Home hacking is a great strategy to introduce to clients who are interested in purchasing an investment property but may not have enough money to own a separate rental property. This is what you need to know.
Low mortgage rates and high demand from buyers have made both seasoned and new investors hungry to jump into the real estate market. But the dwindling housing inventory has caused bidding wars and strong increases in listed prices nationwide. For many, this has put their real estate investment dreams out of reach, but domestic hacking has the potential to overcome these financial hurdles.
The economy is just beginning to recover from coronavirus shutdowns, and saving for a big down payment And the associated costs of owning a property can seem far away.
However, through home hacking, buyers with good credit can buy a property for just 3.5 percent discount while minimizing your monthly mortgage payments and maintenance costs.
Here’s what brokers need to know about home hacking and what to educate their investor clients.
What exactly is house hacking?
Home hacking involves buying a duplex, triplex, or fourplex and living in one of the units while renting the others to tenants. The income generated from monthly rental payments is usually enough to cover almost all or all of the owner’s monthly mortgage payments, dramatically reducing the amount of money they need to spend on the property’s mortgage and other costs.
House hacking is good for investors who want try real estate investment without the full commitment to buy a rental property. Although it is common for hackers to start with one or two properties, expanding can be easy once a property’s cash flow is combined with W-2 income.
For clients looking to quickly expand their home hacking operations, agents may suggest that they sell their current property and purchase multiple replacement properties with the proceeds, using a Change 1031 to defer capital gains taxes.
How to hack a house
If your clients are ready to start hacking the house, use the following steps as a guide for your investment journey.
1. Find a property
Staying on top of MLS alerts and getting to a property ahead of competition is crucial, especially in today’s seller’s market. Make sure to set up notifications for clients whenever a home that matches your criteria hits the market.
Off-the-market properties are another good way to find potential hackers, but this method takes a lot of time and perseverance. Tap your contacts to see if they would be willing to sell a property even if it is not listed.
Investors can use online tools like Zillow’s Zestimate to get an idea of a property’s value. For homes on the market, the mean margin of error is 1.9 percent, and for off-market homes, that’s 7.5 percent.
2. Choose the right financing
There are three main paths investors typically take to finance a home hack. The first option is an FHA loan, which requires as little as 3.5 percent down payment. These loans are backed by the federal government and therefore come with strict rules.
Borrowers will have to pass an FHA inspection and show that the property has no major defects (eg, no peeling or leaded paint, all central systems in good working order). These loans do not have high credit score limits (minimum 580).
Conventional mortgages are the next option. These loans require 10 percent to 25 percent less for a useful life of 15 to 30 years, but have higher minimum credit score limits than FHA loans (around 620 minimum).
If your client is a veteran, you should definitely look for a VA loan. These loans require a 0 percent down payment and the inspection process is less rigorous than an FHA loan.
Once your clients have purchased the property and taken out a loan, they always have the option to refinance later for a better interest rate. They can also request a personal loan for reforms with ARP as low as 4.99 percent.
3. Consider monthly expenses
To understand how much money a property can actually make, make sure clients understand the expenses involved in owning a home.
In addition to monthly mortgage payments and closing costs, you will have to budget for property taxes, homeowners insurance, utilities, maintenance, apartment vacancies, capital expenditures, and house administration fees. the property.
4. Resident owner
One important thing to make clear to your clients is that hacking the house means that they will act as a resident owner. Some investors may be tired of this fact and might think that tenants will constantly knock on their door to make repairs or discuss the rent.
Offer tips for managing tenant expectations, such as presenting themselves as the property manager rather than the owner, including “rental rules and communications” in your lease, setting up payments online, and conducting background checks for all tenants.
Home hacking is a great strategy to introduce to clients who are interested in purchasing an investment property but may not have enough money to own a separate rental property. Just make sure they understand what is involved and the level of time and commitment it will take for your investment to be successful.