Updated about 1 year ago on .
Successful House Hacking
How to Successfully House Hack
While there are many benefits of house hacking, there can be downsides as well, and you need to read up on the pitfalls you may face.
Safety is a primary concern when it comes to house hacking. While every investor needs to worry about whether a potential tenant will damage their rental property, as this is also your primary residence, you must be sure that you trust the tenant. Screening renters becomes even more critical in this circumstance.
Additionally, you need to worry about legal concerns, such as the Fair Housing Act, which is meant to prevent housing discrimination. As you refine your house hacking strategy, you will become familiar with the many legal obligations you have toward tenants.
Once you’re familiar with these elements of house hacking, it’s time to begin looking for the proper investment.
Calculate Your Investment
As with other forms of real estate investing, you must run the numbers to ensure that house hacking is the right option for you. Assess the purchase price of a potential house hack, then estimate the rental income you would get from the units you will not be occupying in order to identify whether you will make enough to satisfy your living expenses.
The Debt Service Coverage Ratio (DSCR) will be helpful here, but remember that you must divide your rental income in half or subtract the income from one of the units in order to accurately assess how well the property will pay your monthly mortgage payment.
Find a Property
If you do not have an existing property that you intend to renovate for house hacking, you’ll need to work with a good real estate agent and discuss your particular needs for your new real estate investment.
When hunting for an existing property, you’ll want to avoid some common house hacking mistakes, such as buying a building that does not have a separate entrance for the tenant and property owner. This can be a safety issue, particularly if you want to turn your building into a short-term rental. A good duplex typically has this, as does a larger multi-unit property.
Choose a property that has excellent soundproofing between the units so that you’re not bothered by your tenants, particularly if you intend to live on the first floor and rent out the second one. This can save you a great deal of hassle when it comes to smooth relations between you and your tenant.
Lastly, focus on the potential for tenancy, just as with other forms of real estate investing. When house hacking, particularly for vacation rentals, you want a property that is in an attractive location with plenty to do nearby, as well as one with a low crime rate. If this will be a long-term tenancy, consider school districts, parks, and amenities like shopping centers.
Make Repairs
House hacking typically involves a few repairs to bring the home up to a rentable standard. Always get a home inspection before you sign anything, as this will reveal issues that may scuttle your house hacking plans. Avoid any property with serious structural issues that could be expensive or impossible to repair.
When you decide what will need to be fixed, work with a good contractor to assess the problems and develop a plan of action. You will want to get multiple quotes from different contractors and reach out to those in your investment network to identify any difficult contractors that overcharge.
Repairs can include simple things like fixing up flooring or rehabbing the kitchen, or they may require more intensive work, such as adding more soundproofing between the units. This depends on the condition of the property and your personal preferences.
It’s not necessary to make the two units identical if you intend to do house hacking for the long term. Fix the side of the property that you will be living in to your preferences, then ensure that the other areas are habitable and attractive.
Finance Your House Hack
Most house-hacking investors do not have the funds to pay for their property outright, so they turn to financing. There are several options here, including FHA loans, VA loans, and more investment-specialized loans such as DSCR loans from private lenders like Visio Lending.
DSCR Loans
DSCR loans are real estate investment loans that work well for income-generating properties, such as those used in house hacking.
Instead of relying on the investor's personal financial profile, a DSCR uses the Debt Service
Coverage Ratio, which compares the income generated to the PITIA (principle, interest, taxes, insurance, association dues).
If the ratio is below 1, that means that the property has negative cash flow and will likely not cover its debts; most lenders want a ratio of 1.2 or higher, meaning that the property is making 1.2 times in rent as what it is paying in a mortgage and insurance.
The benefit of DSCR loans for house hacking is that they can be underwritten much faster than a conventional loan, as there is less investigation into the house hacker's credit, tax returns, and bank statements. Rather than the lengthy, months-long process, you can typically get approved in 45 days or less, sometimes much faster.
Rental Property Loans
Another option is rental loans, which can include house hacking properties. Like DSCR loans, these look at the profitability of the venture rather than the creditworthiness of the investor, allowing for faster approval times and a higher approval chance. As long as the property itself can perform well and finance itself, you are likely to be approved.
House hacking can be a highly lucrative, efficient, and effective way to invest in property while still covering your own expenses. A house hack allows you to begin building equity faster by covering the mortgage, and it reduces your costs because you are only financing one property, not a primary residence and an investment.
At the same time, you must choose a property carefully for safety, marketability, and profitability. Working with a good realtor and spending time identifying the profit margin will serve you well, as will careful, targeted repairs on the units that you intend to rent out.
If you’re ready to begin house hacking Nick at Edge Home FInance for more details on our affordable and efficient investment loans.