Real estate investing has many perks over other types of investments, including simply purchasing a home. Since you\u2019ve found yourself here, you might be interested, in what BiggerPockets calls a House Hack. It\u2019s essentially a smart primary residence purchase. You buy a 2-unit property, live in one side and rent out the other to help cover your mortgage.<\/p>\n
Better.com offers a HomeReady loan to help you get into a House Hack and start increasing your financial position.<\/p>\n
If you haven\u2019t qualified for this loan type yet, visit the loans page on BiggerPockets, to apply for a HomeReady loan from Better Mortgage.<\/p>\n
If you are here to read this content and complete your application, before you get started, make sure your property of interest fits these qualifications for the loan:<\/p>\n
Please note the following; the loan is subject to income qualifications by geography and same basic qualifications as other conforming loan products.<\/p>\n
To qualify for the loan, you are required to read all the chapters ahead and pass the quiz found below.<\/p>\n
Let\u2019s get started!<\/p>\n
Table of contents<\/strong>:<\/p>\n The internet is full of \u201chacking tips.\u201d I\u2019m sure you\u2019ve 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?<\/p>\n Well, what about using this concept on a scale that could change your financial life?<\/p>\n House hacking, when properly implemented, can have a dramatic effect on your wallet and the financial destiny of you and your family. House hacking can allow you to build wealth automatically. It can empower you to live rent and mortgage-payment free, often with extra cash flow as an added bonus.<\/p>\n So what does house hacking entail? Essentially, house hacking means buying a property with more space than you need\u2014a multifamily property with extra units or a single family home with extra bedrooms\u2014living in a portion of it, and renting the rest out. When it comes to multifamily investments, these properties are often called \u201cowner-occupied multifamily properties,\u201d but you\u2019ve probably heard other names for them, like \u201cduplex,\u201d (2 units) \u201ctriplex,\u201d (3 units) or \u201c4-plex\u201d (4 units). They are the properties that have more than one unit but don\u2019t quite fit the \u201capartment complex\u201d category. They exist in every market, every neighborhood, and every price point\u2014and by purchasing one of these small multifamily properties, living in one unit, and renting the other unit(s) out, you can live for free and get paid to do so.<\/span><\/p>\n Let\u2019s get started.<\/p>\n Buying a home is not for everyone.<\/p>\n If you are flat broke, up to your eyelids in debt, switching jobs every 2.5 weeks, and can\u2019t seem to avoid calling those late-night infomercials, maybe it\u2019s best to get your life and budget in order first. Buying a home shouldn\u2019t be a light-hearted, flippant decision.<\/p>\n However, if you have decent credit, a stable job, and a small amount of savings, you can enter the homeownership world. And if you\u2019re smart about it, you can enter the real estate investing world at the same time and start hacking your living expenses.<\/p>\n By purchasing a great small multifamily deal, the rent that your tenants potentially pay each month can cover all of the expenses for the property\u2014and more. For example, if you buy a 2-unit property, live in one unit, and rent out the other for $1,200 a month, you could take that $1,200 and put it towards your loan, taxes, insurance, utilities, and other expenses. Let\u2019s say these expenses come to $1,000 per month. In this case, you would be getting paid $200 a month just to live in your home. Even better, when it comes time to move out into your future home, you can rent that second unit out for even more income.<\/p>\n So, how do you put yourself in this position? Let\u2019s walk through the process of landing a small multifamily property.<\/p>\n These properties are everywhere.<\/p>\n The easiest way to find them is by speaking with a real estate agent. Ask your family and friends for recommendations and start up a conversation. The best part about working with agents is that it\u2019s totally free for you!<\/i> 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.<\/p>\n Use this!<\/p>\n Keep in mind, however, that you are only looking for properties that have 2, 3, or 4 units. Once you hit 5 units or more, the entire world of real estate changes into something entirely different (commercial real estate). And for the Better HomeReady program, which offers 95% LTV, you will need to look for a 2-unit property in order to qualify.<\/p>\n If you simply want to start looking, you can also use sites like Realtor.com, Zillow.com, or Trulia.com to start looking at properties. 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.<\/p>\n Don\u2019t be scared of homes that are a little \u201cugly\u201d 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.