House Hacking to Build Real Estate Wealth

by adidasw1 · Published July 14, 2022 · Updated December 8, 2022

Owning your own home can help you achieve your goals if you want to build wealth. House hacking is when you rent out your home. You can rent out a spare bedroom, a part of your multi-unit property, or live with a roommate. How do you get started with house hacking? Real estate investing can be intimidating for young people because of the 20-25% down payment required to get a loan. However, with house hacking, a tiny down payment can work.

If you qualify for USDA or VA, you have a great advantage. You can get away with 0% down payment although their upfront fees are high. Other options include a conventional mortgage and FHA loans. Not all houses are “hackable” in equal measures. When buying a multi-family home, ensure that it will still be able to meet cash flow needs should you decide to move. Having roommates so you can cut down on expenses is a great idea but having negative-cash flow will not help much. It is not financially impossible for most people, but it is socially impossible.

You need to be flexible and trust people. However, think of the financial benefits. You will save so much on the mortgage. Even people with families (including kids) can successfully house hack. House hacking requires money. Save up money while living in the house. When you move out you should be able to convert the property into a cash-flowing rental. Consider the following calculations before venturing into house hacking. According to the 1% rule, the gross rent of a rental property should be equal to 1% of the value of each property every month.

If a house is worth $200,000, the fair-market rent should not be less than $2,000 per month. With you living in the property, the 1% rule is not that significant. Evaluate the house as though you are renting it all out. The 1% may seem impossible. In this case, consider multi-family rental properties. You will have a higher chance of earning more income compared to the value of the house. If you want to rent it out on Airbnb, be realistic in your estimate.

You cannot assume that you will have visitors every day of the month, each paying the full price. If the property passes the 1% test, it will have a positive net operating income. This is what you can expect after paying the mortgage. When calculating your cap rate, factor in the idea that you will be living in the house as well. The cap rate you want to attain depends on your goals. If you love the cap rate, it is time to decide whether or not the house is perfect for house hacking. First, calculate the yearly cash flow based on the amount you expect tenants or roommates to pay as rent. The result may be negative. Now, calculate the cash flow based on what you would receive if you were not living in the house (imputed cash flow).

When you have the capital, rental property investments can be rewarding. But even with little money, making one million dollars is possible. The more money you have saved up for investment in rentals, the easier it will be for you to make $1 million. This plan is going to assume that the potential investor earns $75,000 and they are able to save 10% of their salary. $75,000 may not seem like much since you need more money to buy rental properties. Lucky for you, there are ways through which you can buy investment properties with less money.

In your first year as an investor, you are better off buying a REO or HUD home. It may require some work, but it will qualify for a conventional or FHA loan. Purchasing properties below market value is a good strategy and with REO or HUD homes, you can do that. Suppose these homes cost $100,000. First, you need to purchase a house. Buy it as an owner-occupied and turn it into a rental later on.

For instant equity, look for a great deal. The best way to get this deal is to purchase a house that requires repairs. In the case of a HUD home, $5000 of the repairs can be rolled into the loan so you will only have to put down 3.5%. If a lot of money will be required for the repairs, roll the extra money into the loan using an FHA 203K loan. In this case, assume that the house will need $4,000 in work for a loan qualification and you purchased a HUD home— the costs are rolled into the loan. Now, an FHA loan requires you to pay monthly mortgage insurance and a mortgage insurance premium upfront (the estimated cost is $200+ a month). The mortgage insurance for a conventional loan is much lower than that of FHA. Nevertheless, it may not be possible to roll repairs into the loan.

Before closing, ask the seller to make some repairs. For cosmetic repairs, you can get a loan before closing without having to make the repairs. The estimated amount you will need to close on this hypothetical property is about $5,000. Because repairs were needed, and it was a foreclosure, the amount is below the market value. Once the repair is done, it’s worth will be around $125,000. If you buy the home as an owner occupant, you must live in it for no less than one year. After the first year, you will gain $22,000, give or take, in net worth— that is, $125,000 minus $100,000 (purchase price) minus $4,000 (repairs) plus $1,000 received in equity pay down. Remember that you did not collect any rent in the first year because you occupied it as the owner to receive a lower down payment. In the second year, you can rent this house and purchase another owner-occupied house with the same strategy.

