How to Become an Investor & Live Rent Free
How to become an investor & live rent free
How to Become an Investor & Live Rent Free …through “HouseHacking”
House hacking is a term coined by Brandon Turner of Bigger Pockets, my favorite Real Estate investing website. Simply put, house hacking is getting other people to pay the mortgage payments on a house you occupy. This is done by renting out the other units or rooms. Go to the BiggerPockets website and type in “House Hacking”. You will be able to read about thousands of others who have excelled using the technique and ask them questions in the forums.
Investing, in general, can be risky to a first timer. House Hacking takes away much of the risk that can come with typical real estate investing. Many full-time investors start off by house hacking and have learned a lot in doing so. You’re probably already paying rent now, so you’re used to having a monthly payment. Surely you can find at least one person to live with to help with that payment. With a duplex, you have the option to live alone and rent out the other unit. With the right property, you can get paid every month to live.
So, how do you even get started? Below are the steps to take to start investing in real estate via House Hacking.
Will a lender approve me? What is a lender looking for exactly?
- Low Debt to Income Ratio.
- Lenders will look at how much you make vs. how much debt you have.
- Common Debt
- Credit card payments
- Car payment
- Student loans
- Decent credit score
- If the other pieces of the approval process look good, you may be able to get away with a lower credit score.
- Your lender can give you pointers on how to raise it.
- Usually, with a score under 620 the loan will have to be FHA loan terms and not conventional.
- Steady job
- It can be trickier to receive loan approval if you work for yourself or are an independent contractor. But it’s not impossible! You’ll need to provide more paperwork to your lender and have at least 1-2 years history in that job/industry.
What is my budget? How much do I want to pay a month?
After working with a lender, they will give you an idea of your budget. Remember, even if you’re approved for a $600,000 home, that doesn’t mean buying a house for the full approval amount is an investment. Buying a house isn’t an investment unless you make the numbers work for you. Look around different areas. How much will the taxes be? How much can you charge for rent? After doing some research, you may find you don’t want to pay over a certain amount per month. Let’s say, $1,600-2,000. That means taxes, mortgage payment, insurance and repairs included. In an ideal situation, you would find a property where roommates would cover all of this.
Where should I buy? How do I pick a property?
Let’s look at an example. After looking online in different areas, Sam decides he wants to buy a house in Southeast Austin. It’s close to his work, and his two current friends and roommates decide they will be his tenants and move with him. Sam currently pays about $800 a month in rent (including utilities) for a room in a three bed, two bath house in the area.
Sam’s Realtor shows him a home that may be a good possibility to buy and House Hack. It has three bedrooms and two bathrooms and listed for $213,000. Why would this be a good investment? The property has been sitting on the market since August. Presently, in Austin, if a home has been on the market for over 30 days, it usually means more negotiation room for a buyer. The property is very close to the developing St. Elmo Project, and Sam thinks the home will appreciate a lot in the next few years. After viewing the property and seeing what has sold in the past, Sam thinks making an offer of $200,000 is fair.
- Sam decides to put 5% down: $10,000
- His closing costs are $4,500
TOTAL CASH OUT OF POCKET NEEDED: $14,500
- After close Sam’s monthly mortgage comes out to be: $840 month
- Taxes: $270 month
- Homeowners insurance: $83 month
- Monthly bills/repairs (Bills split with roommates): $100 month
TOTAL MONTHLY PAYMENT: $1,293
He charges his two roommates $750 a month minus utilities=$1,500