June 2, 2020
Joe Fairless

Debunking the Most Common House-Hacking Myth

By now, everyone has heard of house-hacking, which was popularized by Brandon Turner at BiggerPockets. 

House-hacking is when an investor acquires a two-to-four-unit multifamily building using a low money down, owner-occupied loan. Once acquired, the investor lives in one unit and rents out the rest. 

One of the major benefits of house-hacking is the ability to buy an investment property with a very low-down-payment. Rather than saving up for a 20% to 30% down payment, a house-hacker can secure an FHA owner-occupied low for as little as 3.5% down. On a $200,000 duplex, this equates to a $7,000 down payment as opposed to a $40,000 to $60,000 down payment.

The other major benefit is the ability to live for free. When you house-hack a duplex, triplex, or quadplex, you have income coming in from one or three other units. Depending on the market, the rental income may equal or exceed your expenses (mortgage, insurance, taxes, maintenance, etc.). When you acquire a single-family home, you pay the same expenses without benefiting from the rental income.

Or do you?

Banks will only provide owner-occupied financing on residential real estate. Single-family homes up to fourplexes are classified as residential. Therefore, whenever house-hacking is discussed, we are told to avoid single-family homes and focus on duplexes, triplexes, and quadplexes (for the above reasons).

However, Theo spoke with Nicole Heasley on my podcast, Best Real Estate Investing Advice Ever, and learned that she got her start in real estate going against the house-hacking grain – she house-hacked a single-family home.

Nicole’s episode will air on 06/08/20 but here is a sneak-peak into her Best Ever advice, which debunks the myth that one can only house-hack a duplex, triplex, or quadplex.

Bedrooms vs. Units

The strategy for house-hacking a single-family home is essentially identical to that of a duplex, triplex, or quadplex. The major difference is that rather than focusing on the number of units, you focus on the number of bedrooms.

Nicole house-hacked a three-bedroom single-family home. She lived in one room and rented out the other two for an average of $525 per month. She also rented out one of the spaces in the two-car garage for $25 per month, bringing her total income to $1,075. After paying all expenses, not only was she able to live for free but made an additional $100 per month in passive income.

Don’t Live in the Master Bedroom

When you house-hack a duplex, triplex, or quadplex, a best practice is to rent out the unit or units that will demand the highest monthly rents. The same logic applies to house-hacking a single-family home. As nice as it would be, do not occupy the master bedroom. Instead, pick one of the smaller bedrooms.

Location Matters

Obviously, the market in which you invest is important. But it is even more important when you are living in the same home as your roommates. 

You will want to find a single-family home that is in a market with a demographic that is like you. For example, Nicole house-hacked a single-family home near the Cleveland Clinic. She was a recent college graduate and wanted to live with other college graduates. Since she bought near a hospital, her roommates were nurses and medical students.

How to Find Roommates

Nicole had lived with roommates in college, so it did not seem weird to share a unit with strangers. But that does not mean she would live with any stranger. She had a system for selecting roommates.

Nicole found her roommate candidates on Craigslist. Then, she would meet them in a public place and bring at least another person with her. If she felt that this person would be a good fit, Nicole would confirm their identity on social media. The final step was to perform a background check.

House-hacking is one of the best ways to get started in real estate investing. After hearing about Nicole’s journey, you now know that house-hacking only applying to duplexes, triplexes, and quadplexes is a myth.

The single-family housing supply is almost always greater than the supply of two-to-four unit multifamily. Therefore, you can obtain the same benefits from house-hacking multifamily but with a lot more options. 

Make sure you listen to Nicole’s full interview on the Best Real Estate Investing Advice Ever show on XX/XX

Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.

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