The 5 Step Process to House Hacking Your Way to Financial Freedom: Part 2

Welcome back to the 5-step process to house hacking your first property. Let’s get right into it and continue onto step 4.

Here is Part 1 for those who have missed it.

Step 4: Find a Property, Run your numbers, close on the property

Finally, it is now time to start searching for a property. You know where you want to invest, you are working with your preferred lender, and you have your pre-approval in hand.

The first thing I recommend is you find a Realtor that you want to work with and trust, just like your lender. A Realtor can set you up on an automatic email list for your search criteria in specific locations. This is usually the easiest way to find a property, but it also can be the most competitive.

You will be competing with a much larger pool of buyers when shopping for a deal on the MLS, especially with single family properties. However, with your first house hack, don’t be afraid to purchase the property, at or above market value, off of the MLS. I offered $30,000 above list price to get my first property off the MLS and many other people do this as well.

When purchasing your first property, there are a lot of moving parts and things can be overwhelming. By working with a Realtor, you will have an expert in your corner, making this process much easier.

For those who are ambitious or feel comfortable purchasing a property off the MLS, there are many ways to go about finding these properties. These include:

  • Driving for dollars: Driving through the neighborhoods to find distressed properties
  • REIA meetups: Local real estate meetups where you can talk with other investors who might have properties they want to sell
  • Direct mail: Build or buy a list of distressed homeowners such as probate, divorce, tax delinquent, evictions, or absentee owners
  • FSBO’s: These are for sale by owner properties that are usually listed on Zillow, Craigslist, and other FSBO sites

These are just a few of the ways you can find real estate deals off of the MLS. They do require more work and possibly money to get started. To make things simpler, I recommend using the MLS and a Realtor for your first purchase. It will reduce your stress and make the entire process much easier.

What do you do when find a property that you like? When analyzing a house hack property, the best thing to do is run your numbers like it is a rental property first. Because in the future, when you move out, you will most likely keep this property as a rental.

Calculating your numbers on a rental property will take some time and repetition to get good at. Your expenses on a property include your PITI (principal, interest, taxes and insurance), utilities (electric, gas, water/sewer, and garbage), and your fixed expenses (Property management, capital expenditures, maintenance, and vacancy). Over time, you will become proficient at calculating these numbers and you will be able to analyze a property in under five minutes.

To determine your PITI on a specific property, you can either do this yourself or have your lender do it. Typically, it will be more accurate to have your lender do it because they will calculate it with the exact loan you are using, and they have experience with it.

To have your lender do this, they will need the property address and the purchase price of the property. Obviously, there isn’t a purchase price yet, so give them the asking price. (Or to be even more conservative, give them a number $10,000-$20,000 above asking price)

Your lender will then use a standard insurance amount, find the taxes on the local tax records, and run your property through their software, at the purchase price you , to get a pretty accurate PITI number.

Now that you have your PITI expense calculated, you will want to find the average utilities in your area. One way to do this is to use sites like Numbeo. These sites determine average cost of living in a certain area and they have a lot of data to support their numbers.

Another way you can find the average utilities costs in your area is asks friends, family, and close neighbors what they are paying for their utilities. Of course, this only works when you know people in your area, but if you don’t you can ask other investors, your lender, or even your real estate agent.

The last way you can find average utilities on a certain property (and the most accurate), is to call the actual utility companies that service the property you want to purchase. They will give you actual numbers of the property you are interested in over the past couple of years.

Whatever way you choose to determine your utility costs, overtime a pattern will emerge and you will have an average number you can use on most properties in your area.

The final category of expenses on a property are your fixed expenses. These are based on a percentage of the total rent you expect to collect. They also depend on your area, the type of property you are purchasing, and your overall preference. Again, these expenses include property management fees, vacancy, maintenance, and capital expenditures. For my specific area and personal preference, I use:

  • 10% Property Management
  • 7% Vacancy
  • 5% Maintenance
  • 5% Capital Expenditures

For a total of 27% fixed expenses based on the total rent that I collect. Again, do some research in your area. Find standard vacancy and property management rates by asking local property managers or doing a Google search and generally for older properties, you will want to use higher maintenance and capital expenditure percentages.

Let’s break all these numbers down and calculate the them on an example property. I will use the exact numbers on my first house hack purchase to show you what is truly possible.

Example Property: Duplex

Address: 123 Main St, St Paul, MN 55403

Purchase price: $192,000 – (List price was $162,000)

Loan details: FHA 3.5% down loan, 30 year fixed at 3.5% interest

Down Payment: $6720

Closing Costs: Approximately $8280

Total cash needed to close: $15,000

Cash Flow numbers based on renting out both units. As I said earlier, first calculate your numbers as a standard rental property and not as a house hack.

  • Income:
    • Unit 1 rent: $1300
    • Unit 2 rent $1300
    • These numbers are based off the research I talked about earlier in this post for my specific market rent
  • Expenses:
    • PITI: $1332/month (I gave my lender the address and $192,000 purchase price and this is the number they calculated for me)
  • Utilities: $125/month (This duplex was separately metered for gas and electric, so my utilities expenses were only water/sewer and garbage. The tenants will pay for their own gas and electric.)
  • Fixed expenses: $702/month (Based on the total rent collected, $2600, I can take $2600 times 27% to get $702.

Cash Flow Calculation:

$2600 – $1332 – $125 – $702 = $441 in total monthly cashflow

Based on that cash flow, I knew a purchase price of $192,000 would work.

The next thing I want to look at is running my numbers as a house hack. This will give the amount of money I need to pay out of pocket each month while I am living in one of the units.

