Use The Best Real estate hack To Win Life
Traditionally, people think you need to save up 20% of your money to buy a real estate property. But what if there was another way?
Let me introduce you to one of the best ways to expedite your path to financial freedom. The average American’s largest expense is housing so if you can reduce or completely eliminate your largest expense, you will supercharge your savings.
The way that you can greatly reduce your largest consistent expense is through house hacking.
What is house hacking?
House hacking is a real estate hack where you live in the property and rent the home out to a tenant or short-term guest. There are a few variations of this but the main goal is to not only reduce your largest expense but also to gain equity in the property. (Which is the difference between the property’s value and what you owe on it.)
How can you buy a real estate property with little to no money out of pocket?
Don’t think that you need to save up $40,000 or more for a home, there are some ways to bipass the need to save up so much money. Here’s how;
As you’re buying the property as a primary residence, the down payment options are more favorable. Therefore, it’s not uncommon to get a property for 5% down, or in the recommended case, 3.5% down.
You can utilize what’s known as an FHA loan, which is a special loan for first time homebuyers. (You can use this loan anytime but can only be used on one primary residence property at a time)
This way, since you live in the home, you’re able to get more attractive options. In this case, 3.5% of the total purchase price plus closing costs. (It’s standard with any on-market real estate buy which will need to be back of mind as they are 3% of loan amount)
At this point, you need to look at how much money you want to make from the home compared to your comfort level and comparable units in your area.
Different Methods of house hacking
There are quite a few ways to start a house hack. Below are the main ways to start reducing your housing expense. They are categorized in order from least to most comfort;
Convert a single-family home into a boarding house or rooming house
This involves buying a single-family home and turning it into a boarding house or rooming house, where you rent out individual rooms to separate tenants. This is also referred to as a co-living space. This is the highest income producing property.
You will either stay on the couch for max income, or just stay in one of the bedrooms. Sure you can stay in the master bedroom but of course, if you’re wanting to make the most amount possible, you might take the smallest room if the couch isn’t something you want to do.
In a 4–5 bedroom house, with rents going for $500-$750+ you’re likely completely covering the full mortgage or even making money on the home.
Find a fully finished basement with a bathroom and kitchen
Next up is going to be a basement where the tenant lives in the basement, (or vice versa) and you rent out the room to them either on a long-term basis, or through Airbnb/VRBO. (potentially more income this way)
You will still hear noise coming from the tenants but much less than sharing bedrooms.
These can be great options if you have basements in your market because they’re entire spaces and allow for completely private setups. Look for homes with full bathrooms, kitchens, and completely separate entrances, preferably a walkout basement is best.
Get a multi-family property
This next method involves purchasing a property with multiple units, such as a duplex, triplex, quadplex and living in one unit while renting out the others. This is a more lucrative option than a basement since they’re completely separate units with full walls dividing each space instead of just a door with a basement.
In this case, a quadplex allows for the highest level of income since you have three additional incomes on the same property.
Get a single family property with an ADU
Another option is to look at homes with a garage apartment aka ADU (accessory dwelling unit) or detached mother in law suite. These are often classified as Single family homes.
Pro tip: When searching for on market deals, search for homes that have 4+ bedrooms. Sometimes the extra unit will get bundled in with the home. Keywords to look for are mother in law suite, garage apartment, guest home, or living quarters.
These are hidden gems that if you can find them, are likely undervalued as they’re treating it as one big home but for you, you’re getting close to multifamily value without paying for it.
Ways to get the most out of your house hack
When participating in a house hack, the additional benefit is that the tenants are paying down your mortgage allowing for equity to be gained the whole time. Therefore, if the time comes when you want to use the equity to buy another property, do some renovations on the home, cash out without selling, or anything else your heart desires, you can do so!
In fact, if you really want to expedite your path to financial freedom, do a cash out refinance after one year of living in the home, pull out all the equity you gained (i’d recommend doing something simple like painting walls, cabinets, and the exterior. Paint does wonders for increased equity)
From there, you can repeat the process all over again by using the FHA loan again since you refinanced it. rinse and repeat. Ideally, within 10 years you’ve already got 5+ properties that are (hopefully) paying for all of your standard living expenses.
Conclusion
Regardless of which approach you choose, it’s important to carefully consider your financial situation and the local rental market before committing to house hacking.
Make sure that you are able to afford the upfront costs of buying a property, including the down payment, closing costs, and any necessary renovations.
It’s also important to carefully research the local rental market to ensure that you will be able to generate enough income from your tenants to cover your expenses.
Please don’t rush into buying a property just because you saw this article. This is not financial advice. I’m just sharing my experiences based on the house hacks we’ve done.
Thank you for reading, let me know your thoughts in the comments! Also, following if you enjoyed this article!
Take care,
- Eric