Are you interested in investing in real estate, but not sure where to start? Consider house hacking in Philadelphia, PA. House hacking is a strategy where you live in one unit of a multi-unit property while renting out the other units to generate income. It’s a great way to get started in real estate investing, and Philadelphia is an ideal city for this strategy. In this blog post, we’ll discuss different ways to house hack, how to finance a house hack property, how much money can be saved, benefits and downsides of house hacking, other cities where house hacking is common, how to scale up your real estate investment portfolio after house hacking, and ways to protect yourself with contracts like leases and roommate agreements and property insurance.
How to House Hack
There are many ways to house hack, depending on your preferences and the type of property you purchase. Here are a few examples:
- Single-Family Home: Purchase a single-family home with a basement, garage, or extra space that can be converted into a separate living area. Rent out the basement or garage apartment to generate income.
- Duplex: Purchase a duplex and live in one unit while renting out the other. This is a great way to generate income while living in a larger space than you would in a single-family home.
- Multi-Unit Property: Purchase a larger multi-unit property, such as a triplex or fourplex, and live in one unit while renting out the others. This can generate a significant amount of income, but also requires more management.
How to Use House Hacking to Get Started in Real Estate Investing
House hacking is an excellent way to get started in real estate investing. By renting out part of your property, you can generate income that can help you pay down your mortgage, save for a down payment on your next property, or invest in other assets. Additionally, by living in one of the units, you can keep an eye on your property and manage your tenants more effectively.
How Much Money Can Be Saved House Hacking?
The amount of money you can save through house hacking depends on the type of property you purchase, the rental market in your area, and the amount you charge for rent. However, in general, you can save a significant amount of money on your housing expenses. For example, if you purchase a duplex and charge enough rent to cover your mortgage payment, you could live in one unit for free. This can save you thousands of dollars each year.
How to Finance a House Hack Property with an FHA, Conventional, or VA Loan
One of the benefits of house hacking is that you can finance the property with an FHA, Conventional, or VA loan the same way you would finance a traditional home purchase. An FHA loan is a government-backed loan that allows you to put down a lower down payment, typically around 3.5%. Additionally, depending on the market, you may be able to negotiate for a seller to pay for some or all of your closing costs using an FHA loan. FHA loans are commonly used by first-time homebuyers and those with lower income or credit scores. Many people do not know that an FHA loan can be used to buy a property that has up tp 4 units as long as you live in one of them! A conventional loan requires a higher down payment, typically as low as 5% and up to 20%, but can offer lower interest rates and fewer fees. House hacking using a VA loan is a great way for eligible veterans, active-duty service members, and some surviving spouses to purchase a property with as little as 0% down, and without the need for mortgage insurance. There are eligibility requirements and restrictions that must be met, such as occupying one of the units as your primary residence for at least one year and purchasing a property with no more than 4 units. It’s important to work with a local lender who is experienced in working with real estate investors and can advise you of the best options for your situation.
Benefits of House Hacking
Homeowners who decide to house hack for a few years find there are many benefits over continuing to rent or paying for a mortgage by themselves.
- Generate Income: By renting out part of your property, you can generate income to help pay down your mortgage, save for future investments, or invest in other assets.
- Reduced Housing Expenses: Living in one unit of a multi-unit property while renting out the others can significantly reduce your housing expenses, which can save you thousands of dollars each year.
- Property Management Experience: As a house hacker, you’ll gain valuable experience managing tenants, maintaining your property, and dealing with any issues that arise.
- Building Equity: By making mortgage payments each month, you’ll be building equity in your property, which can be used to finance future investments or upgrades to your property.
- Tax Benefits: As a landlord, you’ll be able to deduct many of your expenses related to the rental property on your taxes, which can reduce your tax burden.
Downsides of House Hacking
While house hacking has many benefits, there are also some downsides to consider, including:
- Shared Living Space: Living in a multi-unit property means you’ll be sharing some living space with your tenants, which may not be ideal for everyone.
- Tenant Management: Managing tenants can be time-consuming and stressful, especially if you’re living in the same property as your tenants.
- Lack of Privacy: Living in a multi-unit property means you’ll have less privacy than you would in a single-family home.
- Property Maintenance: As a landlord, you’ll be responsible for maintaining your property and ensuring that it’s safe and habitable for your tenants.
