Does House Hacking Work In An Expensive Market?
House hacking is a real estate strategy that involves living in a property and renting out the extra units or bedrooms. This can be an effective way to offset the high costs of living in an expensive real estate market, and as a relatively affordable way to get into the real estate game.
Why House Hacking Works Well in Expensive Markets
It can be challenging to find a great deal in an expensive market.
But, by house hacking, you can take advantage of amazing financing terms which can give you a substantial advantage as a buyer.
You’ll be able to bring relatively little down to the deal (though you’ll have to be wary of loan limits in an especially expensive market). And you’ll be able to enjoy the lower mortgage interest rates available to owner-occupied buyers.
House hacking can be effective in an expensive market because:
- It can help you offset the high cost of living. If you’re living in an expensive market, chances are rents are also quite high. By house hacking, you can offset some of that cost by renting out the extra space in your property, so you’d pay less out of pocket than renting a standalone unit.
- It can help you build equity quickly. In an expensive market, home prices often appreciate at a faster rate than in a less expensive market (though that’s not a given!). And you’ll be paying down the mortgage on that expensive property each month, so you’ll be creating equity more quickly that way as well.
- It can provide steady income. As mentioned above, rents are likely to be high in an expensive market. This means you’ll be able to rent out your extra rooms or units for a greater price.
Things to Watch Out For When House Hacking in an Expensive Market
There are a few things to keep in mind if you’re interested in house hacking in an expensive market:
- Look for multifamily properties. You can still use many of the amazing owner-occupied loan programs so long as the property is 4 units or less. And, when determining your loan eligibility, your lender will be able to factor in the income for the other unit(s) that you won’t be occupying yourself.
- Consider large single-family homes. Assuming you are able to qualify for a mortgage on a single-family home in an expensive area, a large singe-family home can make for a great house hack. By renting out the extra bedrooms, you can potentially offset your entire mortgage (and then some!).
- Don’t forget about condos! Many expensive markets have a significant stock of condominium units, which tend to be relatively affordable options. So long as a condo association allows rentals, they can make for great house hacks.
- Consider a fixer-upper. In an expensive market, you may not be able to find a property that’s already in good condition which also falls within your budget. If you’re willing to put in some work, a fixer-upper can be a great option. Just be sure to factor in the cost of renovations when running the numbers on your potential deal.
- Have reserves ready to go. House hacking can be a great way to save money, but it’s not without risk. Make sure you have sufficient reserves to weather significant, unexpected expenses that will come up from time to time, and to cover for future vacancies.
- Be prepared for extra work. In addition to the usual responsibilities that come with owning a property, you’ll also be responsible for managing tenants. This can be a lot of work, so be sure you’re prepared for it before you take the plunge.
How To Get Started with House Hacking
Once you decide to move forward with house hacking, the process is relatively straightforward. Though it can be intimidating, nevertheless!
Here are some basic steps to follow:
1. Look for Properties.
Get a feel for your market by looking at many properties and running the numbers on them. Try to have a particular type of property in mind when you go on your search. That is, are you looking for a small multi-family building? Or are you looking to house hack a condo? Narrowing your criteria in advance will make your search that much easier.
2. Make Offers
Once you’ve found a few properties that you’re interested in, it’s time to start making offers. It may take a long time to get one under contract, especially in a hot market. But, once you do, then it’s time to move on to the due diligence phase.
3. Due Diligence
This is your chance to conduct an inspection on the property. You can also bring out contractors for bids on work you would anticipate doing. Make sure you learn as much as you can about the property before you close on it.
4. Get Financing
If you’re going to buy a property, chances are you’ll need to get financing. While you’ll want to reach out to a lender before you start your property search, at this point you’ll submit all of the documents your lender will need to approve your loan. Once approved, you can move forward to closing.
At this point, you’ll wire any required funds to buy the property, and you’ll get official ownership. Now the fun really starts!
6. Find Tenants
Once you’ve bought the property, you’ll need to find tenants for the other bedrooms or units. This can be done through listing it online yourself or by working with a real estate agent. Be sure to follow local fair housing laws whenever applicable. Here’s a detailed article about searching for roommates.
7. Manage Your Property
Once you have tenants, it’s time to start managing your property. This includes collecting rent, maintaining the property, and dealing with any issues that may arise. You may consider hiring a property manager for this, though you will be living in the property already, so hiring one might not save you from too many headaches. In short, it all comes down to taking care of your property and being fair with your tenants.
The Bottom Line – Can House Hacking Work in an Expensive Market?
House hacking can be a great way to offset the high costs of living in an expensive real estate market (and in a less expensive one, too!).
By living in a property and renting out the other units, you can reduce your overall housing costs, which can free up money for other investments.
However, house hacking is not without risk. Be sure to factor in the cost of renovations and potential vacancies when you’re running the numbers on a property. And, of course, be prepared to manage tenants if you go this route.
And understand if your property would work well as a rental if you were to move out of it, assuming that’s something you plan to do. A house that’s a wonderful house hack might be a poor “full” rental, so make sure you know what you’re getting into.
With all of that being said, house hacking can be a great way to get started in real estate investing.
What is house hacking?
House hacking is the process of buying a property, living in it, and renting out the extra space. This can be a great way to offset the high costs of living in an expensive real estate market.
How can I find a property to house hack?
Start by researching your area to see what’s available. Take a look at single family homes, condo units, and small multi-family buildings to see what might work as a house hack. Reach out to an experienced real estate agent in your area to help you narrow your search.
What are some things to keep in mind if I’m interested in house hacking?
Some things to keep in mind if you’re interested in house hacking include getting financing, finding tenants, maintaining cash reserves, and managing your property. House hacking, while a great strategy for many, is not without serious responsibility.
How do I get started with house hacking?
To get started with house hacking, you’ll first need to find a property. Once you’ve found a few properties that you’re interested in, it’s time to do double down on your research. Make sure you know everything you could reasonably know about the property and the local market before you actually close on the thing.
House hacking sounds like a lot of work. Is it worth it?
House hacking can be a lot of work, but it can also be a great way to offset the high costs of living in an expensive real estate market. If you’re considering this strategy, make sure you do your research and have a solid financial plan in place before you commit to anything.
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