How do I succeed on my first house hacking property?

[Jason Oliver]

I have read the B.P house hacking book many times. Now it's time I take action. How do I succeed on my first house hacking property after I find it?

[Wale Lawal]

@Jason Oliver

House hacking a single-family home or small multifamily property follows the same general steps:

1. Understand financing options
Conventional loans, along with FHA and VA loans, are three common ways to finance a primary residence through a traditional lender like a bank or credit union.

Interest rates are often attractive, even for borrowers with lower credit scores, and down payments may be 5% or less. VA loans backed by the Department of Veterans Affairs even allow veteran borrowers to obtain 100% financing on a home.

According to the Consumer Financial Protection Bureau (CFPB), before shopping for a mortgage a borrowers should:

Check their credit report
Assess how their spending habits will change with a mortgage
Budget for additional or changed expenses
Determine how much of a down payment is needed
Decide on a purchase price of a home
Create a loan application package with personal and financial information including pay stubs, W-2 forms, copies of recent tax returns, bank statements, and proof of identity
2. Search for a good property to house hack
A property that is a viable candidate for house hacking may have characteristics that are slightly different than a home that the owner will live in year after year.

That’s because eventually, most house hackers will turn the primary residence into a rental property as they grow their rental property portfolio. So it makes sense to choose a home that will make a good rental right from the start.

Common factors that real estate investors consider when choosing a good rental property include:

The neighborhood, which will influence the type of tenants the home will attract and the rent they can afford to pay.
Property tax rates, which vary widely from one place to the next and can have a significant impact on the total return of a rental home.
School district quality, crime rate, and overall neighborhood ratings affect occupancy levels and the overall value of the home.
Job market and population growth are two indicators real estate investors consider to help predict the future demand from tenants for rental housing.
Housing Price Index (HPI) and Housing Affordability Index (HAI) are two other metrics investors use to anticipate rental property demand, because when home prices are unaffordable more people may choose to rent rather than own.
Average rents and rent growth also affect where to buy a home to house hack, since the rental income will be used to pay for part of the mortgage and other expenses. Good tools to use to learn about market rents include Rentometer, Zillow Rent Zestimate, and Zumper.
The number of rental home listings and vacancies in the area also indicate how strong or weak the demand for rental property is, because high vacancy rates may lead to lower rents and poorer investment returns.
3. Crunch the numbers before making an offer
Before making an offer on a home to house hack, investors crunch the numbers to get a better idea of the potential amount of income the home may generate.

Even though a home being house hacked won’t be used entirely as a rental at first, investors often look forward to the day when the property can be refinanced and the equity turned into cash to use as a down payment to purchase another rental property.

This simple spreadsheet by Roofstock provides an easy way to view the potential financial performance of a given property. You can use it to forecast the potential return of a property. Simply enter some information to view projected key return on investment (ROI) metrics, including cash flow, cash-on-cash return, net operating income, and cap rate.

4. Close escrow, move in, and make repairs
Closing costs on a primary residence normally run between 3% and 5% of the loan amount, in addition to the down payment. Fees to close escrow on a home include costs such as origination charges, appraisal fee, home inspection, title search and lender insurance, prepaids (such as homeowner’s insurance and prepaid interest), and title insurance.

After taking title and moving in, the part of the property being rented out will need to be made ready for a tenant.

The amount of repairs and updating required will vary depending on whether a bedroom in the home is being rented, a basement or attic is being remodeled into a studio apartment, or extra units in a multifamily property are being updated.

5. Find a good tenant
People who are house hacking and being landlords for the first time should take care to understand the state landlord-tenant laws and the Fair Housing Act to avoid breaking the law or discriminating against a tenant.

When the space is ready to be rented, these are the general steps investors follow to screen tenants:

Determine minimum tenant criteria, such credit score or income-to-rent ratio
Pre-screen tenants by discussing requirements such as the monthly rent, security deposit, rental application fee, and background check up front
Gather and review applications from prospective tenants and get permission to run a credit report, conduct a background check, and contact current and previous employers and landlords to verify tenant information
Decide on the best tenant and sign a lease agreement

All the best!