Your house may be a terrible investment, but I love the idea of house hacking. In fact, I knew people doing it way back in my college days. Half a century ago.
Of course, it wasn’t called “house hacking” in those ancient days. I’m not sure it even had a name.
But some students, or maybe more accurately, their parents, would buy a place, have their kid live there, “manage” it and rent out the rooms to friends. Usually, at the end of four years, the kid would leave with a diploma and sell the house on.
What didn’t exist, at least to my knowledge, was any kind of manual or book or guide as to how to do this successfully. What worked and what didn’t. It was all pretty hit and miss.
Those days are over and the internet is teeming with information. The problem now is not a lack of resources, but sorting the wheat from the chaff.
Craig is very much on the wheat side of things.
So when his request for a blurb to be featured on the cover of his upcoming book, The House Hacking Strategy, hit my inbox back in July I was honored. And mercenary enough to note that my name and comment on the cover of what was sure to be a successful book held the potential for personal benefit.
But between my travel schedule, being in Europe, Chautauqua and the onslaught of new emails following his; I missed my shot. It wasn’t until a few weeks ago, when I finally had a chance to wade through old emails, I saw it again.
But that is no reason for you not to know about this book and, more importantly, the house hacking concept.
I reached out to Craig and he graciously agreed to write this guest post. It is sort of a Cliff Notes version of the book, if Cliff Notes is still a thing. (It was for me back in school half a century ago.)
In ten short points, Craig will share with you what house hacking is all about. Then, if you want to give it a shot, well, now there is a book about it:
10 Steps to House Hacking
What the heck is house hacking? It’s the idea that you buy a one- to four-unit property for a low percentage down (typically 3% to 5%). You live in one part and rent out the others such that the rent you receive fully covers your mortgage, and you live for free.
The average American spends 34% of their income on housing expenses. The average FIRE enthusiast maybe spends 20%. The average house hacker spends 0% and likely makes money on their housing. What would eliminating rent or your mortgage payment do to your savings rate? How much would it speed up your journey towards financial independence?
In this article, I am going to take you through the ten steps of purchasing your first house hack—from the initial emotional stages all the way to closing and managing your first one. You ready? Let’s do it!
Step 1: Realize the Power
I am a huge personal finance nerd and have been for years. In all of my time researching, networking, and experiencing, I have yet to find a strategy that provides returns in the 100%+ range with little risk. Yup, you read that correctly. 100% or more return. I have done it three times and have achieved these returns (or more) every time! How is this possible?
The first reason house hacking is so powerful is that you do not need a large sum of money to get in. All you need is 3% or 5% of the price of a property. The median house in the United States is $230,000. With 3% down, you’ll need less than $10,000 to get in.
The great thing about real estate is that there are multiple wealth generators. You get wealthier from the rent coming in, the savings from not paying anything, the principal on the loan you are paying down, the appreciation on the property, and the tax benefits. After you add the increase in your net worth from all of these generators, you are becoming much richer than the low amount you put down.
Through this strategy, I have gone from a net worth of negative $30,000 in May 2017 to financially free and hundreds of thousands of dollars of net worth in August 2019. Not a bad deal, right?
Step 2: Pick Your Strategy
Now that you know just how powerful house hacking can be, which strategy is best for you? At first thought, you are likely thinking, This guy is nuts! There is no way I’m going to live in a house with people I don’t know, or even a multifamily property where I need to share walls. Don’t worry! There is a strategy out there for everyone.
Luxurious: This is where you buy your dream home. Only, your dream home has an accessory dwelling unit (ADU) in the back, a mother-in-law suite in the basement, etc. Rather than having your mother-in-law live there, you can rent it either as a short-term rental on Airbnb or as a long-term traditional rental. Either way, the rent will offset your mortgage costs.
Traditional: This is what most people think of when they think house hacking: buy a 2-4 unit property, live in one unit yourself, and rent the other three units out. This way, you get your own place, but you just have to share walls with your tenants.
