Many people find themselves trapped in a cycle of renting an apartment and living paycheck to paycheck. It’s not easy to save money when you’re paying so much every month for rent, utilities, car payments, insurance, and other monthly expenses. The solution? House hacking a condo!
House hacking is the process of buying a residential property with the goal of renting out part of it to make money and cover your expenses. It is how many property investors, myself included, got their foot in the door in this game.
There are many advantages to house hacking: you get cheaper housing; your tenants help pay for your mortgage; as you live on-site, it’s much easier to manage the property; and you will have a steady source of income.
What Is House Hacking and How Does It Work?
House hacking is the process of buying a residential property with the goal of renting it out to make money and cover your housing costs.
People may think house hacking is just a fancy term for roommates, but it’s actually much more than that. House hackers become landlords, collecting rent from their tenants who live in a part of the home. A great way to do this is to buy a condominium with at least two bedrooms and two baths, but house hacking can be done with just about any home that’s within your price range.
You then find one or more tenants who are looking for somewhere affordable to live. Usually, they’re students or young professionals just starting out on their careers who are willing to accept a smaller space in exchange for cheaper rent.
House hacking can work for anyone anywhere there’s a rental market: urban areas, suburban areas, even rural farms. It just takes some preparation and the right strategy for your particular situation.
What Are the Benefits of House Hacking?
There are several advantages to house hacking:
Buying a residential property condominium means you have more space for less money. Because part of your home will be rented out, they will help you pay for property taxes and insurance. Your tenants should also cover their own utilities, and you may even be able to house hack a condominium with amenities such as a shared laundry room, parking garage, or swimming pool.
Not only will house hacking make it much easier for you to pay your monthly expenses, but it also means that you get to enjoy some of the comforts of a higher-priced home.
Easy to Manage
Since you live on-site, it’s very easy to keep track of what’s going on with your property; if there are any issues or concerns about maintenance, repairs, or other problems, they can be handled immediately.
Tenants who feel like they have attentive landlords living right next door also tend to take better care of the property and pay their rent on time.
A Steady Source of Income
If done correctly, house hacking can be a very lucrative way to build up your savings and financial assets. A lot of people find themselves in a cycle where they can’t save money because they’re so focused on paying for their monthly expenses. House hacking makes it much easier to have a good savings rate because you’ll always have a steady source of income from your tenants.
As long as you have a reliable tenant who can (and will) pay their rent, you will have a steady, secure stream of income and can start saving up for investments, travel, or any other things you want to do.
Your Tenants Help Pay for Your Mortgage
The median mortgage payment, according to U.S. Census Bureau, is $1,609 per month, including property taxes and insurance costs.
In a house hack, you can cover most of your mortgage costs with just one or two tenants renting half your condo. In fact, if done correctly, it’s possible for your tenants to actually cover all of your housing costs.
How much you can charge in rent depends on the market and what your area’s rental prices are like. In a city like San Francisco, renting out a room could make you $1,800 or more a month. It will be less than that in most places, but in general, rental prices tend to correlate with property prices. If you live somewhere particularly expensive, your tenants will usually be able to fetch higher rental prices than someone in a rural area where there are fewer jobs and less housing demand.
How to Get Started with House Hacking a Condo?
A residential condominium can be an excellent investment as long as you think about the future and have a plan for your tenants. Here is how to get started with house hacking:
1. Research the Housing Needs in Your City or Town
Before you start looking for condominiums to buy, research the housing needs in your city or town. This will give you an idea of how many units are out there that need tenants.
Check rental websites and classified ads to see what’s available. Keep track of these details so that you can determine if this is a good investment for you, and you don’t end up overpaying for something that will not earn you enough money to cover the additional mortgage payments.
Some locations are much more popular than others. You will also want to check up on the area’s demographics and see who lives in your area and how they can help you make a profit. Is it a university town or a working-class neighborhood? Are young professionals living there, or is it mostly families with children? This will help you determine the type of tenant that would be most likely to apply to rent from you, and it also gives you a place to start with your marketing campaign.
To ensure an increase in rental rates, find out if people are moving in or out of that location. If people are moving in, chances are there will be more potential renters plus an increase in property values.
2. Decide How Much Space You Need
Before you go house hunting, decide on how much space you want to rent out. Will it be a studio, one-bedroom, two-bedroom, or more? This will depend on your budget and the available space in the condominiums that you are considering.
Ask yourself how much space you need to have for yourself. What can you afford in addition to that? Will it be hard to find tenants or charge a decent rent because it is too small? Do you want more than one tenant? The answers to these questions will help you determine how large the condo will need to be.
3. Find a Condo for Sale That Meets Your Budget
Once you have done your research and know the kind of space you are looking for, it is time to look at condos for sale in your area. This will take time, patience, and footwork because you want to find the perfect place that meets all of your needs.
