Live for FREE by House-Hacking

If you're tired of paying rent (or a mortgage) every month, you may want to look into house-hacking. House-hacking is the concept of buying a 2-4 unit property, living in one of the units, and renting the remaining units out to help cover your expenses, allowing you to live rent-free in a lot of cases.

If you’ve ever wanted to live rent-free or even get paid to live in a house while building up equity, this video is for you.

Let’s talk house-hacking. House hacking generally refers to buying a multifamily property, living in one of the units and renting out the other units to pay for your mortgage. With the right deal in the right market, you could even make money every month to live in a house instead of just spending money on rent.

I’m going to go over some real world examples with houses that are on the market today, so you can see how I’d go about analyzing a deal, but before I do that, let’s cover some basics.

MORTGAGE

So to house hack, we need to find a multi-family property between 2 and four units. Once you get past 4 units, you get into commercial real estate – which you can technically still do this, but it becomes a little trickier to get a mortgage. Speaking of which, let’s talk about how you can pay for this. Despite what you might think, you don’t necessarily need to have a crazy amount of money in your savings account to do this.

Now for conventional mortgages, a 20% down payment is standard, but you could also buy a multi-family property using an FHA loan with only 3.5% down. You will have to pay for mortgage insurance every month, but if you just don’t have a lot of money in your savings account, this is a great way to get yourself into a property that can pay for itself.

So for example, if you found a four-plex for $500,000 in your city, you’d just need a $17,500 down payment. You also just need a credit score of 580 or higher, so it’s easier to qualify for an FHA mortgage than it is a conventional mortgage.

Now some caveats to this – every county has FHA loan limits – so you won’t be able to go buy a million dollar property with only $35,000. For instance, if we look at Cook County Illinois, where Chicago is, the FHA limit for a single family home is $368,000… but it does go up to $707,700 for a four-plex.

And as I mentioned earlier, when you put less than 20% down when buying a house, you generally need mortgage insurance, which is a percentage of the loan amount. You will have to pay a mortgage insurance premium at closing, which is 1.75%. So in our $500,000 fourplex example, you’d need an additional $8,444. Then, you’ll have an ongoing annual insurance premium to pay which ranges from .45% to 1.05% and is divided by 12 and added on to your mortgage payment.

So, while that does suck, it’s not so bad if you really want to own a property and may even be able to pay for all of that with a couple of tenants.

EXPENSES

Okay, so let’s say you can find a multifamily property in your area where the rents will cover the mortgage payment and you can live for free. Done deal, right? Well, not so fast.

Let’s talk about some other expenses involved that you don’t want to overlook when analyzing a potential deal. There is a 50% rule of thumb you can go by as a rough idea of expenses. The 50% rule stats that out of your monthly gross rents, 50% will go to expenses not including your mortgage. The remaining 50% can cover the mortgage and anything left over will be cash in your pocket. Now that’s just a rough rule of thumb to give you an idea and some of these expenses may vary based on where you live, but don’t forget to plan for them. Let’s go into more depth with some of the main expenses.

UTILITIES

Many multifamily properties have separate meters for electricity, water, and gas – but others may not. This means you either have to pay an arm and a leg to split the meters, or you as the landlord have to pay all the utilities, or you pay all the utilities and then charge your tenants.

Now, I’m using Chicago as an example in this video, so most often I see electric and gas are separate and the landlord pays water, which generally isn’t a lot.

REPAIRS

Chances are when buying a multifamily property, there may be some deferred maintenance you need to take care of up-front. Even if there isn’t, you should take about 10% of all the income generated from the property and save it away for when repairs pop up – because they will – and you have to be able to keep your tenants happy and your property in good shape.

CAPEX

On that note, you don’t want to forget about Capital Expenditures – or CapEx – either. This covers more of the big ticket items that won’t be replaced as often like the roof or a hot water heater. Depending on the age of the roof and mechanicals, you should also allot about 5% of your property’s revenue to CapEx so you’ll have the money ready when big things come up.

VACANCY

In a perfect world, all of the units in your property would be rented 12 months out of the year, with tenants paying on time, every time. But this world is far from perfect and that’s just not going to happen. Once a tenant moves out, at the very least, you’ll likely need to paint and get a toilet fixed or patch some drywall. So at the very least, you should assume 10% of the monthly revenue will cover the times the units are vacant.

MANAGEMENT

Now maybe the idea of being a landlord doesn’t excite you. Maybe you don’t want to live in the property for more than a year and you just want a property management company to take care of the day-to-day things for you. In this case, you can assume 10% of the monthly income will go to property management.

So as you can see, it’s not as simple as just ensuring your mortgage payment is covered. There are a lot of other expenses that can add up and you want to account for that before jumping into a deal.

PROPERTY TAXES

Maybe you’re lucky enough to live in a state with a low property tax rate – or maybe even no property taxes at all, but some areas have incredibly high property tax rates that can kill a deal. We’ll look at that later, but make sure you add property taxes into your mortgage estimate if it isn’t already calculated for you.

