House hacking refers to a strategic approach to homeownership aimed at minimizing living costs. It involves buying a multi-unit property, living in one unit, and renting the others to offset your housing expenses.
Done wisely, house hacking provides affordable housing while building equity and passive income. However, novice errors can quickly backfire.
Heeding key tips helps maximize rewards and avoid pitfalls when embarking on your own house hacking journey.
Tip 1: Calculate Numbers Conservatively
Crunching numbers conservatively prevents unpleasant surprises later. Avoid optimism bias when estimating rental income, vacancies, maintenance, and expenses. Budget for best and worst-case scenarios.
Build an accurate pro forma spreadsheet incorporating cautious projections. Anticipate higher vacancy rates, overestimate expenses, and repairs, and use realistic rent comps.
Conservative estimates help ensure positive cash flow, even if projections don’t pan out perfectly. Make sure your financing Includes healthy wiggle room.
Tip 2: Screen Tenants Thoroughly
Finding responsible tenants makes or breaks successful house hacking explained. Beyond checking incomes and credit, do in-depth vetting and reference checks uncovering red flags.
Review prior landlord history closely. Interview thoroughly to gauge dependability and compatibility. Make expectations clear regarding property condition, maintenance requests, and grounds for eviction.
Though tempting, don’t rent to friends or acquaintances—keep relationships professional. Follow intuition if someone seems off. Losing one good tenant is better than being stuck with a problematic occupant.
Tip 3: Keep Finances Separate
Avoid commingling personal and rental finances when house hacking. Open a separate business checking account and credit card used only for rental expenses like repairs, maintenance, capital improvements, and vacancies.
Track all income and expenses meticulously using accounting software. Keep business finances organized and documented properly to simplify taxes. Treat your rental like the business it is. Clean financial separation makes managing the asset easier as it grows.
Tip 4: Live In Largest Unit
When buying a multi-family to house hack, live in the largest, most desirable unit. The biggest unit likely commands top market rent, so occupying it yourself means lost rental income is minimized. This also incentivizes renting smaller units first.
And you’ll enjoy the prime unit’s extra amenities. Just be sure to allocate rent from roommates in other rooms properly for taxes. Residing in the best unit works well when starting out before expanding your portfolio.
Tip 5: Manage Maintenance Expectations
Even with tenants handling smaller issues, the owner remains responsible for maintenance oversight, preventative repairs, and replacements. Be realistic about the ongoing workload required to manage the property and tenants properly.
Handle problems promptly to prevent bigger headaches. If the intention is to stay hands-off, hire a property manager to handle maintenance fully. DIY repairs require time and skill. Know your limits and budget more if delegating duties. Maintenance demands never disappear.
Tip 6: Purchase Below Market Value
Seek out fixer-upper or off-market deals allowing you to purchase below market value (BMV). Through more effort, a BMV entry point means greater equity and options long-term.
Seek properties enabling value-boosting improvements or in promising areas poised for appreciation. Be cautious of overpaying just to clinch a deal.
Patience during the search ultimately pays off. Look for forced sales, foreclosures, or inherited properties if pursuing a BMV purchase. Sweat equity can make an undervalued property shine.
Tip 7: Consider Long-Term Plans
Keep eventual exit strategies in mind when house hacking. Will you want to sell the property, do a cash-out refinance to buy more, or transition to a traditional landlord? Define goals for how long you plan to house hack.
Assess if a 30-year mortgage suits the timeframe or if shorter terms allow maximizing leverage. Clarifying long-term motivations guides appropriate financing and purchase decisions. Evolving as your portfolio grows is easier with an exit strategy laid out.
