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Three Ways of House Hacking in Los Angeles
I love looking at a property and seeing beyond what it is…and instead seeing what it could be. That’s why House Hacking is so exciting for me, but it’s a new term for many, so I wanted to break it all down by covering these common House Hacking questions and topics:
- What is House Hacking?
- Why should you consider House Hacking?
- How can I start House Hacking?
- House Hacking a Multifamily Property
- House Hacking by adding an ADU
- Pros and Cons of House Hacking
You can jump ahead using any of the above links ☝️ but also check out this video where I cover 3 Types of House Hacking I’ve done with my Los Angeles Real Estate portfolio.
What is House Hacking?
House Hacking is when you buy a property, you live in part of it, and you rent out the other space. The rent you receive offsets your mortgage and can even make owning your home profitable. There are also more advanced house hacks that we’ll cover that don’t necessarily involve you living at the property. significantly reduced (and oftentimes living for free or close to free. House hacking is a great way to get into real estate investment without a lot of money up front. It is also a great way to live in a desirable home or location that you otherwise couldn’t afford.
Why should you consider House Hacking?
So we’ve heard it a hundred times. You’re either paying your mortgage or paying someone else’s. While, it is a cliche. It’s never been more true with House Hacking. The reason why House Hacking is so great is it’s much more approachable, especially when you’re just starting out in real estate. And in cities like Los Angeles, a starter home can set you back significantly so House Hacking can really unlock some doors (oh yes I did!).
You might not have a ton of cash to put down or afford this mortgage payment, but when you use rental income from other sources, it makes it a whole lot easier. And you’re getting the traditional advantages of real estate investing like building equity in your home, property appreciation, writing off property taxes and interest, and using depreciation for even more tax benefits.
So house hacking is a great first step for not just home ownership, but also being a real estate investor.
How to start House Hacking?
My first experience with house hacking was in 2004, which pre-dates the phrase “House Hacking”. I really just wanted to get outta my mama’s house. So I purchased a 3 bed, 3 bath, single family home. I qualified for the loan but my budget was stretched pretty thin with the mortgage payments, so I found two roommates. One of them was from Craigslist and she ended up being a very dear friend.
So I pretty much stumbled into this technique of owning the home and using rent to offset the mortgage. But it ended up being the first step that led to more and more real estate investing here in Los Angeles. That’s the beauty of House Hacking: it’s is a great way to get your feet wet in real estate investing without having to dive in headfirst with a property that’s a 100% investment.
House Hacking a Multifamily Property
So this was my second house hack. It was a duplex where I lived in the front house and rented out the back. I got an FHA loan with just a 3.5% down payment and was able to use the rental income to qualify for the mortgage.
Now on that second unit, I had a long term tenant BUT you can decide maybe have a long term tenant or short term tenant, like Airbnb and VRBO, which can oftentimes get better cash flow.
In my case, I eventually moved out and rented both units BUT the mortgage still had the lower “owner occupied” interest rate…so I was able to have the best of both worlds. This is why House Hacking is such a great first step on the real estate investing journey.
House Hacking by adding an ADU
First off, what is an ADU? It’s an Accessory Dwelling Unit.
Don’t be intimidated. They’re really just small houses or studios that you can add to a property. For example you can put them in the backyard or convert an existing part of the building (ex: like a garage) to an ADU. Plus, there are companies and services that can help with the planning and the permitting too. And in Los Angeles, because of the housing supply shortage, the city is becoming more accommodating to ADUs.
In our case, we had a duplex with an oversized front house and we took one of the bedrooms and blocked it off from the main house and made it an ADU.
ADUs are especially great to use for a short term rental (STR) because there are limits on square footage and that means they’re often focused on one sleeping area and a bathroom. Kitchen and common room space is sparse compared to apartments, which is why, many ADUs look just like a studio apartment or a hotel suite…hence being great for short term guests.
In our example, blocking off that fourth bedroom and making it its own studio, we were able to double the rental income on the property.
And besides the additional rental income, there’s a lesser known benefit to increasing the rental income for a property: investors calculate a property’s value based on the rental income it generates. So by increasing the income, we made the property much more valuable if we ever decided to sell.
Pros and Cons of House Hacking
- Better financing: Owner occupied properties often require less down payment and interest rates are usually significantly lower. FHA and Conventional Mortgages are especially great options.
- Lowers the bar to start real estate investing: Because of these financing benefits, you can start with less cash up front. Also since you plan to live at the property your risks are lower compared to if the property was purely an investment.
- Short term rental possibility: The STR regulations are more forgiving when you live in part of the property and rent out the other on sites like Airbnb and VRBO
- Repeatable process: If you ever want to move out of the property and make it a pure investment property, you can AND then you can repeat this process again and again. Which will grow your property portfolio in a responsible way.
- All the other benefits to owning real estate still apply like Appreciation, depreciation, tax advantages, forced savings within the property’s equity and cash flow from rents.
- Ready for roommates? If you plan to House Hack a single family residence, that means having roommates. So if you’re super sensitive to OPDD (other people’s dirty dishes) and playing whodunnit with your missing Haagen-Dazs…then you may want to rethink this.
- Maintenance mode: Even if you rent out another unit in the property, if something breaks, you’re gonna be financially responsible for that…and you’ll be expected to fix things in a timely manner. Don’t wanna drop everything and grab a plunger? Well then you’ll need to find a good property manager or reconsider this path on the real estate investment journey.
- Multifamily costs more: If you go with a 2+ unit property (which are more conducive to House Hacking) you’ll typically need to pay more than if you started with a single family residence or townhouse/condo. Multifamily properties in most parts of Los Angeles are well above $1M and you may be shocked (not in a good way) at the condition of these properties.
- Responsibility check: This is a business…and you’re now the owner. That means certain expectations need be met from an accounting, planning, and communication standpoint.
After reading this post, we hope you’re convinced of the many benefits of House Hacking and are inspired to give it a try. If you’re ready to get started but not sure how to finance your first property, reach out to us. We’d be happy to chat with you about your options and help you get started on your journey toward financial freedom through real estate investing.