Pro House Hacking Advice: Maximizing Your Wealth from House Hacking

Disclaimer: The following is provided for general information purposes and nothing included below in this post is financial, legal or accounting advice. 

You've been thinking about picking up your first investment property for a while and you're tired of reading everyone else's success stories while you're sitting on the sidelines. 

It's time to get that first rental property, and you've heard of this great concept called "House Hacking" that you are ready to try and get a deal done. 

You want to make sure you want to understand how this strategy works and how you can maximize your wealth from closing on that first property. Make sure you're following these best practices!

Recap: What is House Hacking?

The phrase "house hacking" refers to the act of buying a property, renting out the additional rooms (or units for a small multi-family) to either reduce your living expenses or produce some cash flow, and effectively live in a property for free. Or even better, you get paid to live in a house. Check out Brandon Turner's Guide to House Hacking for an introduction to the House Hacking concept. 

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How do you Maximize Wealth from House Hacking? 

Follow these tips to learn what you need to consider in order to set yourself up for incredible success with your house hack. Below, we'll discuss what numbers you'll need to factor in, how to create additional value, and what to do once you've created that additional value. As always, feel free to reach out to me with any questions. 

Tip #1: Always Check the Numbers Before you Buy an Investment Property. 

Research Your Potential Income First

As with any real estate investment, you want to get a good understanding of your potential cash flow, which is affected by your income and your expenses. 

Start by focusing on maximizing your income which is done by choosing an area with strong rents and high demand. Look for safe areas with good access to jobs, shopping, and/or public transportation, etc. When you leave the house hack and move into your next place, you'll want to be able to rent the place to your target tenants quickly and easily. 

Once you've focused in on a few areas, you'll want to analyze what property types are in your neighborhood. For example, are we looking at multi-family properties or are we looking at single family houses or even condos? This will mean the difference between renting a room and renting a separate unit. 

The basic knowledge of learning your local area and property type are two important factors that go into positioning yourself for future rent growth, maintaining low vacancies, etc. 

What can the property rent for while you're living there and what can it rent for when you leave and rent the entire property?  

Understand Possible Expenses

On the expense side, you'll want to factor in mortgage payments and a variety of expenses that you could incur. Here is a list of monthly expenses to factor in: 

• - Potential vacancy loss (e.g. lost income from a vacant unit)
• - Potential credit loss (e.g. tenant misses a payment)
• - Credit and background checks
• - Mortgage payments (principal and interest)
• - Private mortgage insurance 
• - Repairs and maintenance
• - Property management fees
• - Utilities 
• - Insurance
• - HOA/Condo fees

These are some of the expense items you can expect to incur in the course of owning a property, and there can be additional expenses to factor in depending on the property and the situation.

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Tip #2: How to Improve Cash Flow with High Leverage

Now that you have a good sense of the income and expenses,you can subtract the expenses from your income to get your monthly cash flow. 

Many investors start off with the smallest possible payment at either 3.5% down on an FHA loan or 5.0% down on a conventional loan. This results in a loan-to-value of 96.5% or 95.0%, which many investors consider to be a high amount of leverage. (Leverage is just another word for debt.) 

Most banks don't let you buy an investment property for less than 20% or 25% down, so anything less is considered a very high amount of debt by real estate investors. However, <20% down payments are relatively common in high cost of living areas. 

This is important, because the most frequent issue you'll run into because of the high leverage is not cash flowing when you move out and rent out the entire property. Here are some ideas to help you increase your cash flow potential: 

• - Pay less for the property 
• - Put more money down 
• - Find a property with lower real estate tax rates
• - Find a property with no HOA or Condo fees 
• - Reduce your interest by paying points up-front at closing
• - Reduce your out-of-pocket repairs and maintenance by obtaining a home warranty
• - Rent the house by the room (in accordance with your local zoning laws)
• - Have the tenants reimburse utility costs 
• - Increase the rents every year and every time a tenant moves out
• - Charge extra for parking
• - Add additional rooms and living spaces (e.g. in the basement, redo a garage, etc.)

Adding value with additional rooms, bathrooms, etc. can be a very lucrative way to grow your rents, and increase your property value. Next, we'll discuss what to do once you've added value and are ready to continue growing your portfolio. 

Tip #3: Leverage Your First Property to Get Your Second and Third Properties

Getting a House Hack to work requires some solid execution on your part, but can be a great way to build wealth. As you begin to cash flow from your first house hack, you can start socking away the money that you're now saving on rent and stashing it away for rainy-day reserves and a down payment on your next deal. You can also try refinancing your property, pulling some equity out and using that as your down payment on your next property.  

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Either way taking lots of action, staying focused on your goals and moving the needle a little bit every day will help you move forward. Stay focused. Stay safe. Stay occupied. 

As always, feel free to reach out to me with any questions!