Realtor Insider explores inside the mind of a Realtor to learn the hidden secrets of buying and selling real estate.
When it comes to real estate investing, there is one technique that has some inherent advantage over other kinds of investing. House hacking is the term that many use for investors who buy a property to live-in, and then either flips the property or rents it out after a living there for a short period of time.
I am familiar with this technique because I have done it myself, twice. My wife and I bought a property to live in it for a few years and then sold it for a quick buck. We didn’t know it was called house hacking at the time, but I loved the process and the thrill it gave me. It is why I am doing real estate full time today.
I will be the first to admit that most investors who do house hack, do it with properties that have more than 2 doors like a duplex or a fourplex. In fact, many investors claim this is the only way to house hack. With multifamily properties, it makes even more sense to live-in while getting it ready to sell. After all, you get a lease payment from the other people living in the building so you virtually live rent free while you are hacking the property for sell.
However, I really like the term for single family residences as well. It can work quite nicely for an newbie investor who first needs a place to live before they can start to buy other investment properties. It can also be a great way to learn to do rehab as you can take your time doing the work. You don’t have to feel any pressure to get it done quickly since you are comfortable living there for awhile.
Does house hacking actually make you real money? I doubt it. I know my wife and I did not make a lot of money when we did our two houses. We did better for the first house, which ironically we didn’t do as much rehab. We walked away with nearly $10K in our pockets. The second rehab’s inspection report held some surprises that shocked me about the house, considering we had bought it brand new. I also learned the hard way that appraisers can carry a lot of weight in real estate, because we had to do some lender required repairs including upgrading the outside AC unit. I think we ended up making a couple of thousand dollars on it.
The real trick to house hacking single family homes is finding a hot location that is appreciating at a higher clip than surrounding neighborhoods. If you are lucky enough to appreciate 5% or higher over the time you live there, and you do the upgrades and repairs, you can go on the market with a ton of equity built into the property. Your sales price going up because of the market forces is nice, but the rehab is the real gem because it puts the property in a move-in ready status with buyers. You will get more offers from buyers, and at higher prices, when the rehab makes the property shine. After all, selling a house is all about the presentation.
What are the other advantages to doing house hacking? There are three other built-in advantages that give house hackers an up over other investors. Please note that none of these advantages should lead you to fraud either sellers or lenders. If asked, you need to truthful that you only plan to live in the property for a short time. Fraud is not to be taken lightly and lead to big trouble for you. Don’t do it!
You don’t look like an investor – Sellers have an issue with investors. The investor stigma is pretty well deserved. Most sellers have an emotional attachment to a home because of the memories made there. Investors don’t care sellers’s feelings, and only looking at it for the property’s return on investment. Please do not misunderstand me. There is nothing wrong with investing in real estate. However, the aggressive investors among us has spoiled the stereotype for us with sellers. In other words, most sellers do not trust or like investors. If you are house hacking however, you are going to be living in the home and will take better care to preserve it for yourself than you ever would for a renter. Sellers will not know your future plans of selling it in a couple of years (unless they ask and then you tell them the truth), nor will they most likely care as long as they know the buyer is going to love it as much as they do, even if it is a for a short period of time. .
You can take advantage of HUD homes – One of the best sources of deals on properties are HUD homes. If you go to hudhomestore.com, you can see a list of homes currently available in your area. HUD homes, however, are usually restricted to owner occupants, nonprofits and government agencies. After a couple of weeks, if none of these buyers purchase the home, then anyone can make an offer. If you plan to live in the house for a year or two, then you are considered an owner occupant. What happens after that initial period is up to your discretion. In other words, if you are house hacking a property, you have access to make an offer on these properties before other investors, who are only looking to flip or rent them right away. If you do decide to go this route, be sure to find an agent that is registered with HUD and knows how to make the offer. You have to be very precise on the offer itself and the timeline has to be kept in strict compliance. If you waiver even a bit, HUD will reject the offer. For example, they require the lender to have specific language in the preapproval letter if you are financing the deal. If you the letter does not have this language, then you stand a chance of getting the offer rejected.
You have more options – When it comes to house hacking, one of the nicer aspects of it is that you are not really worried about unloading the property immediately. You can live in the property as long at it takes for you to reach your goal on the ROI. Because of this, many of the standard formulas used by investors go out of the window. For example, you don’t need to get a flip for 70 cents on the dollar since you don’t have to worry about getting the money back immediately. Of course, you still want to find a property that works for you from a numbers perspective, but you have more options when you are not holding yourself to formulas, which really bind an investor when the market has a tight inventory. If there is a property that is 80 cents on the dollar, you might be able to go for it because its appreciation in two to three years will make up the difference you lost by paying more for it initially. Also, remember that house hacking is not the most lucrative investment, but it is a great way to learn the process and get a good understanding of how to do rehab.