Real estate is such a powerful investment vehicle, and so many people back away from it because they don’t know how to get started. Through this simple hack, you can utilize the power of real estate with much less money than what you may have thought is needed. Let’s get right into it.
The technique that we are going to talk about in this article is called house hacking. If you already know about house hacking, keep reading, because you may still learn some things that you didn’t know. House hacking is using an owner occupied loan to purchase a multifamily property- you live in one unit, and rent out the other unit(s). In doing this, you utilize the power of owner occupied loans, while simultaneously utilizing the power of rental income. There are two different types of loans that you can utilize when house hacking.
The first one is an FHA (Federal Housing Association) loan- which is part of HUD. This loan is subsidized by the government, which allows the lender to offer you a better deal. It is great for first time home buyers, as it allows for a 3.5% down payment, the closing costs are low, and the credit qualifications are rather low. The second type of loan is a conventional loan. Believe it or not, there are many banks out there that will allow you to use a 3% down conventional loan to acquire your first property- this is called a first time home buyers loan. If this is not your first property purchase, a conventional loan will require more like a 5% down payment, but it is still a very powerful tool to use when house hacking- after all, 5% down is better than 20-25% down. In utilizing either one of these loans, you will be able to acquire a multifamily property with little money down, and your tenants will pay for your mortgage month after month. If you find a good enough deal…. You may even cash flow every month!
If you would really like to take advantage of a good loan, there is actually a third type of loan that allows you to do the same thing as an FHA loan, but in addition, it allows you to also rehab the property with the bank’s funds. This loan is called a 203(k) loan. Section 203(k) insurance enables homebuyers and homeowners to finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage or to finance the rehabilitation of their existing home. What a powerful tool this can be! So if you find a property that needs work, you can purchase the property with little money down, rehab the property from top to bottom, live in one of the units, and rent out the remaining units to tenants. Now you have equity in the property AND your tenants are paying for your mortgage. Straight from the HUD website, these are the type of improvements that a borrower may make using Section 203(k) financing:
structural alterations and reconstruction
modernization and improvements to the home’s function
elimination of health and safety hazards
changes that improve appearance and eliminate obsolescence
reconditioning or replacing plumbing; installing a well and/or septic system
adding or replacing roofing, gutters, and downspouts
adding or replacing floors and/or floor treatments
major landscape work and site improvements
enhancing accessibility for a disabled person
making energy conservation improvements
Keep in mind, both of these loans are owner occupied loans, which means that you are required by law to live in one of the units. If you purchase a property through one of these loans, and then decide to rent out all of the units, you will be committing mortgage fraud. If however, you live in one of the units for a year, you are then allowed to move out of the property and rent out all of the units. You can then repeat this process by purchasing another property through the same method, and again… And again, and again. This is why house hacking can be so powerful, and it’s not just limited to purchasing a multifamily property. As I write this article, I live in a two bedroom apartment with one of my best friends. He lives in his room, I rent out MY room to another one of my best friends, AND I SLEEP ON THE COUCH. My roommates are essentially paying for my rent every month, and it’s all because I am utilizing the power of house hacking, and I am willing to make the sacrifice. There are no excuses in this business if you truly want to make it big, and the different possibilities for house hacking are endless. If you can think of a way to get someone else to pay your rent, no matter how creative you get, you are house hacking!
House hacking is almost always the answer for someone who wants to get started in this exciting business. It takes little money up front to get started, there is a small amount of risk (if you plan on buying a property anyways this is even lower risk), and it gives you access to very good, residential interest rates. Good luck out there, and happy investing!