Part 2: How to Analyze a House Hack Listing
Part 3: How to Finance a House Hack
DISCLAIMER: Nothing in this video should be construed as legal or financial advice. The views and opinions expressed do not necessarily reflect those of my law firm or any of my business partners.
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In this video, I cover what house hacking means, four main benefits of house-hacking for new investors, and tips on what to look for in a house hack. I also discuss how I was able to realize a $100,000+ gain on my first duplex over the course of 8 years of ownership.
My definition of house hacking is buying a property, moving into it, and renting some part of it out to tenants to offset your living expenses. This can be done with single family or multi-family properties. I prefer multi-family properties because I like to have my own space, but you can do either.
The four main benefits of house hacking are:
1. Favorable Financing
2. Reduction of Living Expenses
3. Ease of Management
4. Real Estate Experience with Low Risk
5. Bonus Benefit in New York: School Tax Offset/Credit
Here are some tips for finding a great house hack:
1. Look for properties in good school districts and in areas of low crime. This will make it much easier to attract good tenants and will make your job managing those tenants a lot easier. This will also make it more likely that the property will appreciate in value over time.
2. Look for newer properties. These will have fewer structural, mechanical, and environmental issues. Properties built before 1978 may contain lead paint and asbestos, which are very costly to remediate and are hazardous to you and your tenants. When you are just starting out, you are better off avoiding these issues.
3. Consider the price-to-rent ratio. At the very least, the property should meet the 1% Rule, which states that the monthly rent of a property should not be less than 1% of the purchase price. If the rent is $1,000/mo, you should not pay more than $100k for the property. Ideally, you want to be at the 2% Rule, but this is not always possible with newer properties in good school districts.
The numbers on my first property were as follows:
Total Current Rent: $2,240/mo (both units with one tenant taking care of lawn care and snow removal)
Total Current Expenses: $2,128/mo (including $975 for mortgage, $600 for taxes, $55 for insurance, $50 for water and sewer, and $448 for vacancy, maintenance, repairs, and capital expenditures).
Total Cash Flow: $112/mo
Here is what the profit numbers look like on this investment so far:
Appreciation: $40,000. (I bought this property in 2011 for $230,000. It is currently valued at approximately $270,000.)
Loan pay-down: $32,000. (My initial loan was $207,000. As of September 2019, it is about $175,000.)
Savings on living expenses: $24,000. (I lived in the property for about 4 years and saved about $1,000/mo in the process. This equals to $48,000. However, because the one rental apartment did not cover all costs, my savings as compared to if I did not buy this property and instead rented a comparable apartment are about $24,000.)
Cash flow: $4,800. (This is the amount this property has produced in cash flow profit since I moved out in 2015.).
Total Net Gain: $100,800. (This is the net gain on this property as of September 2019.)