House hacking is a great way to get started investing, especially in the Houston market. House hacking is buying a single-family or multifamily property and renting out the other spaces you are not occupying. Ideally, you want to live rent-free. There are a couple of ways you can go about this.
- Buy a single-family and rent out the rooms.
Let’s say you buy a 3 bedroom house in Spring, TX for $150,000. Your PITI (principle, interest, taxes and insurance) will be somewhere around $1,150. You should be able to rent out a bedroom for about $600 each room in that area. That will leave you with cashflow of about $50/month.
There are some great benefits to doing this with a single-family. For one, there’s always lots of inventory on the market to choose from. You can also be very specific with location for a single-family home, unlike multifamily property. Single-family homes are everywhere, and you can choose a location that best suits you where the numbers work. Even if you still have to come out of pocket some for the monthly payment, you’re significantly increasing the amount you can save each month for more investing. Buying a single-family is a very low barrier to entry. In a lot of markets, you can get a house under $200,000. The management is typically pretty simple when renting out rooms as well.
However, there are some downsides to sharing your home with other tenants. For one, you lose your privacy. Renting out rooms in your home usually means sharing kitchen cookware, your fridge, the living room sitting area; usually, most common areas are shared. The other tough part about renting out rooms is tenants don’t usually stay very long. You will see tenants ask for short term leases such as 3-9 months. They are usually in the process of finding another place or relocating short term. It can also be difficult to find these tenants and typically rooms rent for less than a small, private apartment would.
- Buy a small multifamily property (2-4 units) and rent out the units you are not occupying.
You can purchase a quadplex in certain areas of Houston for around $350,000. Your PITI would be about $2,600. If these are 2 bed 1 baths in the south part of Downtown Houston, you should be able to rent these out for $900/month. You would live for free and cashflow roughly $100/month.
Small multifamily is great for house hacking because as far as lending goes, it’s still treated as a residential property, so you will receive more favorable terms. This also gives you great experience as a landlord. The biggest benefit in choosing the multifamily route to house hack, is you still get to keep your privacy.
Unfortunately, you can’t find multifamily property everywhere. You don’t always find it in the suburbs, where home prices are cheaper. There are some builders doing new builds in great suburb areas, but you are going to pay a premium since they are newer. Multifamily properties are almost always more expensive than single-family meaning you will need to be able to qualify for a higher loan value. Note that lenders will usually add 75% of the rent income from the property to your monthly income. For example, if you are able to rent out 3 units for $1,000 each, $2,250 will be added to your monthly income.
House hacking is a great way to get started investing. It allows you to significantly decrease your cost of living, which is usually your highest monthly expense. House hacking helps you to learn the ropes of being a landlord: How to deal with tenants, hire contractors and handymen, and what to look for when hiring a property manager. It is a great way to get started!