SCOUTING DEALS

So real estate is very localized and every market is going to be a little different. In some cities, there are tons of multifamily buildings in great areas that demand a high rent rate. In other cities, you may not have a lot of multifamily properties in neighborhoods you want to live in or that have high enough rents relative to the price of the property. And there are a few other ways you can try and house hack if your market allows for it. One way would be to rent out bedrooms in a single family house. This probably works best in a big city or a college town and probably only if you’re single and okay sharing common areas with relative strangers. You may also be able to find a property like a duplex and instead of doing a long-term rental, turn it into an Airbnb where you can charge more with a little more investment and involvement on your part. Also, some cities, having an ADU - or accessory dwelling unit like a coach house or guest house is pretty common. In Portland, Oregon for instance, I’ve seen countless properties with an ADU or some type of income property for sale with the main house.

Okay, so I’m going to check out the Chicago area on Zillow for multifamily properties to give you an idea of how I’d go about looking for a property to house hack. Now, if you saw some of my recent videos where I talk about how much I pay in rent, the idea of living in a decent property for free or for very little is pretty enchanting to me. And so I may not find a deal that completely pays for the mortgage and expenses, but if I can find a nice unit to live in in a nice neighborhood for less than $1,000 a month out of pocket, that’d be amazing.

Now Illinois has plenty of problems and like California, a lot of people are leaving Illinois. One of the main negative things is its high property tax rate. This can really limit your buying power. Looking back at Cook County, it has a property tax rate of 2.12%, which means every year, you’ll pay 2.12% of the assessed value of your property. This can easily add $1,000 to your monthly payment.

Anyways, back on Zillow, I’m going to filter out everything except multi-family properties. Despite its high taxes, I like Chicago for multifamilies in theory because there are a lot of them that can demand pretty high rent rates. I’ve also lived in several different areas and have a decent idea of what things rent for. I’m also going to set a price range to narrow things down.

Okay, so here we have a nice little two-flat – also known as a duplex to the rest of the US. So here with the estimated payment, it is accounting for property taxes, but it’s also assuming I’d be putting 20% as a down payment. So if you want to figure out a monthly mortgage payment based off what you’d plan on doing, you can just open the mortgage calculator here and do that separately. So I don’t think a two bed 1 bath in this neighborhood will come close to covering the monthly payment, so let’s move on. I’d like to find something with at least three units if possible.

Okay, here’s a three unit property. Let’s see… each unit is two bedrooms, so that’s good. It honestly looks pretty nice. Now I’m not entirely sure what a two bedroom rents for in Lincoln Square… I’m thinking around $1800 a month, but what I can do is copy the address and go to rentometer.com and paste the address in along what I think rent would be… and the bedrooms and baths and click analyze. Okay… so we can see I was a bit too optimistic as rent looks closer to $1500.

So let’s just assume that each unit can rent for $1500, which would bring in $4,500 per month in rent. But… I want to live in one of the units, so let’s bring that down to $3,000 per month. So if I put 20% down to buy the property, my mortgage payment would be $3,694, leaving me with $694 I have to pay out of pocket, plus all of the other expenses I talked about earlier. So this isn’t a slam dunk of a deal by any means, but it isn’t horrible.

Okay, here’s one in Bucktown, which is a nice neighborhood. It looks like there’s two legal units and probably an unpermitted garden unit. And it also looks pretty small. These bedrooms are only 7 feet wide which is cramped. But it is a good area, and I bet a two bedroom like this could rent for $1700. Let’s check rentometer to see. Ooo, right on the money. So if you wanted to live in the garden unit and rent out the other two, you’d be generating $3,400 per month in rental income with a mortgage of around $3,100, leaving you with $300 to put towards expenses. So I’m sure you’d still be spending some out of pocket for things that come up, but your mortgage would essentially be covered and you’d be building equity in a property in a great part of town.

And just to give you an idea of another market, here is my hometown of Indianapolis, Indiana. This duplex is for sale for $269,000 – and they even mention house hacking in the description.

So the listing is pretty incomplete – I don’t know how many beds and baths, but it looks like at least a 2 bed 1 bath per unit, maybe more. Probably around the $1,000 per month or so… yeah.

I’m actually just going to type in the address for one of the sides of the duplex in Zillow. Yeah, here we can see it was listed for rent for $1,000 per month. So with an estimated mortgage of $1217 per month, you’re still paying over $200 per month plus expenses to live there, but if you can afford the down payment, it’s not a horrible investment. Plus, you can probably negotiate the sale price down a bit depending on your market and try to get the numbers to work.

You’ll likely find that the numbers work better, when you get three or four units in a property. This also helps with vacancy, so if one tenant leaves, you still have one or two others still paying monthly.

Once you identify a potential property that meets the basic sniff test – meaning its in a neighborhood you want to live in, with rents that can cover your expenses, you’d next want to see what, if any, repairs are needed, and have a good idea of how old the mechanicals like heat, air conditioning, and a hot water heater are. If everything still looks good and the numbers make sense, you can start getting pre-approved for a loan and well on your way to living rent-free.

OUTRO

Well, I hope this video gets you thinking about utilizing real estate as not only a primary home, but a way to save money every month while also building up equity. House-hacking is a really accessible way to get your foot in the door with owning an income generating asset, but just be aware of all of the expenses involved outside of the mortgage so you don’t get over your head buying something you can’t actually afford.

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