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Posted over 2 years ago

House Hacking and How To Do It

Owning a home or two these days feels almost impossible, especially in expensive areas and for those with limited incomes. It seems that our options are either to get a property that's far away from the city and endure a commute of 2 to 3 hours a day or to rent a costly and cramped apartment to save a little bit on time and transportation.

But, did you know that you can own or live in a home where your mortgage is paid for by other people? Yes, it is true! This is possible through an innovative strategy called House Hacking.

Basically, House Hacking is a creative real estate approach where you rent out a portion of your property to help pay for your mortgage and other expenses. It could be a room if you own a single home, or other units if it's a multi-family house.

Amazing, isn’t it? But did you know that you can also use this strategy to grow your real estate portfolio?

Here’s how the magic works!

Purchasing a home under your name requires you to comply with a mortgage clause where the owner needs to occupy the property for at least a year. If you’re trying to generate some income out of it, you cannot rent it out immediately to a tenant because you need to live there.

If you have a single-family house, you can find some roommates and rent your house out per bedroom. You should have the roommates on a lease to keep things in order and avoid potential headaches. Since you’ll be living in the house with other people, you may want to spell out some rules for the common area and other shared spaces, including cleaning assignments or schedules.

Ideally, you want to buy the biggest and best single-family residence that you can afford for the potential appreciation and to attract the best tenant you can. Another thing you need to consider is the cash flow when you finally convert the house into a rental unit, and no longer use it as your primary residence that you house hack.

However, purchasing a multi-family home can be more advantageous when house hacking. You will not need to deal with roommates, but rather you will be living at one of the units in the property as a live-in landlord. You can even choose to live in the lowest income-producing unit and rent out the more lucrative units to maximize return. This structure resembles a more traditional investment property you would usually invest in.

Since you are buying a house under your name, mortgage companies will limit you to purchasing a multi-family with only 2 to 4 units. Properties with 5 or more units are considered commercial, so you will not be able to get a personal loan on a property that large.

A good thing to note is that when you are buying these multi-family properties, the more units there are, the better it works as a house hack typically.

For example, if you have a 4-unit home, you can collect rent for 3 of the units, as opposed to a duplex where you can only collect rent for one of the units. In the latter example, you are only able to earn 50% of your potential income because you will be occupying the other unit.

Now, since we want to grow our real estate portfolio, you will want to put down as little as possible for the down payment. This way you can get a head start to saving for the next one.

The plan is that after a year has elapsed, the property can then be strictly a rental unit. After that happens, you buy a second multi-family property. Once you buy that second home, you will move in, and make that your primary residence. And then, you can do the house hack once again on that second home. After another year has passed, you will repeat the same process until you get to your fourth property. You will want to put down low down payments for all of these properties, preferably a 5% down conventional loan.

When you are on your fourth personal loan, you will want to be more selective of the house, and imagine yourself living there a little longer. This is because you are going to reach the maximum amount of “easy” loans that you can obtain in your personal name.

Applying for the 5th to 10th loans is going to require higher down payments, more reserves, and the underwriting can be a little more strict. Some banks will flat-out not lend to you because you are over four loans.

Pretty neat, right? It takes a little bit of research to find the right homes for you, and some work on getting the leases set up. But, if you get started now with the help of your local realtor, your real estate empire won’t just be a dream anymore! 

Watch the video here!



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