Discover how you can live rent free by house hacking. And it's never been easier thanks to some brand new changes for 2024.
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What is House Hacking?
Housing hacking is living in one unit and renting out the other units of your property, and it's never been easier thanks to some brand new changes. For most people, their rent or mortgage payment is the largest bill they have each month. Imagine living rent or mortgage free! How would your life be different if you didn't have to pay that bill? Let us know in the comments below or text FREEDOM to 305-315-8030.
House Hack with Multifamily
While you can house hack a single-family home, it's much better to house hack with multifamily real estate. Specifically 2-4 unit properties, which keeps you within the residential financing guidelines. 5+ unit multifamily is considered commercial real estate, even though its use may be residential.
One of the benefits of house hacking a three or four-unit property is it increases the likelihood of having positive cash flow every single month because you're introducing economies to scale; more tenants provide more rental income. Whereas a two-unit property might just help you offset your costs, which is still very helpful when trying to get ahead and lower your expenses. I'm not saying a two-unit property can't cashflow. It’s just that three or four-unit properties have a higher probability and likelihood of being able to cashflow when done right.
House Hacking ADUs (Additional Dwelling Units)
There’s is another opportunity to think about, and that is ADUs or additional dwelling units. Now more than ever across the nation, the government is encouraging these to be built due to the lack of inventory. So if you own a single-family home, here is a great opportunity to add an additional unit to your existing property.
For example, California's assembly Bill 1033 could be a game changer and set the tone for other states to follow suit. As I mentioned before, your rent or mortgage payment are typically the biggest bills you have each month. Think about it. How much more could you do if you could offset this expense? Since we have a better understanding of the type of properties we suggest house hacking, let's move to how we go about finding these deals.
On Market vs Off Market
When it comes to finding property, you have two ways of going about this; looking at on-market deals, which are typically listed on MLS with an agent, or off-market deals going direct to the seller. Since I have my real estate license myself, one piece of advice I have for those buyers working with agents is to make sure to get pre-approved before going out and looking at property.
However, our team at Freedom Mentor would argue the best deals are found off market through the techniques we teach our students. We like to focus on getting to deals before the market knows they're for sale. But knowing how to fund the deal is just as important as knowing how to find the deal.
It’s never been easier to house hack multifamily property, and here's why:
3.5 % Down FHA Loan
One option to consider is a 3.5% down FHA loan, but there are some limitations to FHA financing such as stricter appraisal guidelines, smaller loan limits, and one that many miss, which is the FHA self-sufficiency test for three or four-unit properties.
5 % Down Fannie Mae Loan
Fannie Mae just announced a 5% down conventional owner-occupied loan. In past years, this same loan required 15 to 25% down. That is a significant difference in the amount of money you need to save up for a down payment. In comparison to the FHA loan, the Fannie Mae option of 5% down conventional loan has far less restrictions. Plus, when making offers, a conventional loan versus an FHA loan is more attractive to the seller, especially in multiple offer situations, which some of you may be facing right now in this market.
But you may say, “Devin, I don't have the ability to save right now, or I don't have the best credit. What can I do? What are my options?” And this brings me to a topic that we love, and that is creative financing. In fact, Phil has a great post on this subject called Creative Financing Comparison, where he explains in detail various creative financing techniques, the same techniques we teach our students how to deploy on the deals we help them find. But keep in mind these strategies are typically best implemented with off-market deals, direct with the sellers.
So why are we excited about house hacking multifamily? Well, as one of my mentors shared with me, everyone needs a place to sleep and a roof over there head. Secondly, it's because there are so many people in the market looking for a place to rent. Whether it's because they're sitting on the sidelines for interest rates to come down, or their student loan debt is impacting their DTI (debt to income ratio), which may not allow them to qualify for a loan. Whatever the case may be, you can literally handpick the best tenants right now to fill your property.
As coaches, we've seen it all here at Freedom Mentor, and even though we can pick the best tenants, we don't just take their application information at face value. Sometimes it can be a little tricky determining who will or who won't be a good tenant just solely based on their application. Here are three things that I learned over the years from my mentors that are absolute gold when selecting the right tenants:
- Look at how the tenant keeps their car. This may be a very good indicator of the way they'll be keeping your property.
- Drive by where they live to see how the tenant maintains their current property. If they live in an apartment building, obviously this will be more difficult.
- Try to get multiple landlord references because the property they're moving from, that landlord may want them out and just be telling you what you want to hear so they can get rid of them as a tenant. But what's encouraging is, when you pick the right tenants, you could be living rent-free or cash flowing month in and month out.
Every Successful Real Estate Investor Has a Mentor
House hacking is absolutely doable! If you want to do this and do it right, and are looking for coaching or mentorship, apply to our mentorship program here: Freedom Mentor Apprentice Program.