How To Start House Hacking When You’re Under 25

For the last five years, I have been house hacking. In fact, I was house hacking before I even knew what it was and how powerful of a tool it could be. House hacking when you’re under 25 can be a rough road but it teaches you a lot about real estate investing. It all started in college when I read a book that told me paying rent was just paying someone else’s mortgage. What a crazy, yet obvious point. I decided then that I wanted to find a way to be the person that was getting my mortgage paid instead of the other way around.

So how and why do you want to start house hacking when you’re under 25? Well, it is a powerful tool to help get your foot in the door when it comes to real estate investing. On a more macro-level it can lead you down a road towards financial independence. If you can find a property that allows you to charge a certain rate for rent that covers your expenses and at the same time gives you a place to live then you can house hack.

Buying a piece of real estate can be quite a scary task though. I remember making offers on homes and second-guessing myself every time. It’s rough. If you’ve never bought a piece of property I’d suggest you read my article: Before You Buy Your First Home Read This! after you’re done here.

What Is House Hacking

House hacking means that you buy some form of residential real estate. Whether that is a single family home, a duplex, or a multi-unit property. You then live in one unit of that property and rent out the rest. So if you buy a single family home you live in one room and rent out the rest. For a duplex or multi-family, you live in one side of the duplex or one of the units of the multi.

This is just the general guidelines but people have become creative and apply this same concept to garage space and even just a couch. You can stretch it even farther and rent out a storage room as a bedroom (don’t laugh I know someone who did this and loved it) if it’s big enough.

If you’re wanting to start out even smaller I would consider Airbnb’ing part-time as house hacking. My roomate and I did this with a simple air matress that we bought off Amazon. But that’s a story for a different time. No matter how you set it up the main goal is to get enough income coming in from rent to cover your mortgage, insurance, property taxes, and other expenses. I’ll show you the math to doing this later but in essence, you are living somewhere free.

Why Would Anyone Want To House Hack

This can all seem a little overwhelming but trust me there are some huge benefits to house hacking when you’re under 25. I could make a list of one hundred bullet points about the amount of knowledge I’ve gained from general business to fixing things. Yes, this is a huge financial investment but after reading this list I think you’ll get a better grasp of how good of an opportunity this is.

1) Lower Down Payment Necessary Than Commercial Loans

One of the biggest issues almost everyone faces when trying to get into real estate investing is they just don’t have the cash. Typically if you are looking to buy an investment property a bank is going to make you put down at least 20%.

They do this because they know you are more likely to default on a loan if it isn’t where you live. When you try to secure a mortgage on a primary residence you can put down much less. Usually anywhere from 5-20% but if you use a VA or FHA loan it may go all the way down to 0%. This is all going to matter on your situation (credit score, cash available, etc.) and what your bank allows.

It is important to remember you’ll have to pay PMI (private mortgage insurance) until you reach 20% in equity. This is something you’ll need to make sure you consider when analyzing the financial feasibility of the property.

2) Lower Interest Rate Than Commercial Loans

A lower down payment isn’t the only financing benefit of house hacking. The other is securing a lower interest rate. If you want to start house hacking when you’re under 25 you need to get the lowest interest rate possible. People often overlook this but it means the difference of thousands of dollars.

As of late 2018 interest rates are slowly starting to creep up and that means it is going to cost you more money to purchase a home. A typical personal mortgage is going to run you anywhere from 4-6% and a commercial will usually be 6% and up. What’s the difference a few percentage points makes though? Well, a lot.

If you secured a $100,000 mortgage at a 4% interest rate then you would pay a total of $69,000 over a 30 year loan. On the other hand, that same loan at 6% interest will cost you $110,000 in interest over the life of that loan. That’s a difference of $41,000, don’t think the interest rate is important now?

3) You’ll Learn To Fix Everything

I consider myself a pretty handy guy. I worked on a farm all through high school and was the kid taking shop and agricultural classes for most of my senior year. I’d consider my mechanical ability slightly above average but I was quickly brought to reality when I bought my first home.

If you are going to be house hacking when you’re under 25 then you need to learn how to fix things. You don’t have that cash cushion available to hire someone to fix every little thing and I think it’s better that you don’t. It teaches you things no book or article can.

In the first two years of owning a rental property I learned how to:

Tile
Replace a water heater
Maintain air filters
Fix a sprinkler system
Paint, lots of painting
Replace carpet and pad
Fix washer, oven, and refrigerator

I could keep going with this list but you get the point. Before you get scared away of getting into house hacking let me make it clear that these things weren’t all that hard to do. Luckily for you and I, we also have the power of the internet. Want to know where I learned to tile? YouTube.

Yes, I literally watched YouTube videos the night before I tiled a bathroom. Thinking back it’s quite humorous but I know that by taking advantage of free resources, like YouTube and Google, I’m helping the bottom line of that rental property.

In the future having a management company take care of getting most of these tasks done is fine. But you don’t have a huge rental property portfolio yet so take the time to learn how to do these projects.

4) Lower Risk Then Buying A Rental

The fourth and final major reason to get into house hacking is it comes at a lower risk than just buying a rental property. No matter what you need somewhere to live. If you buy a rental property you may have to get an apartment. But if you house hack you will obviously be living there.

With a rental, you need to get tenants in asap. You have the mortgage payment coming in thirty days in addition to your rent that is also due at your fancy apartment. When you house hack you just have the mortgage to worry about. This doesn’t mean you shouldn’t still be trying to figure out how to fill your units but the stress is slightly lower.

In addition, you are learning what it is all about being a landlord. You may love it or absolutely hate it. Just know, if you’re house hacking when you’re under 25 you won’t be sitting back counting checks. The good news is that even though you may be a roommate you are still the landlord which means you make the rules, to a point. On the other side of things when it’s a rental you are at the mercy of your tenants. You can influence them a bit but you can’t come over one day and tell them to vaccuum or do their dishes.

