The Landlord Lens - House Hacking

Episode Date: February 21, 2024

This week on Be A Better Landlord, Seamus and Krista break down the pros and cons of House Hacking and provide five simple steps to get started. 

I'm Seamus, joined today by Krista, and we're here to make you a better landlord. Krista, house hacking. What is it? Yes, so house hacking refers to when you rent out a portion of your primary residence. So if you're in a duplex, maybe you're renting out the other half. If you're in a single family home, maybe you're renting out a room. There are a lot of different ways to implement this strategy, but it's particularly good for beginners. For beginners. All right. Why is it good for beginners? Well, it's good for beginners because you don't have to rustle up a down payment for an entire different property.

You can utilize the property that you already have. Or if you haven't purchased any property yet, you can go into it knowing that you're going to have assistance paying the mortgage, which opens you up to different possibilities without the higher mortgage rate that you would have in a rental property. All right. That makes sense. So what makes for a good house hacking property? Ooh, so it's going to depend on you as a landlord and your comfort level. For me, I would prefer to go for multifamily properties that allows more security, more privacy. You have your own dedicated space away from your tenants, but there are higher costs to acquire

that kind of property. And most people don't find themselves living in a multifamily property accidentally. So usually that's something that people are pursuing and purchasing specifically for the strategy. However, you could also do it with a single family home. In that case, you'd want to make sure that you're mindful of the amenities or features that you want to kind of maintain distance between you and your renter. So, for example, if there is a separate entrance, if there are two kitchen spaces, the amount of space that you have, things like that should definitely be considered as you're looking around if you're looking to purchase new property. Or if you're looking at your own property that you already live in, you can evaluate it and say, hey, is there room for someone else to live here? would that be comfortable for me personally or for them? If the answer is yes, you can move forward and feel confident that it'll be a good situation.

That makes a lot of sense. I actually have a friend and fellow landlord in Fort Collins right near me who actually bought their primary residence knowing that there is an opportunity to turn the basement into a second living space because of exactly what you said. There was a bathroom down there already, a separate entrance, and plenty of room to put in a small kitchenette. Love that. And that's what we see often.

is, you know, basements are really good for this. Anything that creates a little bit of division between the landlord and the tenant makes both parties feel more comfortable. It makes sense. A lot of areas also are cracking down on short-term rentals and Airbnb. So I've actually seen a handful of properties go for sale that were originally designed to be an Airbnb that are the perfect house hacking rentals. Yeah, absolutely.

Of course, there are both benefits and drawbacks to consider before you jump in with both feet. Would you start with the bad news or the good news? That's good all day. Good all day. So, of course, the major benefit to house hacking, why it's so popular, someone else is paying your mortgage. Love that. Right? It's an easy sell from that point of view.

Plus, if you are living in your residence, then you can qualify for homeowners insurance versus landlord insurance. Okay. Typically, homeowners insurance is significantly more affordable. Additionally, you don't have to worry about some of the higher overhead costs when it comes to managing an entirely separate property. Okay. Bring everything in house.

You're right there. Easy peasy. All right. Let's talk about the bad news. What's the downside of house hiking? Sure. Yeah. It's important to get into that too.

So, of course, there are going to still be some fees attached. You'll want to make sure that you're taking care of maintenance requests, that your house is actually up to code, safe and livable. And of course, you're going to have to get used to living in close proximity with somebody who you might not know that well. Of course, you should still maintain your tenant screening process, look over everything, interview past landlords, et cetera, et cetera. But if you like to have your own space, you either need a property specifically designed for that, or you should consider different ways to enter the real estate investing gain. All right. So let's say you've done the house hacking thing and it's working.

Yes. How often can you do this? Can you turn around six months after buying your first one and buy a second one and just run it back? Great question. So you need to be mindful of the rules regarding residency, particularly where you live. Make sure that you know your local laws. That's important in every single aspect of this. But by and large, you need to stay in the residence at least 12 consecutive months in order for it to qualify as your primary residence. Do not get yourself in hot water by jumping into another property too fast because you will get in trouble with the IRS. So be very mindful. Make sure that you're staying there for as long as you have to and then pursue your next property.

fill your spot with another tenant. You have a rental property ready to go and you can get your dream house. Love that. It's an awesome way to scale at a very early stage, rental properties, and have other people help convert your money into equity. Absolutely. All right, Krista, you've taken us through the pros and cons. What are the steps to house hacking? Yes, we've boiled down to five steps. All right. Your first one is to do your research. By that I mean, I want you to look up your local landlord tenant laws. I want you to understand what primary residency means in your locality. By and large, it's going to be a year, so 12 consecutive months, but be sure that you know what it is where you are looking to live and or move. You know, if I buy a property here in Colorado, I want to

make sure that I have everything outlined here. If my next property is going to be in Idaho, I'm going to look up that too. Okay. So step two, you're going to build your finance team. So that's going to be your lender and any other investors you need to work with. This might depend. on the structure of your business. So be mindful of that as you move through. Finding a great lender is super important. And remember, it is competitive. So you should go to multiple lenders. Talk to all of them. Be super upfront with what you're doing. The loan officer you're going to deal with is incentivized to get you that loan in close. They are on your team. They are certainly not your enemy. So be upfront with several of them with what you're

trying to do and then select the one that has the best combination of rates for you. Yeah, absolutely. Similarly, for step three, you'll build out your real estate team. So of course, it's going to be a real estate agent. It might be a broker depending on where you live. But be very transparent with them about what you're looking to accomplish, the amenities that you must have in a house you plan to hack, things that would be nice to have, et cetera, so that they can start to pull properties for you. Yeah, it's super important to remember that this is not your forever home. Yes. So some of the amenities that you might want in your forever home are not going to be important in this first home. You're

you're buying this house for the purpose of a house hacking and building your real estate portfolio. So keep your eye on the prize and don't let some of the little things like the countertop stand in the way of a great deal. Absolutely. So once your real estate team has found you a location that works with the amenities that you need, we move into step four, which is actually purchasing the property and making sure that it is ready to rent out. So they will help you with the paperwork and the timelines, the money down that you need, et cetera. and again, you'll use the research that you did in step one to make sure that your property needs all of the guidelines as outlined by your local landlord tenant loss. And a tip while going through step four and you're buying that property, make sure you get all of the images of the property from the real estate agent or the listing agent so that you can turn around and use that when you move on to step five, which is... Step five is finding your tenant. Of course, that's going to entail advertising your vacancy, starting to accept applications, and then screen tenant.

accordingly. If you have any questions on that, we have an whole episode about your tenant screening process, so be sure to check that out. Sure do. Well, this was an awesome walkthrough of house hacking for any of you out there that have gone through the process yourself or have additional questions. Please leave comments and don't forget to subscribe. TurboTenant is the all-in-one platform for landlords to manage their rental properties. From vacancy to tenancy, we have you covered with industry leading tools and expert advice. Landlord better from anywhere for free at turbotenant.com.