The Biggest Heist In Real-Estate – House Hacking

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I am absolutely in love with learning and sharing all things real estate. I’m an agent for Jacaranda Real Estate In Harare, Zimbabwe. This blog will be the ultimate resource for all things real estate so subscribe and stay tuned.

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What Is and What Is Not House Hacking?

It seems like everywhere you turn on the internet someone is preaching their definition of house hacking and their way of tips, tricks, and knowhow on how to get the best out of it – And I am here to jump on that bandwagon and throw in my 2 cents on the whole ordeal after scouring blogs, videos, books and minds to learn as much as I could.

House Hacking is a shared accommodation real estate strategy that involves a landlord (Home Owner) using their property as a business with the intent of earning enough income to at the very least cover their mortgage payments to covering all their costs of living on a property

Through all my scouring and research I’ve established the following 3 key points that are required to appropriately consider yourself a “House Hacking aficionado:”

  1. You need to be living in a property.
  2. You need to have an income-generating business running from your business while living in your property.
  3. Your income-generating business needs to generate enough income to at least cover the cost of accommodating the property to (and) over the cost of living on the property.

The above, are my *personal* necessities for what you need to qualify to join the house hacking community. So what does my list not include?

  1. You need to be living on the property but you don’t need to be the owner of the property.
  2. You need to share your home with a business but you don’t need to be a landlord.

Allow me to dissect my rather controversial statements:

  •  You need to be living on the property but you don’t need to be the owner of the property.

The common household mentality when it comes to house hacking is that you need to own/be in the process of owning your property; aka you need to be repaying a mortgage to be a house hacker. This is pretty much referencing that you need to be the landlord of the property.

I disagree. To my knowledge, the desired concluding outcome of house hacking is to live for free on a property and not to own your property.

Though the most common practitioners of house hacking are homeowners, when you take a look closer look at their situation:

– they are required to repay their mortgage monthly to an entity that they owe money too for that very property (the bank) or they risk litigation and being removed from that property –

The relationship that the landlord has with the bank for purchasing a home is pretty much the same as that between the landlord and their tenant for renting a home. And both can feasibly house hack.

If you as a landlord (homeowner) are house hacking by generating income to repay your mortgage by renting out a few rooms or an attached home on your property, just how much of a difference is it from a situation whereby a tenant sublets a room to generate income to repay their rent to you?

Subletting on its own is whole other debate and discussion that would need a whole dedicated post to fully cover; which I have luckily covered (HERE) but as for this discussion, I’ll leave it at that to state my point.

With the focus on house hacking, a lot of you may be thinking that the opportunity to sublease is often rare and frowned upon; which is correct and also leads me to my next point…

  • You need to share your home with a business but you don’t need to be a landlord.

The next and probably the most controversial opinion of this post is this; “you don’t need to be a rental landlord to take part in house hacking.” Let me explain.

As I previously stated above, the intended outcome to have successfully house hacked is to be in a situation where your cost of occupying your living arrangement is covered by a business that is being run in your property.

It just so happens to be the fact that when people commonly think about generating income from their home, they primarily and wrongfully think that the only option is to rent out their property.

Allow me to take a few paragraphs to explain my standpoint on this thought:

Early on, out of high-school in 2015, I put my hand into many entrepreneurship pots to try and put some money in my pocket.

One of these pots involved me going to a seminar that was run by a newlywed couple in their newly bought home that they still had a mortgage on (as they blatantly mentioned during their co-speech). The couple pointed out that over the past year, they were essentially living for free on the property because their home-based business was consistently earning them a monthly income ranging between $800USD – $1200.

What was their home business you ask? As you’ve probably guessed from the context; it wasn’t renting out their property through a  spare bedroom or cottage – they didn’t have a cottage and their kids had taken over any spare room they could have used for such.

It was converting their garage and half of their backyard into a mushroom farming operation that earned them potentially more income than they could have earned from renting out their entire property? Does this qualify as house hacking – I certainly think so.

Now, this website and blog are about leveling up your real- estate investments and mindset and not about mushroom farming but there are a lot more opportunities to potentially earn income from your property than you’ve probably considered before and that includes a lot more opportunities to house hack. 

How Do You Start House Hacking?

As I’ve mentioned, this post has less to with the focus on house hacking through renting and more to do with understanding the house hacking mentality of seeing your business as more than just a rental opportunity and more as an overall business investment.

For this, we’ll be dissecting the house hacking equation that will allow you to see whether or not any potential run-from-home business (including renting out) is viable to qualify as a house hacking opportunity that that can meet our 3 points of criteria for house hacking:

  1.    You need to be living in a property.
  2. You need to have an income-generating business running from your business while living in your property.
  3. Your income-generating business needs to generate enough income to at least cover the cost of accommodating the property to (and) over the cost of living on the property.

