I’ve spoken before about how to get your spouse interested in house hacking and how to get started investing, but I haven’t yet given you the details of the process. I will fix that today. Here are the steps you need to take.
- Save Money. As for nearly every investing strategy, you need some money up front. Sure, there are ways to do it with only other people’s money, but they often carry greater risk and fewer rewards. Do it the right way. If you’ve already found a possible property, take the sale price and multiply by 0.035. That will give you the down payment needed. Save this money plus an extra 50% on top of that for closing costs and repairs.
- Start Talking to Bankers. If you haven’t yet found a property, take the money you have saved and divide it by 0.035. That number (0.035 or 3.5%) is the percentage down payment you can get with an FHA loan. The result will tell you how much you can pay. Find a residential banker with some experience in multifamily. After a discussion of credit, the banker can give you greater detail about how much your loan can be.
- Create a Management Plan. One benefit of house hacking is that you will live on-site. This is a great opportunity to save money by self-managing. Managing yourself is something I only recommend when house-hacking. All others should be getting a third party management firm so you can focus on your strengths. Do your research here. Learn the local and state laws. Create policies and stick to them. Read about doing this. Landlording on Autopilot by Mike Butler is a good resource. Get an attorney to draft your first lease agreement. It’s worth the money. You can reuse it multiple times as long as you have no substantial changes in the future.
- Find a Deal. You can go the agent route and find an agent who specializes in investment properties like this or you can find the deal yourself. Deal-finding is a huge topic that I can’t cover in this post. For now, I’ll assume you have interviewed multiple agents and found your favorite. Give them your ‘buy box’, or criteria you want in a property. Be as detailed as you can: size, price, unit amount (I recommend 4 units), location, beds/baths, repairs needed, age, rent amounts are needed. Give ranges on each one. It’s likely the agent will find you some that meet many but not all criteria and then you’ll have decisions to make. Once you have found one, then move on.
- Underwrite the Deal. Figure out how well the deal works if you were not living there first. Pick a unit that works best for your needs and finances. You won’t live there forever, so make sure the place cash flows when you leave. Make sure your income is enough to subsidize the one unit you’ll be down when living in the property.
- Get Insurance Lined Up. You’ll need commercial insurance with an umbrella policy. Find an insurance broker who can find you both of these. Make sure they know you’ll be living in the property and you may get a small discount.
- Do the Inspections. In your due diligence, which is the time between going under contract and closing, you will be calculating all the repairs you want to do. You’ll be getting inspections of critical systems. I recommend you get a general inspector and at least add on an inspection of the sewer and possibly the roof. The general inspector can give you generalities, so don’t be upset if they recommend additional inspectors. This will have greater cost and detail than a single-family home.
- Negotiate Repairs. If unexpected issues have arisen in the inspections, then you will need to negotiate with the seller for credits. Your agent can help.
- Move in. After closing, move in to whatever unit you calculated would be the best in #5. Start doing your repairs. Many of them you can do yourself. Check your local laws to determine which you have to hire a contractor to do.
- Working With Tenants. There are two schools of thought on this. Telling them you are the owner and telling them you are the manager. If they know you are the owner, some would say it’s harder to correct lease violations because you feel bad. On the other hand, some would say it is unethical to not disclose this fact. Still, others would say that having the owner on-site means lots of interruptions by tenants for menial things. I don’t know of any laws that say one way or the other but you should check in your area. You’ll have to decide.
- Move to the Next One. You’ll likely fall in love with this strategy and want to employ it more. There are rules in the FHA agreement on how long you have to stay. Generally you need to have lived there for one year, but talk to your banker, who has many rules to follow. You don’t want to run afoul of this great benefit that you have in getting a low money down loan. Don’t blow it. But do take advantage of it.
House hacking is daunting at the start. It’s not for everyone. It’s best when starting out. It doesn’t expand well because of the time you need to live in the property. At some point, you’ll need to move to other strategies, but it is the #1 best way to get started out for most people. Let me know how it goes.
