There’s a reason why every rich person you know owns real estate. They may not have used it to get wealthy, but they certainly grew their wealth through real estate.
Many people are deterred by the high upfront costs of buying a rental property because, in most cases, you have to put 20% down.
This is where house hacking comes in – the strategy of living in one unit of a multi-family property while renting out the other units to cover the mortgage and other expenses. In this comprehensive guide, we will dive into the world of house-hacking real estate with multi families.
What is House Hacking?
House hacking is a real estate strategy that involves buying a multifamily property and living in one unit, while renting out the others. You can also buy a single-family home and live in one room while renting out the others, but this is a bit more annoying.
Either way, the homeowner can get part of their mortgage covered while reaping 100% of the upside appreciation and increase in equity.
Why House Hacking is a Good Investment Strategy
There are several reasons why house hacking is a great investment strategy. First, it allows you to live for free while building equity in the property. Ok, in most cases, you won’t have 100% of your mortgage covered, but at least you’re not paying 100% of it.
Second, it provides a reliable source of passive income from the rental units. Third, it can help you qualify for a larger mortgage since the rental income can be included in your debt-to-income ratio, usually up to 75% of the rental income.
Finally, it allows you to take advantage of the tax benefits of real estate investing, such as depreciation and deductions for expenses related to the property. Bonus depreciation through cost segregation is a cheat code that the wealthy use for example
Types of Multi-Family Properties you can use for House Hacking
Multi-family properties come in various shapes and sizes, each with their unique benefits and drawbacks. The key is that there must be fewer than 5 units for it to qualify as a residential property. 5+ units, and that’s commercial property.
Here are some of the most common types of multi-family properties for house hacking:
- Duplex: A duplex is a property with two units, usually side by side. It’s an excellent option for first-time house hackers as it offers a balance between cash flow and affordability.
- Triplex: A triplex has three units and can be an excellent choice for house hackers looking for a bit more cash flow than a duplex.
- Fourplex: A fourplex is a property with four units and is the largest property type you can buy with a conventional mortgage. It can provide significant cash flow, but it also comes with higher upfront costs.
Financing Multi-Family Properties for House Hacking
Financing a multi-family property for house hacking is different from buying a single-family home. Here are some financing options for multi-family properties:
The biggest benefit is being able to take advantage of the lower down payment on a primary residence vs. the higher down payment and interest charged on an investment property.
- FHA Loan: An FHA loan is a popular option for first-time homebuyers as it requires a lower down payment (3.5%) and a lower credit score (580). You can use an FHA loan to buy a property with up to four units.
- VA Loan: A VA loan is a zero-down-payment loan available to veterans and active-duty military personnel. You can use a VA loan to buy a property with up to four units.
- Conventional Loan: A conventional loan is a loan that isn’t backed by the government. It usually requires a higher down payment and a higher credit score than an FHA or VA loan. You can use a conventional loan to buy a property with up to four units.
- House Hacking Hack: Another way to finance a multi-family property for house hacking is to use the rental income from the property to qualify for a larger mortgage. This way, you can afford a more expensive property than you could on your own.
Finding the Right Multi-Family Property for House Hacking
Finding the right multi-family property for house hacking can be a challenge, but here are a few other fundamentals to keep in mind.
- Location: Look for properties in areas with a high demand for rentals, such as near colleges or business districts.
- Property Condition: Make sure to get a thorough inspection of the property to identify any potential issues that could become costly down the
Buy a primary residence that has more than one unit with a down payment as low as 3.5%. Live there for 12 months, then relocate to another city and repeat. Contact a real estate agent if you need help finding the right properties.
This is by far the easiest way to grow both your rental portfolio as well as your money. House hack your way to wealth.