Today, we’re going to be talking about house hacking and how it can be a great way for you to buy your first property and start investing in real estate!
House hacking is a great investing strategy, where you buy a home, live in one of the rooms, and rent out the others. This way, you’re able to have your roommates/tenants pay for a large part of your mortgage, taxes, and insurance. House hacking is a great way to reduce your cost of living expenses especially in expensive areas like the Bay Area. We’ll be going over the top 3 strategies for house hacking. You can also watch the video I made about the topic:
House Hacking Strategies
The ways to do it are:
Buy a single-family home and rent out the rooms.
Buy a multi-family residence (duplex, triplex, fourplex) and rent out the other units/ADU.
Do it with fully furnished short term rentals on Airbnb
Here are the pros and cons of each strategy.
SFR and Rent Out Rooms.
Buying an SFR and renting out the rooms is the most standard way that people house hack. SFRs are more liquid and have a better potential for appreciation because you can sell the home to another investor or to a family who just wants a regular home. When you’re ready to move or stop house hacking, you don’t need to do anything to convert it back into a regular home.
It’s extremely cost-effective because you just need to rent the rooms out. The tenant figures out their own furnishing situation. They’re responsible for buying their own furniture like their bed, desk, and chairs and are also responsible for moving it in. You just need to give them access to the house and common areas.
I did this when I first moved up to the Bay area, and it was a great way to reduce my cost of living expenses so I could save more to invest in other properties!
The downside with this strategy is that you’re sharing a lot of common space in the house and will see them every day. This might not be an issue for younger folks who are used to living with roommates, but it can be a challenge for people with families who want their privacy.
Parking can be an issue since a typical SFR might only have a few designated parking spots for the home. If the house is part of an HOA or new development, there might not be sufficient street parking for your tenants, which might cause issues with your tenants and might be a nuisance to your neighbors.
House hacking SFRs can be harder to finance because banks won’t acknowledge the potential rents you’ll get for renting out the rooms. Even though you’ll cash flow by house hacking, the bank won’t count those rents towards your DTI calculations. This might also prevent you from buying another house hack in the future.
Overall, for the SFR house hacking strategy, I recommend that you get people you trust because they’ll be your roommates and will have access to your house. It can be great and a lot of fun if you rent it out to your friends. Just make sure you’re able to qualify for the loan without the extra rental income and buy a house with lots of parking.
Multifamily and Renting Out Units
Multiple units mean multiple streams of income. It can be easier to finance. 75% of market rents can be applied towards your income for DTI calculation purposes.
And in case you didn’t know, you can use an FHA loan to purchase these properties as long as you live in one of the units. The FHA loan limits increase for multifamily properties, so even in the Bay area, you can get an FHA loan for a 4-plex.
Another pro is that your tenants are more like your neighbors versus your roommates. So, you don’t have to see them every day.
The cons are that multifamily properties are subject to rent control due to AB 1482. That means it can be hard to remove tenants and increase rents to market value if they’re really low.
Multifamily properties are generally more expensive than single-family properties and it can be harder to sell in the future since regular buyers aren’t looking for multifamily. You’ll probably be limited to selling only to other investors or people looking to house hack as well.
Renting Out Your Home As A Fully-furnished Short Term Rental
Finally, renting out your home as a fully-furnished short term rental is the most profitable way to house hack
You can generally get 1.5 to 2 times the gross rents per room per month.
The downside is that it’s more complicated to set up. The daily turnover means that you need a system to prepare the space every time the guest checks out. There are also higher startup costs since you need to pay for furnishings upfront.
Living with strangers can also be stressful, especially during COVID. It means you can never leave your valuables in your house out in the open. And you don’t know who your incoming guests will be and if they’ll be great or super nitpicky.
Your occupancy can plummet at the drop of a hat as we saw at the beginning of COVID, so your income isn’t as secure. And similar to regular SFR house hacking, banks generally don’t acknowledge the short term rental rents for DTI calculation purposes, so it can be harder to finance.
Conclusion
Overall, house hacking is a great way to buy real estate while lowering your cost of living expenses. Think of it as renting a home, except you’re the landlord and in 30 years, you’ll own it free and clear.
What was your favorite house hacking strategy? And let me know in the comments section if you’ve heard of any other interesting ways that people are earning income with their homes.
If you’re looking for a house hack in the Bay area feel free to schedule a callto see how I can help.