<\/p>\n If there\u2019s only one lesson you learn from this section, let it be this:<\/span><\/p>\n Find a killer deal. <\/span><\/i><\/p>\n You see, if you are trying to \u201chack\u201d your housing, not just any deal will work. In fact, I\u2019d wager that 90% of the small multifamily properties out there are not going to give you the result you are looking for, which is <\/span>cash flow.<\/span><\/p>\n 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.<\/span><\/p>\n The best trick I know for quickly estimating if a property is going to provide cash flow or not is known as the 50% rule of thumb. Essentially, this rule of thumb says: 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.<\/span><\/p>\n Let\u2019s take a real life example of this:<\/span><\/p>\n You find a 2-plex for sale for $200,000, where each unit would rent out for $1,600 per month. If you rented one of the units out, the total income would be $1,600 per month. Divide that in half and you are left with $800 per month to pay the mortgage. A loan on $150,000 (you don\u2019t pay full price, and then you pay a down payment) at 4% for 30 years is about $700 per month, which means <\/span>you could get paid $100 per month to live for free.<\/p>\n Keep in mind, however, this rule is just a rule of thumb\u2014so make sure you use this as a quick and dirty way to filter lots of properties. When you find some great potential properties, look at all the expenses for the property and figure out what all the costs truly are.<\/span><\/p>\n Maybe you have lots of cash and can simply write a check for a home. In that case, awesome!<\/span><\/p>\n 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 need to supply a certain amount of money to get the loan, known as the down payment. While the \u201cno down payments\u201d mortgages have mostly gone by the wayside, there are still options for purchasing properties with low down payments, ranging from 3.5% down payments for FHA loans (offered at most banks) to 20% down for conventional mortgages. Better\u2019s HomeReady loan program offers 95% LTV and requires a 5% down payment.<\/span><\/p>\n After closing on the purchase of your small multifamily property, you\u2019ll officially be a landlord! At this point, it is imperative to learn <\/span>how<\/span><\/i> 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 articles that talk about landlording, and don\u2019t stop learning. If you want a comprehensive view of the landlording process, check out <\/span>The Book on Managing Rental Properties<\/span><\/i><\/a>.<\/span><\/p>\n Being a landlord is not as difficult as the horror stories will have you believe\u2014<\/span>if<\/span><\/i> you follow some very simple guidelines:<\/span><\/p>\n Being a landlord is not always the most fun activity, but you can minimize your issues by following these simple guidelines. 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, and you\u2019ll find most seasoned landlords are more than willing to help.<\/span><\/p>\n House hacking a small multifamily property can change your life, free up your finances, and start you down a path toward building wealth. This chapter introduced you to the concept, but what about the details of finding tenants, collecting rent, maintaining your property, and all the other aspects of owning a rental? Read on to get a better understanding of how to succeed at owning your first income-producing property.<\/span><\/p>\n Further Reading:<\/span><\/p>\n If you\u2019re hoping to succeed as a landlord, you\u2019ll need an authoritative step-by-step guide teaching the process to get your property rented to great tenants with minimal headache, stress, or costs. In this chapter, you\u2019ll find:<\/span><\/p>\n Screening tenants is about digging into a potential tenant\u2019s background and discovering who they really are. An application can only tell you so much\u2014and can be easily manipulated or falsified. Screening your tenant means looking into the information they provided, as well as analyzing outside information you can discover, and coming to a reasonable estimate on the kind of tenant they will be. It\u2019s a \u201creasonable estimate\u201d because there are no sure-fire ways to know the future quality of a tenant. As a landlord, it is your job to simply screen effectively and choose the best possible applicant for the property.<\/span><\/p>\n As with many areas of landlording, be sure to consult the landlord-tenant laws in your state. Some states may require that you choose the first qualified tenant due to Fair Housing laws.<\/span><\/p>\n As mentioned above, there are no guarantees when it comes to the future quality of a tenant. However, there are several key metrics that will help you decide what kind of tenant they will be. To make your life as stress-free as possible, it is imperative that you only rent to the best tenant. The following is a list of the seven traits that make up the perfect tenant:<\/span><\/p>\n Their Ability to Afford the Rent Payment<\/b><\/p>\n The first and foremost quality of a good tenant is their willingness to pay the rent. Without proper payment, you\u2019ll be forced to evict and be faced with potentially thousands of dollars worth of legal fees, lost rent, and damages. Most landlords require that a tenant earn at least three times the monthly rent from their (documentable) job. Many tenants believe that they can afford more than they really can, so it is the job of the landlord to set the rules. Three times the monthly rent usually is sufficient.