*Disclaimer: This is not professional real estate or financial advice. Everything below are my opinions, knowledge and experiences. What may work for me, may not work for you. The importance is to grab the main concept of these strategies and apply it to your own journey.

Brandon Turner of BiggerPockets.com often uses the term Househacking, which is a strategy used in real estate. The concept consists of buying a multi-family property and living in one of the units. Househacking has become a popular way to get started in real estate. We are going to dip into the pros and cons of househacking, give you my current experiences, how it is working for me and how it may work for you! 

Pros of Househacking:

• Lower Down Payment

Houses are expensive. I live in Northern New Jersey and if you are from this area, then you get it. Housing is EXPENSIVE, taxes are HIGH, hell at least I’m paying under $100 per month on homeowners insurance, that’s a win right? Rent is also expensive here, how can we win?! I won’t get into the whole rent vs. own debate, everyone is different and everyone has their own preferences. So let’s stick to buying and start with talking down payments. For anyone living in a higher priced market such as Northern New Jersey, it also means the need for more cash for a down payment if you plan on taking out a mortgage loan. 

For anyone that doesn’t know what a mortgage loan is (typically known as conventional mortgage), it is a loan from a bank/lender/credit union that is used to pay for real estate. The lender will supply the cash for the sale of the home you are buying and the home will be used as collateral while you pay back the mortgage loan within a certain period of time with interest. 

If you plan on getting into real estate, househacking is a great strategy because you will be eligible for different options to obtain a mortgage.

FHA Loan

If you are a first time home buyer, you may be eligible for an FHA loan, which is supplied by the Federal Housing Administration. If you qualify, this loan will allow you to put down as low as 3.5% for a mortgage loan. But how does this help? Mortgage lenders typically ask for 20% down payment on a home, but with the FHA loan, you can put as low as 3.5%.

But there’s a catch. There always is right? If you get approved for an FHA loan, it’s important to be aware of the fees and insurances that are associated with the FHA loan. When I first started researching FHA loans, I read many websites that advertised the 3.5% down payment, without any mention of the fees and insurances associated with the loan. The fees associated with the loan are in addition to your 3.5% down payment when you ready to close on a property and complete the home buying process. First, you pay 1-2% of the total amount of loan as an FHA fee upfront when you purchase the home. Second, you pay a mortgage insurance premium. The first year’s premium for insurance is required up front. Then will be a monthly payment starting the 2nd year of the mortgage. Mortgage insurance premium for an FHA loan is typically 0.75% the amount of the loan. The insurance will stay on for the life of the loan due to putting down less than 10%, however there are ways to get rid of it! Another catch, you must live on the property for a minimum of one year. If not, that is considered mortgage fraud, which carries a sentence of up to five years in prison. Rule of thumb for me, stay honest to your business and don’t commit mortgage fraud!

So how is this still a good option? Well, if you are buying a $400,000 home, putting down 3.5% means you only have to put down $14,000 rather than the standard 20% down or $80,000. In addition to the 3.5% or $14,000 down payment, the 1-2% FHA fee would be around $3,986-$7,972. Even if you have to pay the 1-2% FHA fee, you are still putting down way less than $80,000 up front.

In addition, there are closing costs when buying a home, more costs (yay???). In New Jersey, average closing costs are around $12,000. So let’s compare!

Costs	FHA Loan (3.5%)	Conventional Mortgage (20%)
Down Payment	$14,000	$80,000
FHA Fee (Average Amount)	$5,979
Mortgage Insurance Premium (1st Year Up Front)	$2,895
Closing Costs ( N.J. Average)	$12,000	$12,000
Total Up-Front Cash (Rounded)	$34,874	$92,000

Wouldn’t it be better to put down 3.5% to get a house faster rather than waiting to save up all that money? I think so! Just remember, you don’t need to do this. This comparison might be helpful to someone who doesn’t have enough cash but wants to get started. I didn’t choose this route, but it was the route I almost took!

Now this is all situation based, ask yourself these questions before looking into an FHA loan:

• Do you want to get a home faster rather than wait to save up for 20%?
• Are you comfortable paying the fees? (FHA fee’s & mortgage insurance)
• Are you ok with applying for a refinance in the future to remove the mortgage insurance? (Yes this is possible and recommended!)
• Are you ok with a higher monthly payment?

Saving cash is hard. This is why Get Your Money Right! An Introduction to Tracking Your Finances is important! 

If you choose to go the conventional mortgage loan route, just remember this: YOU DO NOT HAVE TO PUT 20% DOWN FOR A MORTGAGE LOAN. 