If you purchase the house immediately, you cannot count the first house’s rent as income right away. For this to work, try to purchase homes priced very low so that you qualify for two homes at the same time. Otherwise, you will have to wait about a year before the rent counts as income. For FHA mortgage you can only get one at a time. So, in this case you will have to opt for a conventional loan (5% down). In year two, you will have saved up another $7,500 from your salary and you will have an extra $2,500 from year one. The total will be $11,500. The second home will cost $100,000. The seller will pay 3% closing costs. For the second house you will need $5,000 for down payment and $5,000 in repairs. The total cost will be $10,000 for an owner-occupied house.

The repaired value will be $125,000. Say you rent the first home for $1,300 a month and taxes and insurance eat up $550. If you factor in maintenance, vacancy, and mortgage insurance, the positive cash flow could be $300 a month. In year two, you earned $25,000 from purchasing the second home (equity) and $3,600 from cash flow. You also earned $2,500 (equity pay down for the two loans). In the second year, you used all of year one’s savings, but you made $3,600 (cash flow) and saved up $7,500. The total is $11,100. Using an owner-occupied loan and $10,000 cash, buy another home. Your net worth rises to $53,000 after you have added equity gained for the new home, equity pay down and cash flow. Again, you rent the second home. In the fourth year, you buy another home below market value.

Your cash flow will increase to $7,200 a year. Add to that $7,500 in savings and $1,100 previous savings. You will have a total of $17,300 saved up. From this amount, subtract $10,000 for a new house. Your net worth has now increased $25,000 plus $4,500 (equity pay down). Your total net worth has increased $90,800 in four years. You have four homes, three of which are rented out. You can remove the mortgage insurance at this point for the conventional loan, but this plan will not do that. In year five, repeat the same process to get the following numbers. Your cash flow is now at $10,800, $5,800 previous savings and $7,500 saved up.

The total is $25,600. If you buy another home, you will use $10,000 and remain with $15,600. Your net worth increases $10,800 cash flow, $25,000 for buying a new house and $7,000 for equity pay down making a total of $133,600. It may be difficult to get four houses but since you are buying them as an owner-occupant, the loan is easier to get. In the sixth year, repeat the same process. Previous cash will be $14,100, cash flow of $14,400 and $7,500 in savings. The total will be $37,500 then subtract $10,000 for a new house. In your account you will have $27,500 left. Your equity increases to $13,500, added to $25,000 from the purchase and $14,400 in cash flow. Your total net worth increases by $186,500. Buy the seventh home. In the bank you will have $26,000 (previous savings), $18,000 (cash flow) and $7,500 (new savings).

The total is $53,000. This year, you can purchase two houses, an investor-owned and an owner-occupied. For the investment property you will need to put a minimum of 20% down and money for repairs. Since you will still buy below market value, it is assumed that you will add $25,000 and $3,600 in equity and cash flow respectively. For down payment and repairs you will spend about $32,000 for the investment property. After buying two houses, you will be left with $11,000. Your net worth increases by $60,500 making it $247,000. In the eighth year, you buy two properties. After adding equity pay down, increased cash flow and the extra homes, your net worth increases by $98,000 in a year making your total net worth $345,000. After buying a house (owner-occupant) in year eight, you will remain with $42,200. You will be able to acquire another investment property but don’t.

Even while making $75,000 a year, your net worth will increase by $100,000 in a single year. In year nine you will add $26,500 (equity pay down), $25,000 (equity with purchases) and $28,200 (cash flow) making an increase of $80,300 in net worth. Over the nine years, you will have increased your net worth by $425,500. After buying another house you will be left with savings worth $60,000. You can purchase another home and still have $26,500 left. In the tenth year, you can purchase two more houses and remain with $28,000. Your net worth goes up by $114,500 making a total of $540,000. In the eleventh year, you can purchase two more homes and boost your net worth by $129,000 making a total of $669,200.

At this point your cash flow is $43,000 a year and after buying two houses you will have $36,700 left. If you want, you can even purchase a third one. In the twelfth year, with $94,000 available, buy three homes if you want. If you decide to buy three houses, you will have $22,000 left in savings, $44,500 equity paid down and cash flow amounting to $50,400. Your net worth is $814,000. Because in the twelfth year you purchased three homes, the thirteenth year your net worth has increased by $190,000 and your net worth is $1,004,300. Your cash flow is $61,200 a year. You have also paid $54,000 of equity. You have 16 rental houses giving you more than $60,000 a year.

Variables Not Included in the Plan

Inflation: it may cause wages, rents and prices of homes to increase.

Taxes: the issue of tax can be complicated.
Refinancing: you can easily refinance some properties and be able to acquire more but that was not factored in.
It is difficult to get a loan more than four times.