Rent by the Room: My favorite strategy. This is where you purchase a single family house, live in one room, and rent out the others. With this strategy, you live with roommates, but you still get your own bedroom and quiet place if you please.
Trailer: This strategy is the most aggressive and, as a result, the most profitable. You guessed it! Buy a trailer, park that baby in your driveway and rent out your entire unit. I do have a friend that did this quite successfully for a few months.
Now that we laid out the different strategies, it’s your turn to pick one! Let us know which is best for you.
Step 3: Where to House Hack?
After you pick your strategy, it is time to figure out where to house hack. Lucky for you, the search is already narrowed down to one city: the one you live in! By definition, you need to live in a house hack, so unless you plan on moving, you have to do it in the city you are currently in. I would recommend driving around the neighborhoods and figure out which one you would prefer to live in and which one your strategy would work best for.
For example, if you are renting by the room, it would be best to be near a school, a hospital, or a place where a lot of people are employed. If you want to try the short-term rental strategy, then it may make sense to be by a tourist attraction. For a traditional rental? Maybe near a public transportation line, a bus stop, or a convenient place to live.
I always like to buy in the path of progress. In other words, you do some research to understand where the development in your city is headed, and you buy in that area. Property prices likely have not tremendously increased yet, but they are destined to increase in three to five years once the developments happen.
Step 4: Assembling Your Team
There are two main team members you need when purchasing a house hack: a lender and an agent. Your first order of business is to find a lender to pre-approve so you know what kind of property you can afford. Once you have your lender, it’s time to find your agent so he or she can set you up with an MLS search for properties that fit your criteria. I highly suggest you find an agent that has rental properties and ideally has even house hacked themselves.
When assembling all members of your team, I highly recommend you interview three to five of each. Ask them all the same questions, and pick whichever person you think will get you into the best possible house hack.
Step 5: Financing
Now that you have your team in order, you need to go over the different financing options with your lender. If you are doing a low-percent-down loan, you will need to live in the property for a year.
There are two loan options that I suggest because they are the easiest and cheapest: one is a low-percent-down conventional loan and the other is an FHA.
The main difference between the two is that a conventional loan will be 3% to 5% down and the Private Mortgage Insurance (PMI) will burn off once you have 20% equity in the property. The FHA, on the other hand, is 3.5% down and the PMI will remain until you refinance into a conventional mortgage. Additionally, with an FHA you can purchase a 2-4 unit property with 3.5% down, but you can only have one FHA loan out at a time.
Which loan you choose depends on what you want to buy. For a single-family home, I would recommend doing the low-percent-down conventional. For a two- to four-unit, I’d recommend the FHA. However, make sure that you can add value to that property so you can obtain 20% equity in the property, or refinance so you are able to use the FHA again.
Step 6: How to Find Deals
There are lots of ways to find deals, many of which are beyond the scope of this article. With house hacking, though, it doesn’t really matter that you get the best home-run deal. You just need to get in, eliminate your housing expense, and start saving so that you can do your next one in a year. That one-year timer does not stop until you close on the house.
With that being said, I find all of my deals on the MLS. Remember that search your agent set up for you? You’ll find your deals right there in that email. Most of those properties are livable, and if you pick the right strategy, you can easily offset your expenses.
Step 7: Analyzing Deals & Making Offers
There are a lot of variables that come into play when analyzing a real estate deal: rent, principal on the loan, interest, taxes, insurance, private mortgage insurance, vacancy, capital expenditures, maintenance, and repairs. That’s a lot of numbers to keep track of. How are you expected to analyze a deal and do it quickly so that you can make an offer? That’s what I’m here for.
When analyzing a house hack, you don’t need to know all of these numbers. All that you need is to figure out what your monthly rent is going to be (look at comparable properties for this number), what your monthly payment will be (ask your lender), and how much you need to set aside for reserves. I typically will set aside between $250 and $500 per month depending on the age, size, and location of the property, plus if there are any expected large expenses coming up (roof, HVAC, electrical, furnace, etc.).