Depending on credit score, you can be eligible for as low as 5% on a conventional mortgage loan. Yes there is a catch, you pay private mortgage insurance. But guess what? It goes away after you have more than 20% of equity on the home! (This only applies to conventional loans, FHA loans you HAVE to refinance to remove mortgage insurance if you put down 3.5%).

• On-Site Landlord

For real estate investors, if you are not using a property management company, you are then also now a landlord. Us real estate investors wear many hats! Househacking can help relieve a lot of the stresses of being a landlord because you are already living on the property. This is also a good learning experience if you choose to add to your real estate portfolio! Property management companies aren’t cheap. Now don’t get me wrong, I’m not constantly fixing toilets and light bulbs for my tenants at 3AM, but I am more open and aware of the issues that go on in their units and am always on top of fixing them!

*Plot twist = I did have to fix a toilet with my plunger once, just not at 3AM.*

The reputation landlords have is tainted. There are many individuals who put their greed for money on top of providing the best service they can for their tenants. It’s important for renters to know that there are landlords out there that care and work to provide the best service for their tenants. As a landlord, I do my best to always be understanding and to work with my tenants. In return, I have some of the best tenants out there. 

• Lower “Rent” Payments & Building Equity

Lower “rent” payments, this is the fun part of househacking. I will use my situation as an example. My monthly mortgage is $2,880.45/month. This includes the principal, interest, taxes and insurance (better known as PITI). Let’s add in the water bill averaged out to $30/month.

I am responsible to pay $2,910.45/month. Keep in mind, electrical and gas are separate, so my tenants pay their own and I pay my own.

The first unit of my property currently charges $1,950/month.

$2,910.45 – $1,950 = $960.45

I am left covering $960.45 for my monthly mortgage payments & utilities. Me and my significant other pay “rent” to my real estate bank accounts, which is used for reserves and cash flow purposes only! The market rent for a fully renovated 1 bed/1 bath in our area is $1,400/month, so we split $700 a piece. 

That leaves my real estate business cash flowing $439.55/month! When we decide to move and rent the place, the business will truly be pocketing the excess cash!! 

Here’s another good part: that $960.45/month I am covering, is going into the home. I am building equity on the home, which means when I pay off the home (this is also possible before it’s paid off), I can access the equity I’ve put into the home via methods such as Home Equity Loans or Home Equity Line of Credit. This is crucial, especially when you don’t have lump sums of cash! 

Cons of house hacking:

• Vacancy

This was one of my worst fears when getting a 2-family home. These are the risks associated with purchasing a multi-family property. They can go vacant. Now, this can be for all sorts of reasons (overpriced, lack of interest, needs renovation, etc.). Best way to mitigate risks are to take early action and do your due diligence.

• Uncomfortable Living In A Multi-Family Home

Let’s face it, it can be uncomfortable to live in a home and there is another family under the same roof. Before even getting into purchasing a property to househack, are you comfortable with it? If applicable, is your significant other comfortable with it? Are you ok with trusting the tenant? Again these questions come up. Think! Think! Think! I didn’t just wake up one day and decide I want to buy a home, look at how I ended up here! Lots of thinking! How I Began My Real Estate Investing Journey

If you are not comfortable with househacking, don’t do it! There are other ways to get into real estate, this is only one of many! 

• On-Site Landlord (Can have its drawbacks)

Being an on-site landlord does have its drawbacks emotionally and psychologically. When you are on-site, you have a sense of urgency that other landlords may not. This is great to have, but it does keep me up at night. When a tenant brings up an issue, you start to feel the pressure of getting it done right away because you are already there. Being on-site is great, but be sure to not put too much pressure on yourself if things do not get done right away.

How This Works For Me & How It May Work For You

So this is how househacking has worked for me. Since me and my significant other made the leap to move in together, our “rent” is going into this property. Rather than paying an apartment complex or another landlord, we are paying my real estate business. For me, it was important to start the learning curve of being a landlord. I already understand the investing aspect, but being a landlord is a whole other job. 

For you the reader, househacking may work for you if you are looking to get into real estate without having massive amounts of cash in the bank, especially if you are from the Tri-State area. Househacking may also work for you if you are comfortable dealing with people and living with others in the same building. I mean people live in apartment complexes right? Only difference is, you’re the person tenants call for maintenance! Househacking may work for you if your significant other is comfortable with it or if you are single. Always consult your significant other if you have one!

Househacking may be in your future if you are looking to get into real estate investing. This method can help you through the benefits of putting less money down on a mortgage, easing your way into becoming a landlord and will also satisfy your housing needs without spending $1,800/month @ an apartment complex! I hope you learned something from this today. Remember to always do your due diligence before making any type of investment. Real estate or not, proper research will do so much for you.

Happy Househacking!