The 2 House Hacking Calculations.

The house hacking equation is a formula and mindset that has you perceiving your home far more from the perspective of a business than a home.

The main outlook of this perspective has a focus on managing your home by taking a more hands-on approach to controlling your income generation and expenses from living in your home.

As I lightly mentioned above, there are 2 potential goals to successfully house hack:

  • Earn enough income to live where you live (cover your mortgage or your rent).
  • Earn enough income to cover all your costs of living where you live (mortgage/rent + utilities, facilities, and basic commodities).

The house hacking equations are 2 calculations that can be used to achieve either or both house hacking goals.

Calculation 1 – The 1% Rule.

This was originally a rule for how to properly gauge the viability of the amount rent you want to charge for a tenancy on your property but can also be used to generally gauge the viability of any business investment you want to run from your home.

The rule goes like this:

Your gross monthly rent can only be equal to or greater than 1% of the purchase value of your property.

If your property was valued at $375, 000 when you bought it, any viable business investment to qualify for house hacking (rental or otherwise) must generate an income equal to or greater than $3, 750 per month.

  • If your property was valued at $525, 000 then it’s $5, 250 per month.   
  • If your property was valued at $750, 000 then it’s $7,500 per month.    
  • If your property was valued at $1, 000, 000 then it’s $10,000 per month.
  • And so on and son

Fairly, this rule was intended for the application of renting the entire property to a tenant and not with the intention of you co-living on the property with your tenant/business. Some have conservatively settled to say that if you are co-living on the property; a 0.5% rule is viable.

This doesn’t take away the fact that some large properties that have cottages and duplex establishments can fairly achieve the 1% rule but certain factors such as the size of what you can rent, the reputation of your neighborhood and the amenities you offer – can make the 1% rule impossible.

With my statement of thinking outside the box concerning other business ventures you can run from your home to house hack, you can potentially be more lucrative in your house hacking venture by doing something else that isn’t renting – say Airbnb?

It is always important to be realistic with whatever house hacking venture you go into; rentals are easy to evaluate because they often stably generate an income – the same can’t be said for other business opportunities.

Unless you live somewhere forever tropical, your Airbnb estate won’t be accommodated 24/7 – 365. I wrote a comprehensive blog on what’s better to do in your situation between Airbnb and Renting (HERE).

 The 1% rule is primarily focused on making sure homeowners are comfortably on track to repay their mortgage.

For tenants; who don’t have a mortgage and could potentially be renting for life or for homeowners who are focused on the second goal of house hacking (to cover all their costs of living on a property and not just the cost to live on the property) – the second calculation provides a better rule to follow.

Calculation 2 – Net Operating Income Of Property.

This calculation is a better method for tenants or individuals who have paid off their mortgage and are now looking to take house hacking to the next level where the business side of your home is paying for the majority of your living costs for your home and not just the cost to live at your home.

Let me explain the above sentence because I’ve repeatedly mentioned it without clarifying it.

The cost to live on your property; This is what you have to pay to occupy where you live. The inability to pay this cost would inevitably result in you facing legal repercussions that could see you kicked out of your home.

If you have purchased a home; the cost to live is paying a mortgage.- if you are renting a home; the cost to live is paying rent.

The costs of living on the property; This encompasses the average total bill of your monthly home dedicated expenses.

This the bill for your food, utilities, renovations, repairs, etc. Any bill that is directly related to you living somewhere but is not your mortgage; is your cost of living.

*For Tenants, house hacking depends on you seeing your rental payment as both “the cost to live” and a “living cost.”

+ Expected gross rental/investment income:

  • Monthly: +$750
  • Yearly: +$9,000

– (Vacancy rate + monthly rental expenses)/Investment expenses:

  • Monthly – $500
  • Yearly: – $6000

– Property taxes (dependant on your state) * no property taxes here:

Say yearly: -$1000

+Tax benefits (renting or business):

This depends on your state and can be earned from renting to specific individuals, treating specific expenses as tax-deductible business expenses and identifying a portion of your home as business property.

Say: +$200

– On property Insurance costs – *you pay (property, rental, business):

Say: -$800

– Shared utility contributions (if any):

 Yearly: -$150.

