How ‘house hackers’ combine homeownership, real estate investing

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When Brian Robinson bought his first home in 2019, he skipped the standard starter house. Instead, the Chicago accountant opted for a triplex.

By living in one unit and collecting rent on the other two apartments, Robinson made more than enough to cover the mortgage on the entire building.

“Not only was I living for free, I was also making a couple hundred a month,” Robinson says.

He’s speaking in the past tense because he already flipped the property for a handsome profit. The experience turned Robinson into an advocate for “house hacking,” a new name for an old concept.

Homebuyers with an entrepreneurial streak can use a Federal Housing Administration loan to buy a duplex or triplex with a down payment of just 3.5 percent. By combining homeownership with landlording, house hackers get the tenants to pay the mortgage.

The strategy has been around for decades — the FHA long has offered low-down-payment loans on properties of up to four units. But the catchy new moniker has captured eyeballs on social media, leading a new generation of investors to delve into the decidedly old-school business of real estate investment.

“Because it has a cool name, it’s piqued some interest,” says Rashauna Scott, an agent at Kale Realty in Chicago. “It’s definitely been picked up by a lot of millennials. The hack is that you’re living for free, or living for less than you’d be paying to rent.”

For first-time buyers struggling with hefty student loans and modest paychecks, the strategy carries a special appeal: FHA loans are available to borrowers with credit scores as low as 580 and little cash for down payments.

A quicker path to homeownership

A housing market characterized by soaring prices and stagnant incomes has made house hacking a compelling strategy. Scott says she works with a steady stream of millennial buyers who are tapping FHA loans for low-cost entry into an otherwise-prohibitive housing market.

“Everybody wants to invest in real estate, but not everybody has 20 percent down to purchase an investment property,” Scott says. “But a lot of people do have 3.5 percent to put down.”

For buyers who would struggle to afford a traditional home, house hacking offers an alternate route to homeownership. The approach appeals to buyers who are daunted by the responsibility of a monthly mortgage payment, says Suzanne Hollander, a professor of real estate law at Florida International University.

“It’s a little bit of a twist on the American dream. It’s not a house surrounded by a white picket fence,” she says. “But let’s say you do lose your job. You still have tenants paying your mortgage, taxes and insurance.”

The realities of landlording still apply

Of course, there’s a reason most people aren’t landlords — it’s work. You have to find potential tenants, check their backgrounds, then collect their payments. If the toilet clogs or the refrigerator breaks, it’s your problem.

Randolph Saa, sales director at Century 21 American Homes in Fresh Meadows, New York, helps buyers find multi-family units for house hacking. He stresses the reality of landlording. For one, maintenance emergencies never strike at convenient moments.

“If something does happen, it always seems to happen on the coldest night of the year, or on a holiday,” Saa says.

Meanwhile, sharing yards, entryways or driveways with tenants can turn stressful.

“You have to be quite selective in terms of the individuals you rent to,” Saa says. “You want to have the income, but you want it to be someone you can get along with.”

Some house hackers try to avoid friction by not telling tenants that they own the building. They hire property managers to handle some of the headaches.

Robinson says he deals with maintenance issues by cultivating a team of reliable workers, including a handyman, a plumber and an electrician. And he says he headed off many maintenance issues by renovating his building when he bought it. Robinson took an FHA 203(k) loan, which financed both the $140,000 purchase price and $52,000 in repairs to his triplex.

“If you fully renovate it and it’s done the right way, it’ll make it a lot easier,” Robinson says.

Many house hackers find the occasional middle-of-the-night repair a small price to pay.

“It might not be your vision of a great time to have your tenant living right next door,” Hollander acknowledges. “But not only does it let you get into homeownership, you’re also building wealth.”

A $100,000 payday

Robinson says his financial rewards came quickly. He sold his triplex for an $80,000 gain after owning it for a little more than a year. Add in his rental income, and he made a six-figure score.

“Making that one decision to house hack made me about $100,000,” he says.

Emboldened, Robinson is buying another multi-family property in Chicago. And he started a business teaching others how to house hack profitably.

Jose Garcia, a mechanical engineer in Florida, also has done well with house hacking. Frustrated by bidding wars for single-family homes, the first-time buyer bid on a Wellington triplex four years ago. “It was a less competitive market,” he says. “Most people want single-family homes.”

His first challenge after moving in: Raising rent for tenants who were paying well below the going rate. Since then, the landlord business has gone smoothly, with two rental units covering most of his costs.

“The fortunate thing is that you keep a good eye on the property, so it’s not like you have tenants sneaking people in, or dogging the place out or throwing wild parties,” Garcia says. “I don’t mind fixing a toilet once in a while.”

Loans from Fannie, Freddie might be cheaper

For house hackers, FHA loans are a good starting point. However, there’s one major downside to the loans: They come with costly upfront fees and mortgage insurance premiums.

For that reason, Eli Sklar, senior loan consultant at loanDepot, tells his house-hacking clients that an FHA loan isn’t always the best option. For borrowers with solid credit scores, he recommends Freddie Mac’s Home Possible program or Fannie Mae’s HomeReady loan.

For borrowers moving into duplexes, both require 5 percent down rather than the 3.5 percent required by FHA. However, coming up with an extra 1.5 percent means avoiding the FHA’s hefty mortgage insurance. “You pay less over the life of the loan,” Sklar says.

Following that philosophy, Garcia refinanced his Florida triplex last year. He took advantage of plunging mortgage rates, while also locking in a conventional loan without private mortgage insurance.

Pros, cons of house hacking

Property investment isn’t for the faint of heart. Home values can decline, as the Great Recession showed. And with evictions on hold during the coronavirus pandemic, many landlords find themselves saddled with tenants who can’t make the rent payments.

Chris Hogan, the author of “Everyday Millionaires,” worries that house hacking can make landlording seem easier than it really is.

“It sounds good in theory, but in reality, it tells me they’re not ready to buy yet,” Hogan says. “If you’ve got to rely on your tenants, that’s going to leave you open to have a lot of headache and heartache.”

Robinson acknowledges that profitable landlording isn’t easy. He says buying the right place requires attention to detail — you need to scrutinize the cash flow the rental property will generate, and develop a realistic view of repair costs.

“I would say definitely go for it,” he says. “I would just say make sure you’re doing your proper due diligence.”

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Written by
Jeff Ostrowski
Senior mortgage reporter
Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal.