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Grow Your Real Estate Portfolio by House Hacking

Many would-be real estate investors are intimidated because they believe that they need a huge capital to start in the industry. While this is a perfectly understandable fear, the truth is that there is a low-risk way of entering the real estate industry using something relatively small (like $20,000) as a starting capital? Imagine a scenario where you could buy a property on 3.5% down, and getting 100% in return per year? This can be achieved with what is called house hacking.

House Hacking Defined

The concept behind house hacking is easy to explain – it’s basically buying an investment property as an owner-occupant. You buy a property, move in to one of the units, and then rent out the rest so that the tenants can help pay for your mortgage.

How to Use House Hacking Effectively

Of course, it’s not as straightforward as it sounds. You can’t just buy any property that you come across and just rent it out, expecting great returns. You have to consider a few things before you deem a property “house hackable,” such as:

  • You need to get a property with as low of a down as you can get – you want to minimize your initial cash out
  • The property should be good attractive – you have to rent it out, and you need to ensure that it can attract renters who are not looking for bottom-of-the-barrel rent. You basically have to make sure the property is worth a decent amount as rental
  • You need good tenants – evictions and turnovers can be costly and will bring down your bottomline fast. So you need to avoid bad tenants. Go for wonderful tenants who are not trying to weasel out on rent or those who cause trouble

It may seem difficult at first, but the returns are worth it especially since you also get to live for free as one of the tenants. Picture it this way: after the initial down payment and after finding wonderful tenants, you now get to live free of rent, surrounded by wonderful neighbors who will pay your mortgage PLUS pay you a decent amount with their rent. It’s one of those things that sound too good to be true, but it is true as long as you put in the hard work beforehand.

Scaling Your House Hacking to Build a Portfolio

The main challenge with house hacking is that most scenarios involve a low down payment loan or a 5% down conventional loan, which come with mortgage insurance. This mortgage insurance can make a dent in your pockets as they tend to reach hundreds of dollars per month. The approach to this is to reach 25% equity as soon as you can, then refinance it into 30 year mortgages that have no mortgage insurance.
You can achieve this with a few tricks:

  • rely on market appreciation
  • improve the property in order to force appreciation
  • pay the loan
  • take advantage of the fact that you can live rent and mortgage free in order to build your savings

House hacking is no magic bullet, it requires some creative thinking and a lot of elbow grease. But stick with it, because it is one of the safest and fastest ways to take novice investors from a modest income to early financial freedom.

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