For this I want to find my actual monthly cash value I need to pay, so I do not factor in my fixed expenses when running this number.

Income: I still know I can rent one unit for $1300 per month, while I live in the other unit. I also will be renting two spare bedrooms in my unit for $550 and $600 a month. My total income while living in this house hack is $2450

Expenses: My PITI will remain the same at $1332 per month, however, my utilities will be slightly higher since I am paying for my own electric and gas. I called my local utilities companies and determined my monthly cost will be around $250 per month.

Cash Flow: $2450 – $1332 – $250 = $868

This means I will be getting paid $868 every month after all of my actual expenses. Even if I include my fixed expenses of $702 and set that aside for emergencies, I will still be getting paid approximately $166 a month!

This is the true power of house hacking. I could either rent the same unit for $1300 a month or I could purchase the entire duplex and get paid $868 a month to live in the same exact place.

Which would you choose?

Once you run your numbers and are satisfied with your investment, it’s time to get the property under contract.

If you decided to use a Realtor, they will draft up all the contracts and negotiate on your behalf with the seller or seller’s agent. There really isn’t much to do at this stage except submit your offer and wait. The seller can either reject your offer, accept it, or counteroffer. Whatever the case, you need to make sure you do not exceed your maximum purchase price number of what you calculated. Stay disciplined and if the seller doesn’t accept your maximum offer, move on to the next property.

If the property sits on the market for a while, you can also come back later with the same offer and submit it again. In the meantime, find another property where your numbers work, and the seller accepts your offer.

Your Realtor will help you tremendously in this stage of the process. The only thing you need to worry about is calculating your numbers and staying disciplined to those numbers on your target properties.  

When you have an accepted offer, there are many steps you will need to follow. I am not going to go into detail, as the professionals in this process will help you along the way. These professionals include your Realtor, lender, and your title company. They will guide you through the process up until closing and beyond.

Step 5: Prepare to get it rented

The last step in the house hacking process is to prepare your property for rent and find a tenant.

If the property you decided to buy needs rehab work before you rent it out, that is the first thing you will want to do. Whether you are doing the work yourself or hiring someone, start within the first couple of days after closing. The quicker you get this done, the sooner you can rent it out.

After your property is rent ready (Or if it already was after you closed on it) you will need to start marketing your property for rent. Have professional photos taken of the units or bedrooms you are renting out. You can do a quick Google search of real estate photographers in your area and this will typically cost anywhere from $75 to $150.

With professional pictures in hand, you can create an awesome advertisement on multiple platforms to attract potential tenants. Some popular platforms are Zillow, Realtor.com, Craigslist, and Facebook marketplace.

As inquiries come in, you will want to pre-screen potential tenants before you show them your property. This will save you a ton of time and hassle. These are the top 20 pre-screening questions that I ask potential tenants.

For the potential tenants that pass the pre-screen questions, you can set up a time to show them your property. If you have multiple showings, you can schedule them one after another, or what I like to do is set up a large group showing at the same time. This almost acts like an open house and it stimulates competition among potential renters.

After people have viewed your property and they are still interested, you will have them fill out an application. I use the BiggerPockets rental application, as it is very thorough. See attachment below:

Rental Application

After reviewing applications, move forward with the tenants that are going to be the best fit. You’ll then need to set up background checks, credit checks, verify income, and call previous landlords. Setting up background/credit checks will typically cost around $40 a person. I usually have the potential renters pay for this expense, just make sure it is common in your area before you do this.

There are many resources to do background/credit checks – some of these include TransUnion, Cozy, and SmartMoves. From personal experience, I find Cozy the best and it costs $40 per tenant screen.

Whatever program you use, just go their website and follow the steps to complete the tenant screening. It usually only takes a day or two to get back and you will be able to review each person that you screen.

During the time you are waiting to get your background/credit checks back, you can call previous landlords and employers to verify income. And when you receive everything and gather all your information, you can make the decision of who you want to rent to.  

Remember, you cannot discriminate for things such as race, sex, color, religion, gender, national origin, mental or physical disability, family status, or age. Look into state and local protected classes because it varies by location. You can, however, deny a tenant for their income, if they smoke, pets, convicted criminal records, poor or no rental history, falsified information, low credit scores, bankruptcies, or previous evictions.

After you have gone through all these steps with a tenant, it is now time to select one and get a lease signed. You can find leases online, however, I do not recommend this. They typically aren’t lawyer reviewed and they aren’t state specific. If you want to do it the right way, I recommend going on BiggerPockets and purchasing state specific, lawyer reviewed leases: Here

This will cost you $99, but it is well worth it. You will get these 8 documents:

  • Residential Lease Agreement
  • Lease Extension
  • Pet Addendum
  • Lease Amendment
  • Application
  • Move-in/Move-out
  • Lease Guaranty
  • Lease Addendum
  • Maintenance Agreement

Once you purchase these documents, you will have them for good and can use them as many times as you want.

When filling out your lease, make sure you don’t leave any sections blank. Take your time and fill out everything with accurate information and add anything else that you would like to. Go over the lease with your tenant, answer any questions they may have, and get the lease signed.

You are now successfully house hacking.

You are well on your way to financial success as you have eliminated one the biggest expenses in your life. While living in your new property, over the course of the next year, you will not only save a ton of money, but you will learn so there is to be a successful landlord and real estate investor.

This first house hack will be a catalyst into your future endeavors, whether it be continuing to invest in real estate or setting yourself up for financial success by saving money.

Don’t wait for the perfect moment to get started. Start the first step now and begin to change your life for the better.

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