Are you an aspiring real estate investor in Rhode Island, Massachusetts, or Connecticut? If so, you’ve probably come across the term “house hacking”, but may not understand what it is or why people do it. House hacking is acquiring a property to live in while renting out other rooms or units to generate cash flow to pay the mortgage and other ongoing expenses. House hacking is most common with multi-family homes, such as a duplexes, triplexes, and quadplexes. It is possible with a single-family homes, but the lack of privacy from sharing common areas doesn’t appeal to many investors.
Why House Hack?
House hacking is a common way for younger investors to enter the real estate market and build wealth. House hacking blends your primary residence with a revenue-generating investment property. Depending on the specifics of the property, the revenue generated from the rental units will partially or fully cover the mortgage payment and ongoing expenses. In some cases, the property may produce positive cash flow after all payments are made, resulting in an additional income source for the investor. For many real estate investors, it’s a chance to build wealth early on while enjoying the freedom of owning their own place.
Owner-occupiers receive better financing terms than investors, and when considering a property that may be held as a long-term investment, having the best financing terms possible can drastically improve the property’s returns. As a result, house hackers prefer to take advantage of FHA lending. FHA loans have several requirements that must be met:
- The borrower must live in the property as his or her principal place of residence for at least 12 months.
- The borrower must have a FICO® score of at least 500.
- The borrower must have a debt-to-income ratio of less than 43%.
- The borrower must have proof of employment and recurring income.
If these requirements are met, then a borrower is likely to be able to use the FHA loan program. One of the biggest benefits to the FHA loans is the reduced down payment. Under the FHA loan, borrowers can put down as little as 3.5% with a FICO® score of at least 580, or 10% down with a FICO® score between 500 and 579. These loans still require mortgage insurance because their loan-to-value ratios are higher than 80%. Once a borrower has lived in the property for at least 12 months, they can move out and rent the unit they were living in while retaining the FHA loan. For many, house hacking from one property to the next is a great way to build wealth and a real estate portfolio.
House hacking is a well-trodden path to real estate investing. Our attorneys have significant experience in acquiring, leasing, and selling multi-family properties. If you are a real estate investor or are planning to become one, please contact our office to set up a consultation or complete the contact form. Our attorneys have successfully helped hundreds of individuals like yourself navigate real estate investing across the states of Rhode Island, Massachusetts, and Connecticut.