House hacking is a simple but effective strategy. You buy a property, go into it, rent the units that live with it and start living for free. Or, at least, it seems that simple on the surface. Unfortunately, there are four seemingly impossible criteria. First, the property must be:
- Affordable to conventional financing.
- Stay where you want to be.
- Able to create positive cash flow.
- Able to give reasonable opportunity in praise.
For first-time investors, the hard part of house hacking seems to be financing or finding enough cash flow. But, in fact, the challenging part is deciding where to make that commitment. Buying the rent you want to live in and actively manage is more than just a financial commitment. You will probably live, work and invest in that area for at least the next few years.
For this reason, there are some serious questions to ask yourself before hacking a house. These four criteria mentioned earlier are very important for first time investors and some basic things will help you meet each of them as long as you are willing to be patient and methodical.
Ask four questions before hacking a house if you are just getting started.
1. Can I carry property with conventional financing?
This question has two follow-up questions:
- How much money do I have?
- What is the price of the property in the area I want to buy?
If you want to hack house and still live in a reasonable place in an urban area, you need some cash. Even with great owner-occupant financing terms, if you want to live in a somewhat desirable place near a prosperous city, you will need a substantial amount for a down payment.
Working hard and living frugally will help you save the amount that will cover down payments on properties in the area you want to live in. If you don’t like this fundraising strategy for your first down payment, you should seriously question whether you want to invest in real estate in the first place.
Also, keep in mind that no matter how big the money you will need for repairs. You can spend thousands on plumbing and electrical work, machinery and DIY tools and materials, among other costs.
If you are going to own a property from rent, there may be a chance that you do not own a powerful tool and are not even familiar with the materials needed to work on relatively simple projects such as painting and drywall repairs. Saving extra money as a cushion means you can easily cover all minor repairs and contractor costs. And it can get you a pretty solid little toolset.
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2. Would I be happy to live there?
New and experienced investors alike must recognize that we are investing in improving our financial position and our lives. House hacking does not work if you want to live in an area where you do not want to live. Some people, for example, prefer to live in the city and do not want to live in an area where things like grocery stores, for example, are not within walking distance.
Unfortunately, cities may not be the best place for first-time investors to invest. Features can be very expensive to consider the possibility of cash flow. But that usually means finding places on the outskirts of the city that make more sense if you start investing.
3. Will the property have cash flow?
As a first time investor, there are ways you can take advantage of others. For example, buying a multifamily property is a good idea considering that many other first-timers are not considering them. You can also take advantage of a government program called First Look Program from Fannie Mae.
Fortunately, as an owner-occupier looking to buy a multi-family property, you will have a few serious advantages over the competition. First, you’ll be looking at features that most homeowners weren’t interested in. First time buyers usually do not want to buy duplex, triplex or foreplex.
Second, you may have the opportunity to bid on the property before investors who do not wish to sit on the property due to a special government program – the Fanny Girl First Look program. According to its website, the program gives investors a “first look” at new foreclosed properties. This can give you the edge you are looking for when searching for great multifamily deals in your desired location.
This is because other investors outside the program will not be able to offer the assets for a few weeks. Since the demand for duplex, triplex and foreplex is low among first time homeowners, there is usually less competition. This window can help you gain your confidence to make such a big financial commitment.
4. Is there a reasonable opportunity to appreciate?
Investors refer to the compliment as “icing on the cake”. But, unfortunately, it is not usually considered even in the case of purchase of investment property. While it’s a good idea to look at cash flow first as an owner-occupier, spending extra time looking for investment features that give you a good chance to appreciate and reward you nicely in the long run.
As a house hacker, appreciation can create a stronger financial impact for you than a strong financial stakeholder because of a special tax law that benefits owner-occupants. Assuming you have been in the property for more than two years, most of the capital gains are tax-free when you sell the property. This tax break is powerful for those who want to hack into small multifamily properties because you have the opportunity to take advantage of the compliment as it relates to both income features and small residential properties.
As a multifamily property, the increase in property income can be compelling to appreciate. As hybrid properties, duplex, triplex and foreplex can also benefit from appreciation due to local market improvements. When choosing features, choose the ones that you feel that give you the opportunity to receive both types of compliments.
Appreciate compulsory income
It happens when you, a property investor, control how it is appreciated. This may include cosmetic work such as a good paint job or quality lighting fixtures. But it also includes internal work and maintenance such as bad plumbing replacement.
If you have a strong appreciation when choosing a property, consider one that requires a lot of work and multiple opportunities to improve. In multifamily homes, this also means that you can raise rents for tenants and earn more money and value from investing.
You can add appliances like overhaul, washer / dryer unit and refrigerator of the whole plumbing system and do significant cosmetic work. If you DIY it, it can save you a lot of money because you are not paying the contractors. (Just make sure you know what you’re doing.) These improvements will reduce the cost of managing the property in the long run and allow tenants to be attracted and retained, hopefully improving the property’s long-term income potential.
Capital appreciation is also said to be when the value of something increases over time. One of the advantages of buying a property in the area where you want to live is that, in general, other people want to live there as well. This presents you with an opportunity to appreciate if you have a personal reason to live in an area that applies to a larger population. But look for properties in this neighborhood as part of a government-sponsored infrastructure project.
Hopefully, you will be able to gain both types of appreciation to create enough value from your property in the years to come. Then, you can cash in on this equity tax-free increase and be able to invest in other projects that can generate even more income.
Asking questions before house hacking may seem like a lot and it may be irresistible to people who are just entering this type of investment. But these are the same kind of questions that will set you up for success.
However, don’t be too harsh on yourself. As a first time investor, you are going to make mistakes. A list of these questions will help you avoid many, but waiting for the “right time” to invest means you will never do it. There’s never really a right time to try something new like this, but by reading it, you’re equipping yourself with the wisdom to make the best choices you can.