Real Estate Beginners: Why You Should Start Off House Hacking

Buying your first home or rental property can be an intimidating endeavor. There are so many hurdles to owning real estate, from finding the right home to getting approved for your first loan, renovating the home if it needs renovations, and eventually moving in or finding the right tenants to occupy your space so that you can begin receiving cash flow.

The ability to rent out your rooms, or in the case of a duplex, the attached unit, has been gaining ground recently. Although it has always been common practice, only until recently has it been termed “house-hacking”.

What house-hacking simply means is that you live in one unit while you rent out the other(s). Or you live in one room of a single-family home while renting out the other rooms. This ensures that your bills are covered, your debt gets paid down, you essentially live rent/mortgage free, and maybe, even possibly, you will be able to make a little bit of money every month, referred to as cashflow.

I love house-hacking. On my first property, I decided to live in the master bedroom, while renting out the other bedrooms. I rent out the other rooms for $750, $850, and $950 for the largest bedroom with a private bath. The income I receive yearly on the rental is $30,600. My mortgage and escrow on the property are $1430 monthly or $17,160 yearly. Not only are all my living expenses covered, but I net over $13,000 in cash flow every year. 

About the property:

The property is located in Saint Petersburg, Florida. I bought the property as a 3/2 and converted it into a 4/3. The home is just over 2,200 square feet. It is a single-family home on a 10900-square-foot lot. The property is 15 minutes from downtown, as well as 15 minutes from the beach. It is 25 minutes from the Tampa International Airport, and 30 minutes from downtown Tampa. 

Being able to rent out the rooms in this house has not only eliminated my housing expenses but has allowed me to save even faster for my next property. It has added over $30,000 that I am able to claim on my tax returns, qualifying me for even larger loans with better terms, reducing my debt-to-income ratio, and providing me with an enhanced quality of life.

With all this being said, here’s why you should begin your real estate investment journey by house-hacking your first property:

1. You will be able to save much quicker: Of course, not having living expenses or having very little in living expenses will allow you to save your money much faster. If you intend to buy another rental property, an extra several thousand dollars a year in income will help you greatly. Saving for the second property won’t take nearly as long as saving for the first.
2. You will have a lower debt-to-income ratio: Banks look at this, at times not lending more than 43% DTI. If you can show proof of income, lease agreements, and pay stubs that will indicate that you are making extra rental income then banks are much more likely to lend to you in the future.
3. Tax deductions: You will be able to write off your living expenses, showing no income, or even showing a loss. Taxes are generously low for rental income. The income I’ve noted above does not get taxed at face value, because I deduct my living expenses from it. Though I made $17,160 last year in rental income, a large portion of it was written off for items like renovation costs to prepare the home and even depreciation on the structure of the home.
4. You will be able to raise rents: Rents continue to increase. While in some areas rents have increased significantly in the last year, a general rule is an increase of 3-5% per year. Your mortgage payments, however, will stay the same, assuming you’ve locked in a fixed-rate conventional 30-year mortgage. This means that over time, your cash flow will increase, while your mortgage expense will stay the same.
5. Added income on your taxes: This relates to a lower debt-to-income ratio. You will have the benefits of a higher income, without the higher tax rate. You will get the perks that come with a higher income—credit and loan opportunities, a better rate when/if you decide to refinance the property and a generally higher quality of life.

Once I bought and renovated my property, I immediately began looking for tenants for the rooms. Sometimes, people do not like to sacrifice their privacy by letting other people live in the home with them. I always tell people who have this concern that they are the landlord, they make the rules, they choose who to let live in the home with them, how they screen them, and what personalities to allow into their space.

You are not at the whim of a landlord who will place just anybody in the home or apartment and force you to live with them. Whom you allow into your home is entirely under your control. Interview them, do a background check, set the expectations, write up a detailed lease, and all should go smoothly.

What I love most about house-hacking is the freedom and peace of mind that comes with not having to worry about covering my monthly payments on the mortgage. I know that come the first of every month enough money will flow into my account to be able to more than just cover the mortgage on the home.

Starting off my investment journey house-hacking has propelled me forward in a way that I would not have been able to do had I chosen to not rent my home. It is something that I will continue to do, and it is something I recommend you consider doing as well.