How To Help Clients ‘Hack’ Their Way Into Real Estate Investing

House hacking is a great strategy for introducing clients interested in buying an investment property but may not have enough money to own a standalone rental property. Here’s what you should know.

Low mortgage rates and high buyer demand have drawn both experienced and first-time investors into the real estate market. But a dwindling housing stock has led to bidding wars and sharp rises in list prices across the country. For many, this has put their real estate investment dreams out of reach, but house hacking has the potential to overcome these financial hurdles.

The economy is just beginning to recover from the coronavirus closings, and Save for a large deposit and the associated costs of owning a property can seem a long way off.

However, by hacking homes, buyers with good credit can acquire real estate for only 3.5 percent less while minimizing their monthly mortgage payments and maintenance costs.

Here’s what agents need to know about house hacking and what to educate their investor clients about.

What exactly is house hacking?

House hacking involves buying a duplex, triplex, or fourplex and living in one of the units while the others are rented out to tenants. The income from the monthly rental payments is usually enough to cover almost all or all of the owner’s monthly mortgage payments, which drastically reduces the amount of money they will have to spend on the property mortgage and other expenses.

House hacking is good for investors who want it Try real estate investments without the full obligation to buy a rental property. While it’s common for home hackers to start with a property or two, once a property’s cash flow is combined with W-2 income, scaling up can be easy.

For clients looking to expand their home hacking operations quickly, agents can suggest selling their current property and buying multiple replacement properties with the profit by: a 1031 Exchange to defer capital gains taxes.

How to do a house hack

When your clients are ready to start hacking their homes, use the following steps as a guide on their investment journey.

1. Find a property

Especially in the current seller market, being aware of MLS notifications and getting a property ahead of the competition is crucial. Make sure to set up notifications for customers every time a home that matches their criteria hits the market.

Off-market real estate is another great way to find potential home hacks, but this method takes a lot of time and perseverance. Tap your contacts to see if they’d be ready to sell a property even if it’s not listed.

Investors can use online tools like Zillow’s Zestimate to get an idea of ​​the value of a property. For houses in the market, the median margin of error is 1.9 percent, and for Off-market houses are 7.5 percent.

2. Choose the right financing

There are three main routes that investors typically take to get a home hack. The first option is an FHA loan that only requires a 3.5 percent down. These loans are supported by the federal government and are therefore subject to strict rules.

Borrowers must pass an FHA inspection and demonstrate that the property has no major defects (e.g. no peeling or lead paint, all core systems in good condition). These loans do not have high credit score limits (at least 580).

Conventional mortgages are the next option. These loans require 10 to 25 percent less for a term of 15 to 30 years but have higher minimum credit limits than FHA loans (at least 620).

If your customer is a veteran, they should definitely get a VA loan. These loans require 0 percent less and the inspection process is less intense than an FHA loan.

Once your customers have purchased the property and taken out a loan, they always have the option to refinance themselves later at a better interest rate. You can also use a personal loan for renovations. take up ARPs as low as 4.99 percent.

3. Take into account the monthly expenses

To understand how much money a property can really generate, make sure customers understand the costs associated with owning a home.

In addition to monthly mortgage payments and closing costs, you have to budget for property taxes, home insurance, utilities, maintenance, vacancies, investments and property management fees.

4. Apartment lessors

One important thing to make clear to your customers is that hacking a home means they are acting as the landlord. Some investors may tire of this fact and may think that tenants are constantly knocking on their door to make repairs or discuss the rent.

Offer them tips to help meet tenant expectations, such as: B. Introducing yourself as a property manager rather than a landlord, including “rental rules and communications” in your rental agreement, setting up online payments, and performing background checks for all tenants.

House hacking is a great strategy for introducing clients interested in buying an investment property but may not have enough money to own a standalone rental property. Just make sure they understand what it is about and how much time and commitment it will take to make their investment successful.

Ben Mizes is the CEO of Clever Real Estate in St. Louis. Connect with him on Facebook or Twitter.