If you’re new to real estate investing, you’ve probably discovered that it’s not as easy to break into as, say, the stock market. There is no Robinhood for rental property, and you can’t start with just $1. But there is a way to get your foot in the door — house hacking.
How Does House Hacking Work for Investors?
House hacking is an innovative way to leap the two biggest hurdles facing new property investors:
- Most mainstream investment property mortgage products won’t allow borrowers without previous landlord or property management experience.
- Investing in tangible real estate (as opposed to REITs) requires a sizable down payment or an all-cash deal.
If you don’t have landlord experience or a truckload of cash, house hacking might work for you. House hacking means using your own home to generate rental income and learn to be a landlord. You can modify your current home or purchase one designed for hacking.
Hacking Your Home
There are several popular methods for generating income from your personal home. Determine which is best for you by comparing the advantages and drawbacks, cost and income of these options. For investors with little cash, you might consider investing in digital real estate assets to grow your money
Buy a duplex, triplex or fourplex
Many buyers begin their landlord careers by buying a multi-unit property, living in one unit and renting out the others. This is a great way to enter the rental market as a first-time investor. Not to mention, many investors can live in their unit for free, as tenants’ rent may cover the mortgage or let the investor pay off their mortgage quickly.
- As long as you live in one of the units, you can get an owner-occupier mortgage instead of an investment property mortgage. Buying as an owner-occupier gets you cheaper financing, a smaller down payment and less-restrictive underwriting.
- You can buy a multi-unit rental with a government-backed home loan (normally, these low- to no-down options are only available to borrowers who will live in the homes). That means you only need 3.5% down for an FHA loan or zero down if you’re VA-eligible.
- You’ll have access to tax breaks that normal homeowners don’t get. At tax time, you may be able to deduct maintenance, depreciation, repairs, property taxes and utilities (check with a tax pro before buying).
- Managing your rental units gets you legitimate landlord experience in a low-risk way.
What happens when you sell or move? You could convert the entire property to rentals and buy a new primary residence. Or execute a tax-deferred 1031 exchange with a 1031 exchange company to buy additional investment property. Many real estate empires started out as small investments that grew over time.
Qualifying for a mortgage, even as a first-timer, is not terribly difficult. Banks, mortgage companies, credit unions, and other vendors offer a variety of terms. Of course, having good credit and stable income will make the process easier. Some programs will allow you to use the rental income (or potential rental income) to qualify for the loan.
Convert unused rooms
Homeowners near colleges have been hacking their homes for decades. In some neighborhoods, almost every house has been converted into a mini apartment building to house students.
Garages and basements become additional units with separate entrances. Larger houses with many bedrooms can be divided between owners and renters. You might need little more than a locksmith to make these changes. Or you can go further and install apartment-style balconies, parking, and outside stairways.
Finished basements can make great living quarters if you brighten them up with windows, fresh paint on the walls and good lighting. You’ll also need to add kitchen and bathroom amenities to make it livable. Just a few thousand dollars can convert a basement, attic, bonus room or loft to a cash-generating rental.
You can finance these improvements with a personal loan, home equity loan, cash-out refinance, or even credit cards (for smaller jobs).
Buy or build an ADU
Guest houses, casitas and mother-in-law quarters are all accessory dwelling units (ADUs). These are legal, permitted dwellings on your property. Make sure that you comply with zoning laws and building codes. And if you buy a home that already has an ADU, make sure it’s permitted. If the ADU is illegal or unpermitted, you probably won’t be able to finance it or you may have trouble with your local government in the future.
Recently, many municipalities have modified their zoning to permit ADUs as a solution to housing shortages. ADUs can be bought or built. Many builders of manufactured homes can deliver and install a small unit within a few days or weeks. Or find a reputable local builder who specializes in smaller projects.
Park model homes and tiny houses
Tiny homes or park model homes that don’t exceed 400 square feet are not real estate. They usually have wheels and not permanent foundations. These units are legally defined as personal property. In many communities, you can buy them like cars or sheds and park them on your property.
Some people even choose to live in their tiny houses and rent out their main homes. Others rent out their tiny homes. In resort areas, tiny houses are very popular vacation rentals. You may be able to earn more with a cute Airbnb than a residential rental with a long-term tenant.
Tiny houses in picturesque places or tourist destinations lend themselves well to Airbnb or Vrbo. Just make sure that your community or homeowner’s association allows non-owners to occupy residences. Many locations have outlawed short-term rentals, so double check before investing in a pint-sized place.
You can finance a tiny home with a home equity loan or cash-out refinance against your main house. Alternatively, you can finance tiny houses with personal loans or sometimes dealer financing. And when you move, you can take your tiny house with you because it’s your personal property.
Good Real Estate Agents Are Crucial
Buying a house especially for hacking is more complicated than a typical home purchase. When you interview agents, tell them that you want a home to live in and also use for rental income. Enlist this person’s help in finding the best single- or multi-family homes for hacking.
Tips for New Landlords
If you want more rental income and fewer headaches, determine who your potential tenants are and what they want.
Will your renters be older folks seeking economical digs and quiet surroundings? Vacationers looking for something cute and convenient? Commuters desiring nearby public transportation? Students who want to walk to class and (naturally) bars, restaurants, and gyms? Local demographic information is widely available on sites such as areavibes.com and can tell you who your renters are likely to be.
If you’ve never been a landlord before, expect to do a lot more than putting up a sign and collecting checks.
Before hacking your existing home, make sure you’re allowed to have short- or long-term tenants. You’ll need adequate parking, safe entrances, rules for communal living, and you’ll need to cover maintenance and repairs.
Carefully screen your tenants to avoid damage, crime, nonpayment and lawsuits. Tenant screening services are inexpensive, and most landlords pass on their cost to applicants anyway. Adhere to local coronavirus guidelines when showing property.
Require satisfactory home inspections in the purchase contract. Experienced property managers might be okay with buying “as-is,” but beginners should not risk getting a bad roof or faulty wiring.
Consider requiring your tenants to carry renters insurance. It’s true that landlords are not normally legally responsible if tenant property is stolen or damaged. But that does not stop tenants from filing such suits. It’s just easier to require insurance, and policies are pretty cheap.
Finally, you can choose your level of involvement. Can you handle midnight maintenance calls, disputes between tenants or deadbeats? If not, consider hiring a property manager. You’d pay between 10% and 35% for this service (long-term rentals are cheaper while vacation rentals have higher management fees). Still, professional management can remove much of the risk and aggravation newbie landlords face. And that can be priceless.