How home hacking cuts your living expenses
Home hacking strategy in 7 steps
Want to reap the benefits of home hacking? Here are the steps you will need to take to implement this strategy in your own life.
1. Choose the type of opportunity
Home hacking comes in all shapes and sizes – there is no one-size-fits-all approach. With this, you can choose the opportunity that best fits your lifestyle and goals.
- Single-family homes: A single family home is an easy place to start hacking into a home. You can rent additional coins to generate income. Typically, this option requires you to share common areas such as the kitchen or living room with your tenants.
- Multi-family homes: Multi-family homes concern several units within the same property. For example, a duplex or triplex would be considered a multi-family property. With this option, you will not have to share interior spaces with tenants. But a multi-family property can be more expensive to obtain than a single-family home.
- Guest rooms or finished basements: A guest bedroom or a finished basement is the ideal space to rent to tenants. If you have available space in a property, determine if this is a possible source of income.
- Accessory housing (ADU): A UAD is a separate building on your property that could be rented out to tenants. The additional privacy offered by an ADU provides an option for hackers who do not wish to share common areas with their tenants.
- Holiday rents: Depending on your region, convert your homes to short-term rentals via Airbnb or Vrbo can be a lucrative opportunity. While there is more work that comes with the higher turnover rate, it could be worth the rewards.
2. Conduct market research
Before you jump into home ownership assuming you can cover your entire mortgage, take the time to do some market research. You should look at property values in the area, determine how much you could expect to make by renting space to tenants, and estimate how much mortgage you can reasonably afford.
It is important to be realistic in your mortgage expectations. Remember, home hacking is a great option. But there will likely be months of vacation time, which means you’ll have to get the full mortgage payment back. Don’t stretch out too much.
Check out our guide to best cities to invest in real estate to start your research.
3. Do the math
The math behind home hacking can be a powerful way to transform your financial future. Here are some of the numbers you need to keep in mind when exploring a possible home hack:
- Net operating income (NOI): Net operating income can help you calculate the potential profitability of a real estate investment. Essentially, you are simply subtracting all the overhead costs of maintaining the property from all the income produced by the property. As a hacker, you can use it to understand the profitability of a potential transaction.
- Capitalization rate: the capitalization rate, also called capitalization rate, places the profitability of a property in the context of the purchase price. With this, you can weigh the income that you can potentially generate from a property against the initial costs of purchasing the property. When you consider your home hack options, a higher cap rate will reflect higher risk associated with higher rewards.
- Cash flow: The cash flow generated by a property can be determined by subtracting your monthly housing expenses from the income generated. As a home hacker, the goal is to reduce your monthly housing expenses. In some cases, you may be able to break even or even generate a positive cash flow. But in other cases, you may be content with negative cash flow that still allows you to lower your housing costs.
- The 1% rule: the 1% rule is a common way to review real estate investment offers. Essentially, you want the monthly rent to be at least 1% of the purchase price. If you are a hacker, you can factor the market rental price of your unit into this calculation to determine if the property follows the 1% rule.
- Estimated monthly mortgage payments: A monthly mortgage payment is an inevitable expense as a home buyer without the capital to buy a home with cash. Along with this, it is important to understand the costs of your mortgage before you jump into the transaction. Although an exact monthly mortgage payment can be difficult to calculate in advance, you can use our mortgage calculators to get the best estimate possible. As a hacker, you’ll want to know this number ahead of time to see how much you should expect to cover in monthly housing expenses.
4. Store financing options
One of the biggest misconceptions about investing in real estate is that people assume the down payment requirements are similar to buying an owner-occupied home.
When you buy a home for yourself, you have the option of using owner-occupied mortgages such as VA loans or FHA loans. These allow you to close with 3.5% decline and in some cases 0% decline.
However, when you buy investment property that you don’t intend to occupy, most lenders require a down payment of at least 20-25%. By purchasing a primary residence and renting a bedroom / other units, this will give you access to loan options that might otherwise be unattainable. This gives you access to loan options that are not available to most investors.
One thing you can do is rent out your home through Airbnb or some other short-term rental company. You will need to provide your most recent tax return including Schedule E. Additionally, you will need a Host Report for the past year. With a HomeReady® Fannie Mae loan company, income from a long-term frontier who also lives in your primary residence can also be used to qualify.
When considering your financing options, take the time to shop around for the best deal.
5. Consider your limits
Home hacking offers an opportunity for home buyers. However, there are some limitations associated with this strategy. Not all HOAs or local municipalities are hacker friendly. An HOA or municipality might limit your ability to rent space to tenants.
In addition, some housing markets have low demand. With this, you might have a hard time finding tenants. As you explore home hacking as a strategy for your life, think about the obstacles that may exist in your unique situation.
6. Renovate And Repair
When you close a property, it’s important to renovate and repair the spaces you plan to rent. Even if an outdated space is fine for you, the best tenants will be looking for a better space.
If you take the time to create a welcoming space for future tenants, you will be able to maximize your return on investment.
7. Search and filter tenants
The success of your home hacking strategy will depend on the tenants you find. Without tenants paying rent, you will simply be an ordinary landlord. However, not just any tenant will do. Many hackers rush to fill the unit with any tenant who requests it. But it can lead to disaster down the line.
With this it is important to filter tenants before they move into your home. The selection process can be as complex as you want. But it’s essential that you have some form of screening in place to work with tenants who will suit your space well. Some common steps include hiring an agency for background checks, performing a credit check, and verifying a potential tenant’s income. Once you find a tenant who passes your screen, you need to write a formal lease. Make sure the lease is signed before tenants move into your space.
While finding good tenants is the key to success for most real estate investors, it’s especially important for hackers. The tenants you choose to work with will share the same property as you. With that, you want to make sure you find the right fit from the start to save yourself headaches down the line.