We recently teamed up with BiggerPockets to bring you a brand-new show all about house hacking. House Hackerz will feature property walks and interviews with investors to talk about why they’re house hacking and how it’s getting them closer to their long-term financial freedom goals.
In today’s real estate market of higher interest rates, we keep getting the same question from our audience and clients. Is house hacking right now a great move or a dumb move? I’m going to walk through the three main reasons why house hacking is a great investment in today’s market and how you can figure out the best way to make it work for you.
- Watch the YouTube video (at the bottom.)
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the video.
Why Does House Hacking Make Sense in a High Rate Environment?
There are three main reasons why house hacking still works even when interest rates are high:
- People always need a place to live, including you and your potential renters or short and medium term rental guests.
- Rising interest rates bump more people from the buyer pool back into the rental pool. This means there are more people looking for a place to rent.
- Historically, real estate is a great investment during inflationary times.
While it makes sense to implement a house hacking strategy in today’s market, you still need to be smart with your money and make sure the investment works for you.
Three Factors for House Hacking Success
There are three factors that will determine how successful your house hack is. Imagine these factors as overlapping circles that need to align. The point where they all overlap will form your buy box. Of the house hacks my team and I have helped our clients with, they’ve been successful or unsuccessful based on how well the investors balanced these factors.
1. Figure out Your Goals
You need to figure out both your big picture goals and your real estate goals. What will it look like to you to achieve financial freedom? Take the time to calculate how much you want to cash flow, what your ideal net worth is, and the timeline it will take to achieve it.
Make sure you write your goals down! This will solidify what you want to achieve and keep you accountable. This is why I write my goals down and share them every year. Go here to see my goals for this year, along with those other Colorado investors.
Once you know your goals, decide what will make the house hack work for you. This usually comes down to how much privacy you need. If you’re younger and single, you’ll probably value privacy less than if you’re a little older and have a family. There’s no right or wrong answer here, just a need to figure out where you fall on the spectrum.
Chris’s Pro Tip: House hacking is a blend of science and art. House hacks are a way to buy a future rental property and figuring out the numbers is the science aspect. But, you still need to live there in the interim. That’s where the art aspect comes in: find the right setup for your lifestyle and situation.
2. Decide on a Strategy
Buying a fourplex isn’t the only way to house hack! In fact, less than 10% of the house hack properties we’ve sold have been multifamily properties. The other 90% are other strategies: room by room rentals, short and medium term rentals, and other options for people who don’t want roommates or tenants on their property.
Learn about the different strategies that are out there and see which one is the most realistic for you.
Chris’s Pro Tip: Figure out your dollar per hour cost. If you want to self-manage an Airbnb, it takes time to set up and continuously manage. Make sure you know ahead of time how much work you’re willing to put in and how much that costs. Remember: your time is not free.
3. Know Your Local Market
Before you get your mind set on a specific property type, get a market reality check. I’ve talked to a lot of people who want to house hack and invest, but what they want doesn’t match up with the market. If you decide you want to find a 12% cap rate property in Denver, you may as well ask for a unicorn, too. Simply put, it doesn’t exist here.
If your strategy and goals don’t match the market, we have a major issue with alignment.
Don’t worry if you don’t get your strategy exactly right on the first try—this is a process that takes time and some compromise. To help you better understand all of these factors, this series will feature multiple videos of property walks with different investors talking about their goals and strategies.
What Types of Properties Can I House Hack?
The easiest way to move from concept to reality is to talk about the different property types that work for house hacking.
What’s the biggest thing you need to remember? Don’t get tunnel vision on one property type. Do you know how many triplexes and fourplexes my team has sold to house hackers in three years? One. And how many house hacking transactions have we done? Over 200.
First, Figure out Your Lending
To figure out what type of property will work best for you, you need to understand your lending options. There are three main ways to finance a house hack:
- 5% down conventional loan
- 3.5% down FHA loan
- 0% down VA loan
All of these loans have different requirements, so it’s important to work with a lender who understands what you’re trying to do. For instance, you need to be a veteran to use a VA loan, and you can’t use the 5% down conventional loan a duplex.
Property Types Our Clients Love
The most popular property type our clients use to house hack is a single family residence with four or five bedrooms. These properties are perfect for the room by room rental strategy.
Another popular option for short and medium term rentals are Accessory Dwelling Units (ADUs). These are separate living spaces or structures that act as a second unit on a property zoned for single family homes. They’re a great sweet spot for house hacking while maintaining privacy.
Finally, a lot of our clients are buying new build townhomes. We love this asset class: there are a lot of infill townhomes in hot parts of Denver. They’re modern, command top dollar rents, and are turnkey.
Chris’s Pro Tip: When you buy a house hack, you’re using an owner-occupant loan. This means you need to actually live in the property. I’m amazed at the number of people—even lenders—who tell others not to worry about it. Breaking this agreement means you’re committing mortgage fraud, which can result in getting in trouble and even going to jail. Either live by the rules, or don’t house hack. It’s simply not worth the risk.
How Do I Start Building My House Hack Stack?
House hacking is a great strategy to build up your rental portfolio. By utilizing the power of leverage, you’re able to buy a very expensive asset for 0-5% down.
Think about real estate like a chess game. Buying your first property is like moving your pawn. It’s one move, but it leads to a lot of future options down the road. A property you buy today will have consequences later; ideally, these will be positive consequences. This is why it’s so important to work with a lender who understands house hacking and will set you up for long-term growth.
You need patience to build your portfolio. It takes years, if not decades, to create real wealth. Figuring out how to stack your house hacks so they make sense for today and will contribute to your eventual financial freedom is key.
Stay Tuned for More House Hacking Content
Throughout the season, we’re going to walk real properties with real investors and talk real numbers. We’ll show you how other local investors are using house hacking to achieve financial freedom. Make sure you check out the BiggerPockets YouTube channel every Monday for a new episode.
If you want to get started on your house hacking strategy, reach out to us for a free investment consultation.