Other monthly property-related expenses:

 Yearly: −$1,200

Net:

Yearly Income = ($9,000 + $200) = $9,200

Yearly Cost = ($6,000 + $1,000 + $800 + $ 150 + $1,200) = $9,150

Yearly Net = $9,200 – $9,150 = +$50

The above example is merely just an estimated projection with no based research for any tenancy or project. It merely presents the founding equation you will need to work out whether or not your income-generating investment can cover your cost of living (out of the mortgage or in a rental).

The figure above may not be flattering to say that your house nets you $50 a year but it is a full-on statement that you not only lived where you live for free but you got paid to live there. If that isn’t house hacking; I don’t know what is.

How Long Do You Have To Live In A Hacked House?

Practically speaking, you’ll begin to reap the benefits of house hacking at the end of the first month. You would have had your living bills paid.

The majority of individuals who house hack are homeowners with a mortgage. In that environment, you’ll significantly see the benefits after a year of having your mortgage paid and you reap all the benefits if you continue house hacking until you’ve fully paid off your mortgage.

What Type Of Properties Can You House Hack?

In general, any habitable property can be house hacked:

  • Single-family homes.
  • Single-family homes with attached properties (cottages and duplexes).
  • Mid-sized cluster properties (multi-unit – triplexes, quadplex, +++  and townhouse complexes)
  • Large cluster properties (hotels and apartments)
  • Housing megastructures (Residential Towers )

 For the particularly savvy, you can even partake in some ultimate house hacking through living where you work. Which I dissect in detail (HERE).

If you can live there and run a form a business that pays your bills; you can house hack there.

The general rule of thumb is this; when it comes to house hacking. “The more accommodation units on the property you have; the more rental house hacking becomes viable – The fewer accommodation units on the property you have; the more creative you need to be in your house hacking.”

If your own an apartment block or fully rent a home with 3 spare bedrooms; house hacking through renting will likely be viable. If you own or rent a 2 bedroom home with no attached property; you’re going to need to become more innovative on how to make money from your home.  

Is House Hacking A Good Idea?

We’ve evaluated the foundation of the house hacking concept. You know what it is, how to do it and where you can do it (according to my opinion). Now, probably as or more important than everything we’ve discussed this far; we are going to discuss whether or not you Should Do It.

Firstly, I cover the general pros and cons of living in a house hacking environment. After this, I will take a crack at presenting who should and who shouldn’t house hack.

Pros and Cons Of House Hacking.

The Pros and Cons Of House Hacking – Table

 

Pros of House Hacking-

Cons of House Hacking-

Someone or something will be paying for you to live where you live.You’re sharing your space (privacy and peace).
Someone or something is paying for the things you want and need to live where you live.Your home partially becomes a hard second job.
You build wealthIt can cost you money (loss).
 Your business can cause harm to your home.

Pros of house hacking

1. Someone or something will be paying for you to live where you live.

Probably the most desired and most known benefit of living the house hacking dream is the prospect of living in your home for free because someone (tenants) or something (a business) is paying your cost to live there.

2. Someone or something is paying for the things you want and need to live where you live.

The next level advantage of house hacking comes when your business side of your home is paying for your living expenses on the property.

Your utility bills for water and electricity, you basic commodities like toothpaste and dishwashing liquid, your little pleasures like your internet bill and Netflix and your general home maintenance costs like renovations and repairs.

3. You build wealth.

This is an advantage that is a specific benefit for people who are working to own where they live through house hacking and who are house hacking via a business investment that isn’t rent focused.

Wealth = Equity, not Income.

When you buy a house and rent it out, the income you earn is building your equity by paying your mortgage and giving you more ownership of your home from the bank who lent you your mortgage.

When you build a business on your property, you earn equity from the value that business generates.

If you fully own your home (have finished paying your mortgage) – your rental income is only earning you income and not equity.

Cons of house hacking

1. You’re sharing your space (privacy and peace).

Depending on how your property is designed if you go through house hacking via the tenancy route; you’re either going to end up with a roommate who’s close enough for you to hear their snoring or a tenant who’s close enough to knock on your door whenever the door opens with a slight creak.

At some point, someone is going to annoy someone else and someone is going to want more breathing room than they’re afforded.

This doesn’t change if you go through house hacking via the business path. To use the previously mentioned mushroom operation example; the family car got kicked out of its house when the garage got converted into a mushroom lab and the backyard was half children’s play area and half sanitized laboratory + the smell of manure.

No matter what you do, you’re going to have to adjust and compromise.

2. Your home partially becomes a hard second job.

You can pretty much kick the whole “Your home is your haven” mantra; to the curb.

House hacking, (as much as guru’s like to preach it is) is not passive income – it’s leveraged income; which is just as amazing but doesn’t have the good PR the passive income has.

