When you hear the term "house hacking," it's usually associated with multi-family properties of two to four units, in which you live in one unit and rent out the rest. However, house hacking a single-family home is an excellent approach for novice investors to get started quickly. In this post, we'll show you how to analyze a house hack on a single-family home:
Let's say a home in Los Angeles goes for $350,000. Although we opted for a conventional loan, let's say we had purchased with an FHA loan, one of the most inexpensive loan options, backed by the government. Our downpayment would cost us $12,250.
That means our total loan would come out to $337,750.
Because you're working with an FHA loan, you'll need to pay PMI, or private mortgage insurance. Lenders will require this for any downpayment less than 20%. In our case, and for simplicity sake, let's play with round numbers. Assuming your interest rate is something around 3.5%, your total monthly expenses including Principal & interest, insurance, and taxes comes out to around $2000.
In our area, a one bedroom in a shared 2 bed 1 bath goes for about $1500. That means our total monthly expenses are $500/mo. Not bad!
But that's not the half of it. Each month you are paying down your principal and interest. Looking at an amortization schedule will help you understand your loan pay down each month.
Additionally, you should expect some appreciation. In growing cities with a healthy economy you can expect something around 6% per year or even higher!
Consider the alternative. If you were to rent in the same city, you would be spending $1500/mo to rent a room, or triple what you would pay with your house-hack. And that money goes to pay down someones else's mortgage. That's cash you'll never get back.
You can see why house hacking can be such a great approach to getting started in real estate. Not only are you able to immediately save money, but you're building equity and cash flow each month!
Once you've saved some money, and gained the experience necessary to manage a property, you can sell your first home and use those proceeds as a downpayment on your next property.
Here's a little secret: the example above is real and it was the first purchase we ever made. But I left out some important details... Immediately after closing we got to work on legalizing an unpermitted basement with exterior access. We spent $25,000 and transformed it into a rentable studio (legally designated as an Accessory Dwelling Unit or ADU with the city.)
We took our time on the rehab as we lived out of the completely untouched first floor. In 6 months, our rehab was complete and permitted with the city. We rented the unit for $1800/mo.
With the extra unit and additional legal square footage, the property appraised for $600,000! Well beyond our expectations. We refinanced into a new loan and took out $165,000. In less than a year, we made $110,000, tax free. We still own the home and it cash flows $1,500/mo! So, don't be discouraged if you hear the nay-sayers telling you real estate investing is impossible in expensive cities. Wherever you live, there is a strategy that will work for you!
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