How to Buy Your First 2-4 Unit Home: House Hacking for Beginners
Living in an investment property can be a smart financial move, where your tenants' rent can cover your mortgage—if you plan wisely and set boundaries.
The Rise of ‘House Hacking’
The concept of buying and living in a multifamily property, often called "house hacking," has gained popularity, particularly among younger buyers looking for passive income or a way to manage the high cost of homeownership. With the average monthly mortgage payment for a single-family home more than doubling over the past three years, renting part of your home to cover mortgage costs has become an appealing strategy. House hacking not only helps manage living expenses but also allows you to build equity and investment income simultaneously.
Setting Goals and Budget
For many, purchasing a duplex or other multifamily property is the first step toward financial independence. Establishing clear goals and a budget is crucial. Determine how much rent you can charge and how it will offset your mortgage. Decide if you’ll use the additional income to save for another property, fund your child’s education, or support other financial goals. Knowing your financial objectives will help guide your property search and investment strategy.
Working with a Buyer’s Agent
Find a buyer’s agent who understands your goals and can help you find the right property. Whether you’re looking for a temporary residence or a long-term home, your agent can guide you on the trade-offs, such as sacrificing square footage for future investment potential. A knowledgeable agent can also provide insights into local rental markets, ensuring you choose a property that will attract reliable tenants and generate steady rental income.
Shopping for a Mortgage
Comparing mortgage lenders can save you money. Consider at least three lenders for preapproval. Recent changes have decreased down payment requirements for multifamily properties. Fannie Mae now requires only a 5% down payment for properties up to four units, while FHA loans require as little as 3.5%. Exploring different financing options and understanding the terms can help you secure the best mortgage for your needs.
Budgeting for Repairs and Maintenance
New landlords often underestimate the cost of repairs and maintenance. Budgeting for these expenses is essential. Bob Pinnegar, president of the National Apartment Association, advises considering the number of units and their needs. You’ll also need to account for insurance and taxes, which can increase over time. Prioritize upgrades that can help increase rental income, often starting with tenant units. Proper budgeting ensures you maintain the property well and keep tenants satisfied.
Understanding Legal Obligations
Ensure your lease agreement complies with local, state, and federal laws to avoid discrimination and protect tenant rights. Use resources like your local Apartment Association to help with background checks and tenant screening, ensuring all applicants are assessed using the same criteria. Typically, tenants' gross income should be at least two and a half to three times the rent. Adhering to legal requirements helps prevent disputes and fosters a fair rental environment.
Setting Boundaries
Clearly define expectations in your lease regarding issues like parking, noise, and maintenance requests. Maintaining clear boundaries is crucial, especially when you share walls or common areas with tenants. Renting to friends or family can blur these lines and create conflicts. Setting and enforcing clear rules ensures a harmonious living situation and protects your investment.
The Rewards of House Hacking
Managing a duplex or multifamily property isn’t always easy, but it can be highly rewarding. Beyond financial benefits, you’ll gain valuable skills and experiences. Matt Horan, who bought his first duplex with an FHA 203(k) renovation loan, emphasizes the personal growth and connections he’s made through his journey as a landlord. “You're going to continue to learn things about yourself and the business. It's important to have an open mind and be willing to learn,” he says.
By carefully planning and maintaining good boundaries, house hacking can be a pathway to financial growth and stability. With the right approach, this strategy can help you achieve your financial goals and provide a stepping stone to further real estate investments.
