Imagine getting paid to live for free in a home you own. For those who think earning money this way is too good to be true, it’s not. The secret is that anyone can do it — by house-hacking.
Basically, when you house-hack, you purchase a multifamily property, which has two to four units, and live in one of the units yourself while renting out the others to build income.
GOBankingRates visited with Scott Trench, President of BiggerPockets — a website and podcast devoted to real estate investing and wealth building — to learn more about house-hacking.
Click through to keep reading about how you can build wealth using other people’s money.
Purchase a Property With Multiple Units
“House-hacking is when you purchase a primary residence with the intent to eventually transform it into an investment,” Scott said. “For example, you might purchase a duplex, live in one unit and rent out the other unit. This gives you the advantage of having your mortgage subsidized or perhaps covered entirely by your tenant. When you move, you might keep the property as a cash-flowing rental investment.”
Invest in a Property That Needs Renovating
Another option you can consider, according to Scott, is to purchase a property that needs significant work — aka a “flip.” You could move in, work on the property and then sell it at a profit.
And Scott has another tip: “If you live there for at least two years, and sell it shortly thereafter, you may be able to avoid capital gains tax on the sale, for a healthy profit.”
Build Up Passive Income
Essentially, when you house-hack, you’re setting yourself up to make passive income, or income you don’t have to work actively in obtaining, which can help you get rich in real estate.
You can build more passive income over time as you acquire more properties and tenants: “A little [passive income] helps make everything more comfortable financially. As you build more and more, your dependence on your day job disappears, giving you the option to work a job,” said Scott.
Make Sure You Can Afford the Area
When you buy a multifamily property, you might not have all the units rented all the time. So, when you don’t receive enough tenant income to pay your mortgage payment, you’ll be responsible for covering the mortgage. You should also consider property tax rates, too, which can be astronomical in some areas.
Choose a Property You Can Happily Live In
Think about whether you’ll be happy to live in the property with your mortgage partially subsidized for at least a few years — if the market declines, for example, said Scott. A property that is in a less than desirable location or that has what you consider to be major flaws might not be what you want to invest in.
Buy a Property That Will Provide Financial Benefits Immediately
Before buying a property, ask yourself if the property cash flow will reduce your monthly cash outlays for living as soon as you move in, Scott said. He also said to consider if the property will produce a positive cash flow if you put a tenant in to rent from you that same day. The faster you can earn money from the property, the more quickly you can build passive income.
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Purchase a Property That Has a Reasonable Chance of Appreciation
Another aspect to consider with the secret trick of house-hacking is whether or not the property can become more valuable over time or appreciate. Consider if it’s in a good area and whether you can fix things up to add value, Scott said. And, if you can buy a house that’s under market value, you’ll gain immediate equity in the property.
You Can Start With Less Than $10,000 Capital
Currently, the median home price in the U.S. is $313,000, which means there are properties available for less. “With an FHA loan, you can put as little as 3.5 percent down,” said Scott. “That’s $10,500 on a $300,000 property. If you can find a property that’s just slightly below the median home price, you can purchase the property with less than $10,000 down.”
Investigate All Loan Options
Scott has personally used FHA loans, but he has some other advice: “Lately, I’ve heard a lot of positive things about low down-payment conventional loans — also as low as 3.5 percent — that seem comparable and, in some cases, advantageous over FHA loans.” Scott recommends speaking with a loan expert to find out how to get the lowest down payments or to learn about grants and rebates that can reduce cash out-of-pocket.
Increase Your Savings First If Needed
In Scott’s opinion, people who earn a median income who don’t have $10,000 in savings or save less than $10,000 per year should initially invest some time into increasing their savings and taking care of debts before trying to house-hack.
“There are a ton of great resources out there for people with the desire to make lifestyle changes to increase their savings rate and at the same time improve their health, happiness and time with their families,” Scott said. “And yes, it is a bit of a grind. It’s slow going for many to save for their first down payment.”
Understand the Reality of the Risk You're Assuming
Scott often hears of people who believe house-hacking is risky, but he believes the practice is much less risky than being responsible for an entire mortgage on your own. “Suppose I can purchase a house for $300,000,” Scott said. “I might also be able to purchase a duplex — same total square footage — and live in half of that property.
“Of course, I’m [only] living in half the square footage if I move into the duplex, but what is more risky? In one case, I am responsible for the entirety of perhaps a $290,000 mortgage payment. In the other, a tenant is partially or perhaps totally covering that payment.”
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Realize That House-Hacking Doesn't Have to Be Permanent
Scott made sure to point out that deciding to house-hack isn’t a permanent arrangement. You can choose to purchase house-hack to get into a starter home or you can house-hack several times over five to seven years to subsidize the payment for your dream home, he said. And once you’ve built up a portfolio of house-hacks, you can enjoy the life of a real estate mogul — and rake in passive income for many years to come.
Click through to keep reading about secrets from real estate insiders.
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About the Author
Cynthia Measom is a Texas-based writer specializing in finance, business, parenting and education. With almost a decade of online writing experience, her work has appeared on websites such as Chron.com, The Bump and The Motley Fool. Measom received a Bachelor of Arts in English from the University of Texas at Austin.