Get a real estate agent involved with this part, especially if you don’t have a lot of experience in this area. You will want to hire an agent who knows the condominium market and who you feel comfortable working with.
When you find a residential property condominium that is the right size that you can afford, look at the blueprint and see if it is possible to convert the space into at least two separate units. If you have to do major renovations or repairs because the place needs work, consider getting an estimate on what it would cost. This will help you determine if this condo is worth buying as an investment.
When you are buying a residential property condominium, make sure your mortgage is manageable even in periods of vacancy. Don’t get yourself in over your head by spending too much on the condo but still not earning enough to cover the mortgage payments. You want to have a strict budget and stick to it, at least until the property is bought and your tenants have started paying rent.
4. Look into your local laws regarding rental properties and tenant rights
Before you go ahead and purchase a residential property condominium and rent it out, check into the local laws regarding rental properties and tenant rights. Read these rules carefully to see if there are any that would affect the success of your business plan.
Look at landlord-tenant ordinances in your city or town to be sure they will not get in the way of renting out your condo. Find out what procedures you will have to follow when you evict tenants and know how to avoid problems in court if this does end up happening. It is also important to keep track of legal notices so that you can fulfill all of your obligations as a landlord.
Also, check the homeowners association (HOA) rules. Some condominiums will not allow you to rent out part of your space, so make sure this isn’t an issue before purchasing a residential property condominium.
5. Buy and Prepare Your Condo
Now that you have decided to house hack a condominium, it is time to buy and make it ready for tenants. If the condo is in disrepair or needs major repairs, hire someone who can do the job quickly and at an affordable cost. Or consider doing the work yourself if you are handy and realistic about how long it will take to complete.
Renovating and remodeling can be a fun and creative way to give your rental space that unique feel. If you have the time, you can add touches that reflect you as well as impress your tenants. But always weigh the costs against how the work will affect your budget.
Buy appliances for the condominium and make sure they are energy efficient. Keep track of all receipts in case something breaks and for tax purposes. Also, know how much utilities will cost you so that your renters can cover these expenses and there are no surprises.
6. Find prospective tenants
Once your residential property condominium is ready for business and looks great on all levels, start marketing it so people can easily find you as a potential landlord. Set up online ads with photos of the condo itself along with information about yourself as a renter and owner of this property. Use social media sites to tell your friends and acquaintances about the property and create an online presence. You want potential tenants to know your contact information so they can reach you with questions or inquiries.
Look for quality renters who you can trust to pay on time every month, not damage the property, and respect your house rules. Take the time to screen applicants and choose a tenant you can work with. Don’t rush this process, or you may end up with someone who isn’t dependable and can cause a lot of problems for you.
This is also a good time to make any necessary changes in your lease contract. Read it over carefully, making sure you understand everything, before presenting it to a prospective tenant. You want all parties to be clear on what is expected from each other so that there are no surprises or disputes later on.
How much can you make from house hacking, and what are the associated costs?
Depending on location, the number of bedrooms, and how many units you choose to rent out, your monthly rental income will be anywhere from $400 to $4000 or even higher. This is a very wide range as it depends on many factors.
One of the biggest factors is the location of your house hack. Areas with a lot of people looking for housing will bring more potential renters to your house, which will, in turn, increase the rent you can charge.
How many bedrooms your house hack has will also affect the rent you can get. A house with only one bedroom will generally generate less money per month than a house with three or more bedrooms because you can have more than one renter. You will generally make more in rental income by renting out two small rooms than one large.
The costs of house hacking are more or less the same as if you lived there by yourself. In addition to the mortgage, you’ll have to pay property taxes and insurance. You will also pay regular HOA fees, which pay for the maintenance of common areas and city services.
You’ll also spend money to service your property and cover maintenance work. For example, if something breaks in the plumbing or electrical system, you’ll need to pay for these repairs.
You will also need to pay taxes on any income produced from your house hack as you would with any other rental investment.
In addition, consider carefully how to charge for utilities. Will you charge a flat fee on top of the base rent? Or will you split the utility bills among you and your tenants, so everyone pays their fair share? If your tenant has their own kitchen and bathroom, you could also install sub-meters.
House hacking a condo is a great way to make some extra money and have the opportunity to live in your own place and get into the home market without having to break the bank.
However, you need to consider the potential impact house hacking can have on your desire for privacy. You will be sharing your house with the person you rent to, and you won’t have full control over everything that happens in it.
If you’re willing to share some of your space for an extra bit of income, house hacking can definitely be worth a shot. Just make sure you do it right – don’t rush into anything before doing proper due diligence.
There are also many costs associated with owning any type of property that can quickly add up, so be sure about whether or not these financial obligations fit into your budget. Do your research and make sure house hacking is going to be a profitable venture for you.