Once you’ve done your analysis, it’s time to offer on the property. With house hacking, again, it doesn’t matter that you nickel and dime with the seller to get $5,000 or $10,000 off the purchase price. At the end of the day, that’s $20-$30 per month in cash flow. If your deal is that close, you shouldn’t do it. It is more important to get into the property so you can start saving on rent, cash flowing, and you can get closer to picking up the next one.
When I offer on my house hacks, I usually just offer at listing price. If the inspection comes back with any major issues, that is where I will negotiate the price down.
Step 8: Marketing the Property
Once you’re in the property, it’s time to start filling the vacancies. If you are doing an AirBnb or luxury house hack, I would recommend doing any renovations, staging, getting professional pictures taken, and putting it on the market ASAP.
If you are renting out units or rooms on a long-term basis, I would still get renovations and professional pictures taken ASAP. Once the rooms are ready, start advertising. There are loads of sites out there, and you should put the listing on all of them. The more places your advertisement is, the more tenants you will have inquiring, and the higher probability you’ll get one that you like.
The places that I list mine are: Craigslist, Facebook Marketplace, Zillow, Trulia, Hotpads, Roomster, Roomies, Silvernest. If I can find others, I use those too!
Step 9: Screening Tenants Roommates
In this entire process, this is THE MOST IMPORTANT one. Nothing will make your life more miserable than bad tenants or roommates.
Once you have marketed your property, you will have people of all walks of the earth inquiring. Do your initial screen by talking with them on the phone, checking out their social media, and googling their name. If everything seems okay, set up a showing. I like to do “open house” style showings, where I say come by between ten and noon on Saturday so that I can make the best use of my time.
At the open house, I meet each tenant, shake their hand and show them the house while having a 10 to 15-minute conversation with them. In this time, I can tell pretty quickly if they are going to be a good fit for the house or not. If they are, I send them an application right there before they leave.
The application includes: their income, background checks, credit checks, references, and more. Regardless of how nice they seem, I always make sure they meet my criteria:
- Income = 3x rent
- Background Check = Clear
- Credit Score = 600 or more
- References: Call previous landlords, employers, etc.
If all of these boxes are checked, I accept them and allow them to move in.
Step 10: Managing the House Hack
Congratulations! You just purchased your first house hack. You got it filled up and now people are paying you rent on a monthly basis, and you’re living for free. The bulk of the work is over, and now you just need to manage it: collect rent each month, respond to maintenance requests, and keep order in the house.
To collect rent each month, I use a web application called Cozy. Tenants can enter in their bank information and it automatically gets paid each month. Set it and forget it. While living there, you will know pretty quickly if something needs fixing. I would find a handyman and give them a call when something goes awry. If you can’t find one, try using TaskRabbit. Keeping order in the house is generally easy if you did a good job screening your tenants in step #9. However, if there is some animosity between neighbors or roommates, I would try to get to the root of the problem and solve it ASAP.
There you have it! A brief, ten-step guide to house hacking. I think everyone pursuing financial independence should house hack—it will put you on the super-fast track because you will be eliminating your largest expense, all while gaining equity in a property, paying down the loan, and saving on taxes.
Given the confines of this article, I was unfortunately unable to dive deep into any one of these steps, but I did write a book called…
…where I put everything I know about house hacking in almost 300 pages of text. If this article isn’t enough for you, reading the book will help you acquire the knowledge you need to become a proficient house hacker.
Happy House Hacking!
It has been a 3-year journey, with hundreds of folks dedicating their time and energy to produce, promote and support this project. But now it is here and I am proud to announce my friends Travis Shakespeare and Taylor and Scott Rieckens have just released…
Yes, I have a small part in it. But that is pretty much their only mistake. I’ve seen it twice now and my only regret is I am not an investor. Buy it to enjoy watching a real family’s real journey into FIRE. It is not always easy, but it is always compelling. And it is a great way to spread the FIRE word.