House Hacking 101: How to Buy Property Without Paying a Mortgage

Posted by Lisa Kohl on Wednesday, January 22nd, 2020 at 11:27am

Joe retired from a national technology company at the age of 44. Soon after that, he spent a year traveling around the world: Europe, the Grand Caymans, Asia, and South America.

See, when Joe was 22, he bought a fourplex. He lived in one of the units and rented out the other three. As part of his job, he was frequently transferred. Each time he moved to a new city he bought another fourplex, always keeping the last one and the previous ones he had purchased. By the time Joe was 44, he was a millionaire.

Before I tell you the amazing part, you should know Joe repaired ATMs for a living. He was in no way a jet-set executive. The most he made in any one year was $55,000, including overtime. So how did this average Joe become a millionaire real estate tycoon? Including down payments, closing costs, mortgage payments and other holding costs, the total amount Joe spent on all these properties from beginning to end was zero dollars. In fact, over the almost two decades he owned these properties, he made hundreds of thousands of dollars in income!

Can you buy a home without paying a mortgage? Most people are well aware that purchasing a home is an excellent long-term investment. Not only do we look at the short term of our personal housing needs, but the hope is to be able to buy low and sell high at some point in the future. While all these things certainly hold true- there are many folks who are going about it in a different way these days.

While the concept of house hacking is not something new, in recent years, its become a popular way to not only purchase a property but essentially live rent free and build a tremendous amount of equity.

What Is House Hacking & Why?

What is house hacking? It’s actually a surprisingly simple concept. Buying a property with the intent of living in part and renting out part to reduce or eliminate your monthly mortgage payment. By living in part of the property, you reap the benefits of owner-occupied financing. This can come in the form of a single-family home with roommates, a duplex, triplex or fourplex that has you living in one unit and renting out the rest. Pretty straightforward.

The idea is simply to be able to live in a place and not have to pay rent or make a mortgage payment. You let your tenants do that for you. But wait, there’s more…

The appeal of house hacking takes on many facets. The main one being not simply having to fork over money year over year for a place to live. Whether purchasing a home or carving out a path into real estate investing, house hacking can be a great way to get a foot in the door with a very low monetary investment. Being able to reap the benefits of not only owning property and having that property provide cash flow (income to you), but gaining equity over the long term.

Consider this House Hacking example:

Purchase a fourplex using an FHA loan for $500,000. Your down payment amount totals $17,500 plus closing costs, with a monthly mortgage payment of $2,500. You live in one unit and rent out the other three. Each unit is bringing in $1,100 in rent totaling $3,300. After paying your mortgage, you are still $800 positive. You are getting paid to live in your own property!

Financing House Hacking Tips and Tricks

When it comes to purchasing your future house hack, the beauty lies in the financing. When you use a loan to buy a property as your primary residence, even one side of a duplex or one unit of a fourplex, you benefit from lower down payment requirements and better interest rates. Typically an investment property would require at least 25% down. When you are purchasing owner-occupied, you’re looking at a down payment as low as 3.5%- big difference.

Financing Options

Conventional – As little as 10% down
VA – 0% down for qualifying, active service members and veterans
FHA – 3.5% down
203k – Finance both the purchase of a house and the cost of its rehabilitation through a single mortgage. 3.5% down
Homestyle Renovation – Offered by Fannie Mae, this renovation loan functions similarly to a 203k loan and offers down payments as low as 3%

Just because you purchase your future house hack property doesn’t mean you have to live in it forever. FHA loans, which can bring your down payment to as low as 3%, only require you to live in it for a year. In fact, many of the most successful house hackers repeat the process again and again.

When a lender looks at extending a loan for an income property with more than one unit, they may also look at the income the property produces, which in turn, can help you qualify for a much larger mortgage than you would otherwise be eligible for. So instead of just looking at your individual income to make the monthly loan payments, they will take into consideration the rents on the property, minus expenses, to determine your loan amount.

