Many people want to invest in real estate but think the capital needed is beyond their means. If you fall into this category of would-be investors, the good news is that there is more than one way to build up a property portfolio. One of the most effective yet least-known ways to buy and profit from real estate is house hacking. Here’s what all new real estate investors should know about house hacking and its role in building a great property portfolio.
What is house hacking?
House hacking is very similar to owning and renting out a multi-unit property. The key difference is that under the house hacking model, you will live in one of the units of the property while renting out the remaining ones. By doing this, you can roll your own living expenses into the cost of the property, saving you from having to simultaneously pay for your own home and a property you are renting out.
If you contribute your own share of the mortgage payment and put the rent you are paid into making additional payments, you can pay down your mortgage much more quickly than you possibly could on your own. And, the faster you pay off your mortgage, the less you’ll spend on interest payments, which in turn actually reduces the total dollar amount you’ll pay for the house.
Since you will be living in the house, the loan you take out to buy it will be more typical of a normal mortgage than the higher-interest ones usually offered on investment properties. If you’re willing to shop around a bit for the best mortgage terms, you will likely be able to conduct your first house hack using money borrowed at a fairly reasonable interest rate.
Can you use house hacking to build a property portfolio?
You may notice that, since you’re only occupying a unit in one property, you can only buy and pay off one multi-unit house at a time using house hacking. While this is true, you can easily get a property portfolio started with house hacking. The first step is to buy, live in, and then pay off your first property. Once you’ve done that, you can simply repeat the process with another property.
The second time, you’ll not only have the combined rents of the property you’re living in, but also those from the one that’s already paid off.
Keep in mind that the cash flow from the first property will actually increase once you’ve moved on to the second, since you’ll be able to move one more tenant into the unit you were previously occupying.
By repeating this process multiple times, you’ll gradually build up a property portfolio of multi-unit homes that will produce consistent cash flow. Since the amount of rental income you’ll receive each month at full occupancy will increase each time you move to a new property, you’ll even be able to increase the speed at which you pay off new properties.
Choosing your first property for house hacking
If you want to build a property portfolio using the house hacking process, it’s important to find the right property to start with. Ideally, you should be looking for a fairly large home that has already been subdivided into three or more separate units. This will save you the time, expense and labor of converting a large single-family house into a multi-unit property.
Aside from being able to accommodate multiple tenants, there are certain location characteristics that can make a property especially appealing for house hacking. One particularly desirable location would be near a local college or university.
College students looking to save on rent are often willing to take relatively small units in houses shared with several other tenants because of the cost savings such arrangements offer.
A nearby college will also supply you with a steady stream of possible tenants, thus helping to keep your property at maximum occupancy.
As you build your property portfolio, the income your previous properties generate will allow you to access larger and higher-end multi-unit homes. For the first one, though, it may be in your best interest to look for something budget-friendly. This will keep your down payment low, as well as allow you to pay off your initial mortgage more quickly. Don’t get something too cheap, though, as a low-quality property is unlikely to attract reliable tenants to occupy your available units.
House hacking as a path to more traditional investing
Although you can build a property portfolio entirely by house hacking, you can also use the strategy to position yourself for more traditional forms of property investment. Once you have three or four properties paid off and generating rental income, you’ll likely have the cash flow needed to buy properties without having to occupy them yourself.
Once you have enough rental cash flow coming in, you could buy a rental property that you won’t occupy while continuing to hack houses by living in them. This is just another way in which house hacking can eventually help you to build up a sizable property portfolio
If you really want to get into real estate investment but don’t have the money, house hacking is a great way to get started. If you find a good triplex or fourplex for sale, get the right tenants, and are diligent about making the largest possible payments on your mortgage, you can be on your way to building a great property portfolio in no time.
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