Popular Cities for House Hackers
While Philadelphia is an excellent city for house hacking, it’s not the only city where this strategy is popular. Other cities where house hacking is common include:
- Denver, CO
- Portland, OR
- Austin, TX
- Minneapolis, MN
- Seattle, WA
How to Scale Up Your Real Estate Investment Portfolio After House Hacking
House hacking is a great way to get started in real estate investing, but it’s just the beginning. After house hacking, you can use the income you’ve generated and the equity you’ve built up in your property to finance future investments. Some strategies for scaling up your real estate investment portfolio include:
- Purchasing additional rental properties
- Flipping properties for a profit
- Investing in real estate syndications or crowdfunding platforms
- Starting a real estate investment trust (REIT)
Use Protection!
As a landlord, it’s important to protect yourself from risk. Some ways to do this include:
- Hiring a Realtor or attorney to prepare a lease agreement that outlines the terms of your tenancy and protects your interests
- Executing a roommate agreement if you’ll be sharing living space with your tenants
- Purchasing property insurance to protect your investment in the event of damage or loss
- Require your renters to purchase a renter’s insurance policy covering their personal property and include you as an additional interest on the policy
How to Find a Real Estate Agent Who is Experienced Working with Investors
If you’re interested in house hacking or real estate investing in general, it’s important to find a real estate agent who is experienced working with investors. Look for an agent who understands your investment goals, knows the local market, and can provide guidance on the best properties for your needs.
Example House Hack Scenarios with Mortgage Cost Analysis
Let’s take a closer look at an example cost analysis of a few possible house hack scenarios in Philadelphia, PA.
2-unit property (duplex) in Brewerytown, Philadelphia purchased for $400,000 with a 20% down payment of $80,000. Using 30-year conventional mortgage with a 4% interest rate and a monthly payment of $1,518. You live in Unit 1 and rent out Unit 2 for $1,550 per month, which covers your mortgage payment (principle and interest). Over the course of a year, you could save over $18,600 of rent you would be paying to someone else! Additionally, your tenant in Unit 2 is paying $18,600 a year towards your mortgage payment while you build equity. After a few years you may decide to buy another property with the money you’ve been able to save. You would have the option to move and rent your unit to another tenant.
2-unit property (duplex) in East Kensington, Philadelphia purchased for $650,000 using a 30-year conventional loan with a 5% down payment and a 4% interest rate. The down payment would be $32,500 and the monthly mortgage payment would be approximately $3,200. Unit 1 is rented out for $2,200 per month. The owner lives in Unit 2 with a roommate who pays $800 per month. The total monthly rent income from the property would be $3,000. The monthly mortgage (principle and interest) out-of-pocket cost for the owner is $200 per month.
While this may seem like a loss, it’s important to remember that the mortgage payment is also building equity in the property, which can be used to finance future investments or upgrades to the property. Additionally, the owner is only paying $200 a month to live in a luxury new construction condo in East Kensington! This frees up the rest of the owner’s salary to invest in more real estate or the stock market, or possibly even take some time off work to start a business they’ve always dreamed about.
4 bedroom single-family house in Point Breeze, Philadelphia purchased for $400k using a 30-year conventional loan with a 5% down payment and a 6% interest rate. The house hacker has three roommates paying $650 per month each, for a total of $1,950 in monthly rental income. The down payment would be $20,000, and the monthly mortgage payment would be approximately $2,266. The roommates pay $1950 per month and the owner pays the remaining $316 per month. The roommates monthly rent payments are contributing to building equity in the property. After 3 years of the roommates paying $650 per month, the total from their rent alone would be $34,200 ($650 x 3 roommates x 12 months x 3 years).
The expenses associated with the property, such as property taxes, insurance, and maintenance, can also be deducted on taxes, which can reduce the overall cost of the property. Additional monthly expenses like homeowner’s insurance, real estate taxes, utility bills, and routine maintenance are not included in this analysis and should also be accounted for when purchasing a property.
It’s important to note that these are just a few examples, and the actual costs and income associated with a house hack can vary based on a variety of factors, including the location of the property, interest rates, down payment, property taxes and insurance, rental rates in the area, vacancy, and the expenses associated with the property. It’s important to do thorough research and run the actual numbers before purchasing a property for a house hack to ensure that it’s going to work for you.
Conclusion
House hacking is a powerful strategy for first time homebuyers and new investors to get started in real estate investing. By living in one unit of a multi-unit property while renting out the others, you can generate income, reduce your housing expenses, generate income, provide value to renters, and gain valuable property management experience. Philadelphia is an excellent city for house hacking, but this strategy can be used in many other cities as well. Whether you’re just getting started or looking to scale up your real estate investment portfolio, house hacking is an excellent way to achieve your investment goals.
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