What’s the Catch?

House hacking may not be a good fit if being a landlord isn’t your gig. No matter what type of property you pursue, you will become a landlord in some capacity. Whether it’s collecting monthly rents from roommates or actual tenants who reside in their own individual units.

Becoming a landlord is like taking on a whole new persona. Your tenants are the ones who will be paying your mortgage, so it’s essential to run it like a business. Having systems in place regarding rent collection, tenant screening and eviction processes are all a part of doing business. It’s up to you to educate yourself about the duties and responsibilities that a landlord takes on. Being a landlord is not everyone’s cup of tea.

The real fun starts if a tenant is delinquent in their rent or when items go haywire, such as the dreaded call at 3 am saying the water heater broke.

If you’re looking at a potential property that has more than one unit, it’s never a bad idea to seek out a property management company either. Not only can a property management company recommend market-rate rents and assist with tenant placement. They also act as a buffer when the rent is late, evictions become necessary, or to take that 3 am phone call. All at a cost though, which is something to consider as it affects your bottom line.

What to Watch Out for When House Hacking

Unless you like to live dangerously, choosing a property that’s in relatively good shape is key. Especially if it’s your first place. The idea is not having to shell out a bunch of cash upfront making repairs as everything you put into the property affects your bottom line. Like any purchase, getting an inspection is priceless and can help dodge any costly bullets. The lender will also have their own input regarding condition, as they will send out an appraiser to ensure the value and condition are there in order to extend the loan.

During your purchase due diligence period, it’s important to consider the items that are likely to need attention now as well as in the future. Say the age of the property is approaching 20+ years old, but the roof is original. It’s safe to say that a new roof may be in the deck of cards in the next few years. Roofs don’t come cheap and a replacement could wipe out months of income at the end of a year. So choose wisely.

Finding the Best Property: Single-Family or Multifamily?

Not only will your overall budget determine the property type, but so should your tolerance. Single-family homes tend to be more budget-friendly and depending on where you live, this may be the best or even the only option. In lower cost areas, multifamily properties such as duplexes and fourplexes can be up for consideration.

Single-Family – Here are some things to consider. With a single-family home, everything is under one roof. While it may not be ideal for some to share the same common space, if you have other roommates, you don’t have to go far to collect their rent. So while being more affordable for the entry-level buyer, your income potential will likely be limited as to what typical room rental rates go for in your area.

Even starting with very little, house hacking provides an excellent opportunity to build wealth through real estate investing.

Duplex – House hacking a duplex can be a nice happy medium for folks. Each individual having their own dedicated living space, usually shared by one common wall. Your own space is key here. However, it’s good to remember that you’re responsible for not just one unit, but two, so that’s two water heaters, roofs, air conditioners, etc. On the flip side, you are only dealing with one tenant, which will typically make everything more manageable.

Fourplex – Consisting of four units, a fourplex in this scenario is like the "Cadillac" of house hacks. Not only does a fourplex offer the best opportunity for monetary gain, depending on your neighborhood, but also the best chance of headaches too. No risk, no reward, right? Investment properties are a numbers game. With the end goal of having a property cash flowing positively, but paying off liabilities like a mortgage in the shortest amount of time possible.

Remember, with four units, you will be managing four separate residences. You will be occupying one for yourself- that equals three other sets of tenants and three additional units to manage. Let that sink in for a moment. Per door, a multifamily property will typically provide the best value dollar for dollar. In most markets, it would be quite the challenge to purchase four single-family homes for the same cost it would be to buy one multifamily investment.

Originally published in February 2016, updated January 2020.

Lisa Kohl

The above article, House Hacking Your Way to Homeownership & Investment Success, was written by Boise, Idaho expert and award-winning Realtor Lisa Kohl. Lisa helps clients buy and sell residential and investment properties throughout the Boise area. If you are considering buying or selling real estate, Lisa would be happy to share her local knowledge and real estate expertise with you.

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