<\/span><\/p>\n Their Willingness to Pay on Time<\/b><\/p>\n While some landlords look at late rent as simply a benefit (and the late fee as a financial bonus to them) a late-paying tenant is more likely to stop paying all together. The stress involved when the rent doesn\u2019t come in is not a pleasant experience and can be avoided by only renting to tenants who have a solid history of paying on time.<\/span><\/p>\n The Long-Term Outlook for Their Job Stability<\/b><\/p>\n While a tenant may be able to pay the rent and pay it on time right now, their ability to do so in the future is often determined by their job situation. If they are the type to switch jobs often or have long periods of unemployment, you may find long periods of missed rent.<\/span><\/p>\n Their Cleanliness and Housekeeping Skills<\/b><\/p>\n No tenant stays forever\u2014and when they leave you want the property back in good condition. As such, it is important that the tenants day-to-day living be clean and orderly. They must take good care of the property you have entrusted them with.<\/span><\/p>\n Their Aversion to Crime, Drugs, and Other Illegal Activities<\/b><\/p>\n No need to expound too deeply on this. Tenants who engage in illegal activities will cause nothing but stress and expense.<\/span><\/p>\n The \u201cStress Quotient\u201d: How Much Stress Will They Cause You?<\/b><\/p>\n The final quality of a great tenant is the \u201cstress quotient\u201d or the amount of stress a tenant will cause you, the landlord. Some tenants are very high maintenance and constantly demand time and attention. Unless you are having a hard time finding quality tenants\u2014these types will only cause more problems.<\/span><\/p>\n This chapter is designed to help you find and sift through the information about the tenant to find one who most closely fits the above seven qualities of a perfect tenant. Obviously, no tenant is going to be 100 percent perfect, so deciding how close to perfection you will require is a personal choice that largely depends on your desired involvement level and the community in which your property is located in. If tenants are difficult to find \u2013 it may be financially advantageous for you to rent to a less-than-perfect tenant in order to fill vacancies. However \u2013 if you have plenty of tenants to choose from, you can be significantly more picky.<\/span><\/p>\n One of the most important steps in screening your tenants and finding the best qualified is by coming up with your list of minimum requirements for the property. This list of standards should be told to the tenant on the telephone, placed on the application, placed in any ad, and told in person to eliminate those who simply will not qualify. The following four standards are commonly used by landlords on BiggerPockets:<\/span><\/p>\n Tenants rarely know how much they can afford. By giving an exact minimum income requirement, you can keep out those who might believe they can afford to pay the rent but really can\u2019t. Requiring income to be three times the rent has been used by landlords, as well as banks and other financial institutions that supply loans, for many years.<\/span><\/p>\n The references you receive from past landlords are the best indication of the way the tenant will behave for you. A bad review from a past landlord is a huge red flag for most landlords. Also \u2013 bad references from personal friends or family are also huge red flags.<\/span><\/p>\n You may decide not to accept anyone with a prior eviction. Landlords vary on this, but know the risks involved with renting to those with previous issues paying rent.<\/span><\/p>\n If a tenant has a background filled with criminal activity, take a stance of being hesitant to rent to them. People can and do change, but again, know the risks involved if you decide to go this route.<\/span><\/p>\n You\u2019ve begun advertising for your property and have begun receiving calls. Contrary to popular opinion, screening doesn\u2019t begin with a background check or an application. It begins with the initial contact. This is known as \u201cpre-screening.\u201d<\/span><\/p>\n Screening is not a flippant activity that you can do in a few seconds. Screening can take a considerable amount of time\u2014and you don\u2019t want to waste that time on every person who shows interest in your property. This is why pre-screening is so important. Think of the screening process as a funnel, like the kind you would use to pour oil into your vehicle. At each step of the process, you are able to narrow down the pool of applicants until only a small few (or just one) match. Pre-screening is the widest part of that funnel and will help to keep away those who obviously won\u2019t qualify.