra income left in your bank account each month after all the bills have been paid. If you can get your rental units to pay all the expenses and there is money left over, that money is yours. The trick, therefore, is finding properties that provide this cash flow.
The best trick I know for quickly estimating if a property is going to provide cash flow or not is known as the 50 percent rule of thumb. Essentially, this rule of thumb goes like this:
Take the total income of a property and divide it in half. Those are your expenses. Now take out your loan payment. The remaining money is your estimated cash flow.
Let’s do a real life example of this:
You find a fourplex for sale for $200,000, where each unit would rent out for $800 per month. If you rented three of the units out, the total income would be $2,400 per month. Divide that in half, and you are left with $1,200 per month to pay the mortgage. A loan on $150,000 (because you don't pay full price, and then you put down something for a down payment) at 4% for 30 years is about $700 per month, which means you could get paid $500 per month to live for free. This would be a killer deal.
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Keep in mind, however, that this rule is just a rule of thumb—so make sure you use this as a quick-and-dirty way to filter lots of properties. Then, when you find some great potential properties, look at all the expenses for the property and figure out what all the costs truly are. To learn more about the analyzing properties using the 50 percent rule, check out this post and YouTube clip.
How to Fund Your House Hack Property Purchase
Maybe you have lots of cash and can simply write a check for a home. In that case, awesome!
However, chances are you are probably not able to pay the hundreds of thousands of dollars needed and are going to need to get a loan (mortgage) from a bank. With any loan, you are going to need to supply a certain amount of money to get the loan, known as the down payment.
While the "no down payments" mortgages have mostly gone by the wayside, there are still options for purchasing properties with low down payments, ranging from 3.5 percent down for FHA loans (offered at most banks) to 20 percent down for conventional mortgages. There are even loan programs (like the HomeReady program offered by BiggerPockets partner Better) created specifically for house hackers.
The best way to determine what the best loan is for your deal? Speak with a qualified mortgage professional at your local bank or credit union. Just like with real estate agents, these mortgage pros are free to use and talk with (they get paid from fees from the loanâyou should never need to pay up front), so don't be afraid to pick up the phone and start fielding your options.
Related: House Hackers: Want Great Tenants? Screen Like This
Managing Your House Hack Without Going Insane
After closing on the purchase of your small multifamily property, you are now a landlord! At this point, it is imperative to learn how to be a landlord—and start running your business like a business, not a hobby. Read a few books on being a good landlord, make friends with local investors that you respect, read blogs that talk about landlording, and don’t stop learning.
Being a landlord is not as difficult as the horror stories you may have heard—if you follow some very simple guidelines:
- Screen your tenants like you would a job applicant. Keep your emotions out of it and look at the facts. For an exhaustive guide on the best way to find awesome tenants, check out The Ultimate Guide to Tenant Screening.
- Have a written policy to refer to. Stick to your policy when dealing with tenants.
- Outsource things you don’t want to do. If you don’t want to fix toilets, don’t fix toilets. Find handymen, property managers, or others who can handle the aspects of the job you don’t want to do. If you found a great deal when you bought your property (which you should have!), the cash flow can pay for these things.
- Never rent to family or friends. Trust me—it never ends well.
- Treat your business like a business, not a hobby. Set up processes and systems to handle the problems that will arise.
Being a landlord is not always the most fun activity, but by following these simple guidelines, the process can be much easier and your problems minimized. There are over 20 million landlords in America, so you are not alone in your journey. If you run into any problems, just ask those who have come before for help (Pro Tip: BiggerPockets Forums are a GREAT place to ask for help), and you’ll find most seasoned landlords are more than willing to assist.
I truly believe that purchasing a small multifamily property can change your life, free up your finances, and start you down a path toward building wealth through one of the most powerful channels there is: real estate. This article is the start of a conversation, and I hope you continue this conversation after reading.
For more articles on house hacking, check out:
- 3 House Hacking Mistakes I Made (& How I Could’ve Prevented Them)
- An Intro to House Hacking: Here’s How I Get Paid to Live for Free
- How I’m Living Rent-Free in the Most Expensive City in America (Using House Hacking!)
- The 7 Drawbacks of House Hacking (& How to Overcome Them!)
Is this a strategy you’re pursuing? Do you have any questions for me?
Let’s chat in the comment section below.