Many people want to invest in real estate, but many beginners lack at least one of three things:
- The capital needed for the purchase
- The experience in real estate investing
- The time
What if, hear me out, you could accomplish all three in one fell swoop? An option where you don’t need a lot of money, don’t need a ton of experience, and doesn’t take up a lot of your time. This, ladies and gentlemen, is called Housing Hacking.
The concept has been around seemingly forever and in expensive areas such as Los Angeles, San Francisco, New York and the like, it may be the only way for some to get started. That’s how I and my clients have been able to purchase multiple properties in such an expensive area.
The basic premise is you buy a home as your primary residence and rent out the other rooms and/or units. Essentially having roommates, except you collect the rent! Best yet, as the rent prices increase, your fixed rate mortgage stays the same, lowering your overall expenses year after year.
So, how does this solve the three issues for beginner investors? Let’s break it down.
- The Capital Needed for the Purchase
Good news, when it is your primary residence, you don’t have to put down the 20%-30% the typical investor does. In addition, you also get the better interest rate on the loan. Depending on the price point, you can put as little as 3% down. Yes, of course your principal is higher and there is an extra fee tacked on called Private Mortgage Insurance (PMI), but (1) your not chasing the market prices when it comes to saving up and (2) you would be paying a higher interest rate if it wasn’t your primary residence. Except for FHA loans where the Private Mortgage Insurance stays on for the entire length of the loan, you can get the PMI taken off generally after two years with an appraisal showing at least 20% equity (values go up and/or principal balance goes down). And if you don’t want to wait and the equity is there, you can refinance as many times as you would like. On my first house hack, I refinanced twice within the first year of owning. It gets even better because once you move out, if you keep the loan, you keep the lower interest rate, generating even more cash flow.
- The Experience in Real Estate Investing
To be honest, I have two rental properties right now and strategizing on how to get my third by next year. With having a small portfolio, managing tenants isn’t that difficult with the right best practices and attitude in place. But with house hacking, you are there, making it much easier to handle issues as they arise. For Accessory Dwelling Units (or any secondary units for that matter), the rules still apply. You live on the property, so meeting vendors or checking out issues before sending someone out is not as complicated. In my case, my wife and I currently live in our ADU and rent out the main house. If there are issues, the tenants show me, I take a quick look to make sure I know who to contact to fix it, and we are done. That saves me time and money.
- The Time
You, me, Beyoncé, and Bill Gates all have 24 hours a day/7 day in a week. How we use it is up to us. By house hacking, it allows you to do a double whammy. Instead of spending time looking for a place to live AND an investment property, you get to do both. This saves you time. Plus, as mentioned in point number 2, you are already on site to handle issues that may arise. If you know you are going to own the property for a long time and you have your ducks in a row, you can also offer better offer prices than a typical investor would, making you more competitive in a low inventory market. What might not work for the investors numbers wise may work for you.
This is how many people get started in investing. What’s great about adding ADUs as part of your house hack portfolio is your largest expense is the land it sits on, which you will already have. Plus, you can house hack the main residence while the ADU is being built, lowering your overall carrying costs.
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