<\/span><\/p>\n Pre-screening Through Your Advertising<\/b><\/p>\n Your pre-screening efforts begin with your advertisement. Whether you are using the newspaper, Craigslist, Zillow, or another service to market your property, the information in your advertisement can help to weed out time wasters. For example, by placing the location in your ad, you are able to screen out individuals who are looking for another location (don\u2019t worry\u2014if you don\u2019t feel comfortable putting in your exact address, just put a general location or a nearby landmark).<\/span><\/p>\n Also, putting the price in the advertisement helps to keep those who can\u2019t afford that price range from calling. <\/span><\/p>\n Pre-Screening Through Your First Phone Call<\/b><\/p>\n The initial phone call is the next logical step in screening tenants. The first thing you hear is often an indication (though, not proof) of the kind of tenant they might be. If the first words you hear after saying hello is a voice yelling into the phone, \u201cHow much do I have to have to move in,\u201d you can assume the tenant might not be a great fit. After all, they are more concerned with getting in anywhere than even asking to look at the property.<\/span><\/p>\n When a tenant calls about a property, you\u2019ll probably want to ask them, \u201cWhat can I tell you about the property?\u201d<\/span><\/p>\n This open ended question allows the tenant to begin talking and asking questions. The typical questions are generally:<\/span><\/p>\n The kinds of questions asked by the tenant are great indications of the kind of tenant they are going to be. You don\u2019t want to judge a tenant solely on their ability to ask good questions, but it does help point you in the right direction as to the type of person they are. Are they orderly? Do they care about where they are going to live? Do they sound broke?<\/span><\/p>\n In the conversation, you\u2019ll probably want to include a few of your minimum requirements, as discussed earlier. Usually, this is easily worked into the conversation such as, \u201cNow, the property does have a minimum income requirement of $____ per month and we do a full background and criminal check to make sure we only rent to upstanding people.\u201d<\/span><\/p>\n Many, many times you may simply get a *click* after stating this information. If not, they usually will volunteer how much money they actually make and reassure you that they have never done anything bad in their entire life.<\/span><\/p>\n This simple two-minute phone call does two great things:<\/span><\/p>\n In both cases, it\u2019s a win for you. This is what makes pre-screening so important. It allows you to save time, avoid nuisances, and project a good image. You may also consider leaving your minimum requirements on your voicemail as well, so when you can\u2019t get to the phone, your tenants still get the message and your pre-screening still works.<\/span><\/p>\n Screening a Tenant In Person<\/b><\/p>\n The next step of the screening funnel is to meet with tenants and show them the property. This is also a great opportunity to screen the tenant before any paperwork is done. At this point, you\u2019ll want to reiterate your minimum requirements to the tenant in person, just in case they didn\u2019t understand (or chose to ignore) what you told them over the phone.<\/span><\/p>\n At this point, many tenants will admit that they don\u2019t quite meet the requirements but ask if you\u2019ll work with them anyway. If you need time to think about it, tell them that you will have to check with the owner (or partner or any other higher authority) and let them know. If you know they immediately won\u2019t qualify, let them know why but still offer the opportunity to apply. Why? You don\u2019t ever want to be accused of being discriminatory for any of the protected classes. <\/span><\/p>\n Protected Classes<\/strong> It\u2019s OK to screen people upon some criteria, but not others.<\/span><\/p>\n For example, discriminating against someone who won\u2019t pay rent is acceptable, as is discriminating against someone with a violent criminal history. However, discrimination against someone in a protected class is not only morally wrong\u2014it\u2019s also illegal. This section will let you know what those protected classes are.<\/span><\/p>\n Federal Fair Housing Laws<\/b><\/p>\n\n
<\/a>Chapter 1: Making the Decision<\/h2>\n
Are You Ready to Buy a Home?<\/h3>\n
Why Purchase a Small Multifamily?<\/h3>\n
Where to Find Small Multifamily Properties<\/h3>\n
What Makes a Killer Deal?<\/h3>\n
How to Fund Your Property Purchase<\/h3>\n
Managing the Property Without Going Insane<\/h3>\n
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What Next?<\/h3>\n
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<\/a>Chapter 2: Finding Reliable Tenants<\/h2>\n
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What is Tenant Screening?<\/h3>\n
7 Qualities of a Great Tenant<\/h3>\n
Setting Your Minimum Requirements<\/h3>\n
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Pre-Screening Potential Tenants<\/h3>\n
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