Owning a house rather than renting can often be a good way to save money and set yourself up with a valuable asset in the future. However, a home can tie up a good portion of your income to mortgage payments and maintenance costs impacting your wealth creation goals. To make your home an investment, consider house hacking.
House hacking is a real estate investment strategy where you live in the house and rent out rooms that cover the total cost of your mortgage. Essentially, your roommates pay for the mortgage giving you the opportunity to use your income differently.
This strategy can help you pay your mortgage faster, help with unexpected financial expenses of home ownership in the early years, or free your money to be invested in other income producing assets.
Getting started with house hacking
Many extremely successful people saw the value of investing in real estate at a young age and are now enjoying the fruits of their labor. One of my favorite stories is the 24-year-old college dropout who bought a 5-bedroom condo for $60,000.
Through house hacking, he rented out four rooms to friends for $300, he was able to live for free while working. Mike Henkel scraped together enough money to buy two more properties in the town. Now, after 42 units, Henkel’s properties are worth $4 million.
His story is an extreme one but it lends itself to the possibilities you can have too.
Your credit rating
Whether you’re looking for that dream home to live in or a good property to rent out, you’ll likely have to work with a bank to get a mortgage unless you’re blessed with heaps of cash. Regardless of which type of loan you want, the bank will take a look at your credit history and credit scores.
Your score will impact the interest rate of your loan. Fortunately, interest rates have been low for the past few years, with 30-year fixed loans typically at around 4 percent. Low interest rates make buying an even better investment, as it means you’ll be able to spend more on the principal of the loan rather than the added interest.
Before applying, get a copy of your credit report through AnnualCreditReport.com and get free credit scores so you have a better idea of where your credit stands.
An obstacle to all potential property buyers is the down payment. This is typically 20 percent of a home that needs to be paid upfront. A smaller down payment is possible, but this likely means higher interest rates or paying private mortgage insurance (PMI). You don’t really want to pay PMI as it’s an added monthly cost that doesn’t benefit you.
However, you may qualify for first-time home buyer loans. Some of these loans allow you to put as little as 5 percent down if you plan to live in the home. And since you’re house hacking you will be living in the home.
Renting out your property
To make money off your real estate, which you want to do when you consider it an investment, you’ll likely be renting out rooms. Here are a few things to keep in mind as a real estate owner-investor:
- Vet your renters carefully. You want responsible people who will pay their bills and won’t require any effort from you to oversee.
- Draft an agreement that sets the payment amounts, terms, and rules of living in the house. This also means getting familiar with local laws and ordinances.
- Require your renters to take out renters insurance for their protection as your homeowners insurance may not cover their belongings.
- Budget for repairs since the house will get more wear with multiple people living in the house.
Making the right financial moves
Buying can make financial sense. In addition to being a homeowner, you’re also learning the difference between ownership and investment. A home is not necessarily an investment when it’s your primary residence with a mortgage liability that’s decreased your net worth and monthly payments reducing your net cash flow.
Homeownership has many benefits and not a bad financial move as some people may state. Owning a house can mean you get the opportunity to create a home that is a place of rest and relaxation. House hacking can simple expedite your progress towards financial independence and freedom as a homeowner.
Investing in real estate can carry benefits that impacts your financial wellbeing. Through house hacking, you can start with the home you live in.
Just remember to do your homework, be intentional and resourceful This can be a fun and rewarding path.