You are going to have to work. And more often than not; you are going to have to work when you don’t want to. When your tenant is essentially your neighbor – you can believe they are going to occasionally bother you at the worst time possible.

3. It can cost you money (loss).

Businesses fail more businesses fail than succeed as almost every study done on the matter has proven. And despite the fancy name, house hacking; is a business.

It would be deceitful to tell you that this is some miracle venture that 100% guarantees you a free-living and financial living. That can happen, don’t get me wrong; but it takes planning, hard work and some form of luck.

Everything from legally setting up your approach, starting to rent out your property or getting a business off the ground; will cost you money no one can guarantee you’ll ever get back.

With this post, I’m hoping to bolster your approach to the planning and hard work you need to put in; to give you a way to put your best foot forward when you enter the environment.  

4. Your business can cause harm to your home.

This is particularly the case for rental situations.

In as much as a great tenant can leave your house better off than when they came in – a bad tenant can be an absolute nightmare. For both the good and the bad, the most important consideration for renting out is having the right tenant screening process.

A good empty property can be rented out tomorrow or the day after that but a nightmare tenant can take months to deal with. If you’re interested in learning how to properly screen your tenants to separate the flowers from the weeds I’ve written just the post (HERE).

Who is house hacking for and not for?

Now that we know the good and the bad that potentially arises from house hacking; the last critical question to answer is this – Is House Hacking For You?

Below, I’ll be listing and explaining some points of the type of person who would and would not likely enjoy the house hacking process and for what reasons.

I’ll leave this as a disclaimer, house hacking is not for everyone and is not for every situation; you might not like the work or environment it will put you in today but you may want to try it out tomorrow. Everything has a season and there’s more than one way to make it, in real estate.

So take my following points with a grain of salt and if you feel like it is or isn’t for you despite my points; go for it or don’t; while knowing that I approve. If you do go for it; just make sure you hit the ground running by knowing what’s in store.

Who Is House Hacking For and Not For?

Who Is House Hacking For and Not For? – Table

 

Who House Hacking Is For-

Who House Hacking Is Not For-

You are free enough to dedicate time to house hacking.You are not free enough to dedicate time to house hacking.
You are willing to learn or you already have the know-how for the avenue you want to take to house hack.You are not willing to learn and you already have the know-how for the avenue you want to take to house hack.
You think it’s something you could learn to enjoy.It’s not something you could learn to enjoy.
You don’t need to house hack?You need to house hack.

1. Time Factor – are you free enough to dedicate time to house hacking.

Like I said before, house hacking is work and erratic work at that; you need to be aware that you may be needed at some of the most inconvenient hours and days of the week and your tenant/business is closer to you than your neighbors are so you can’t just turn off the phone.

You need to take a hard look at your current situation on whether or not you can allocate the resources needed to house hack by yourself.

2. Are you willing to learn or you already have the know-how for the avenue you want to take to house hack?

There are going to be hurdles that need to be cleared to get the house hacking operation off the ground.

Legal, financial and operational – there is going to be a learning curve and if you aren’t well versed or ready to learn the necessary ins and outs; it’s going to be a very expensive high hurdle to jump alone.

3. You think it’s something you could learn to enjoy.

It’s not about having to love the whole situation for you to be able to do it but, simply from the landlord’s perspective of house hacking; you will pretty much be in the deep-end of the tenancy environment.

Being able to find some level of enjoyment and intrigue in the idea of being a landlord, learning how to successfully run a property and interacting with another human being can only help the experience.

4. Do you need to house hack?

House hacking is one of those endeavors that’s better to dive into when you don’t need to perfectly hit a swan dive your first time.

That is to say if you are teetering on the edge of bankruptcy and missing your next consecutive mortgage payments; there are better ways to speed up the process of things going wrong than jumping alone into something new that you don’t fully understand.

It’s always better to start house hacking out of desire and interest than necessity.

*You should note that in almost all the cases I mentioned above, I took special care to mention that the bad is worse when you’re going at it alone.

It’s not a bad idea to talk to some real estate agents or brokers to help you through your first year or so of house hacking as property managers; while you get your bearings straight and leisurely learn what you need to.   

Concluding Thoughts On House Hacking.

House hacking is undoubtedly a potentially game-changing real estate avenue for many people (not all people).

If you or someone you know lives somewhere where you have an extra room or maybe even a whole other living unit – it wouldn’t hurt to consider the idea of house hacking.

It just might be exactly what you need. 

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I am absolutely in love with learning and sharing all things real estate. I’m an agent for Jacaranda Real Estate In Harare, Zimbabwe. This blog will be the ultimate resource for all things real estate so subscribe and stay tuned.