By house hacking you’re getting you toes wet instead of jumping in head first.

How I’ve Found Success

Before we get into my history of house hacking let’s address the elephant in the room. To some, this article may come as some sort of a shock. How could I possibly talk about how I’m using my tenants to pay off my mortgage? No matter how smart you think you are there is one basic rule you MUST follow.

The rent rate you charge must be competitive for that living situation in your market.

I charge right at market rate if not slightly less. They have their options and of course the freedom to choose where they live. If I’m priced out of the market or supplying living situations that are comparable to a slum they will go somewhere else. As they should.

How I started House Hacking

In the spring of 2014, I was finishing up my sophomore year of my undergrad. I was living in my fraternity house and paying somewhere around $250 a month in rent. It was ridiculously cheap and in a convenient location but I knew there was a better option than paying rent. What really pushed me over the edge was reading Rich Dad Poor Dad, if you haven’t read it you NEED to. Seriously it will change your mindset.

Anyways, I knew that I wanted to get into real estate investing so I decided to look into buying a single family home. I had a great internship at the time and was making pretty good money so why not?

Before I even started looking at properties I tried to find roommates to cover my expenses. This is one of the first things you need to do if you’re considering house hacking. Find roomates and try to think 1, 3, and 5 years down the road. Being in a fraternity in college naturally gave me a steady supply of tenants. Five years later and I still go to those guys to see if they need a place to live.

Luckily I found three great guys pretty quickly. One was my roommate at the time and the two were fraternity brothers who lived on the opposite side of town and wanted to move closer. In June of 2014, I bought a property and we were all moved in a week or so later.

My First Property

When it came time to actually figure out how much I was going to charge these guys for rent I was completely lost. We had all come from relatively cheap living situations and I didn’t want to make them upset by changing that. The most logical thing I could possibly think of was figuring out my total bills for a year and dividing it up between them.

This is exactly what I did. I took my mortgage, insurance, and property tax and added them together and divided by twelve to figure out what I needed per month. The total came out to $850. We divided up the cost of the rooms differently based on size and who got their own bathroom but on average each guy paid $280/month in rent.

My Mistakes

House Hacking when you’re under 25 isn’t easy and looking back on this I made two potential mistakes. The first being that I should have accounted more towards my expenses. Things are going to break in a home and its on you to fix them, you’re the landlord. There will also always be other little miscellaneous expenses that are going to add up. Even as simple as light bulbs, you have to buy them.

The other I really wouldn’t consider a mistake, that’s why I said these were ‘potential’ mistakes, was charging too little for base rent. I could have charged $1,000+ and didn’t for two reasons. The first being was I didn’t know what I was doing. I was young and my knowledge in house hacking and real estate investing was almost zero. I was just going with what felt right. The second was I didn’t really want to. These are good friends and I wanted to live with them. We were all getting a good deal and having a good time. I also planned on transitioning the property into a traditional rental property down the road so I knew the income would come eventually.

House hacking is a trial by fire. You are going to know very little at first especially when it comes to maintaining a home, how to deal with tenants and the economics behind it.

The Math Behind It

To be decent at real estate investing you need to be good at math. Luckily for us we aren’t trying to be full-time real estate investors just house hackers, for now at least. While we don’t need to do a full-blown analysis there are certain things we need to take into account when evaluating a property.

If I would have known just a fraction of these things five years ago I believe I would own another one or two properties by now.

Net Operating Income

The first and most important thing you need to figure out is the net operating income. This number will feed into all the other ratios and give you a better idea of what to actually expect from a potential property. I don’t want to get to deep into this topic so I’m just going to give you a quick example.

If you are looking at a potential property then just copy down each line of the image below and input your own numbers. Something you’ll be sure to want to do is only use the income from tenants and exclude the rent of your unit. Remember, you want to see if this is feasible for house hacking and not as a full-time rental property. That analysis can be done later.

As you can see this property bring in $1,200 a month in rent or $14,400 yearly. After expenses are paid it nets about $7,600 yearly. Is this good or bad? Well, that depends.

NOI is a key number to know and more importantly, understand. It doesn’t tell you how much cash you are going to have at the end of the year because this doesn’t take into account your largest expense, your mortgage.

Cap Rate

If you talk to anyone about real estate investing they are going to ask you the capitalization rate of that property. The cap rate is essentially your return on investment. It looks at what return you’d be making on your money if the property was 100% paid off. For this reason NOI is a part of the equation. Here it is:

If you use our NOI from above and we are looking at a property valued at $100,000 then you’ll have a cap rate of 7.7% ($7,661/$100,000). Whether this is good or bad is going to matter on what the cap rates in your market. I will say that anything over 5% is usually a good start.

1% Rule

The 1% rule is another easy equation to evaluate a potential property. All you’re going to do here is make sure that your monthly rent is at least 1% of your properties value. To calculate this all you have to do is take your monthly rent and divide it by the property’s value.

Again, let’s use our numbers from above. Taking the $1,200 of rent per month and dividing it by the $100,000 property value this gives us a percentage of 1.2%. This passes our 1% rule. Performing this quick analysis should be the bare minimum you do when evaluating a rental property.

Other Formulas

If your serious about getting into real estate investing then I would suggest educating yourself on other key metrics when looking at a property like:

Cash On Cash
Break Even Ratio
Debt Coverage Ratio
Rent Ratio
Return On Equity

I plan on doing articles surrounding these metrics down the road but this is just an introduction to house hacking not an advanced real estate class. If you are serious about this topic and want a great tool to analyze properties then email me via the Contact Us page.

The Ultimate Goal With House Hacking

Since my first property I have moved away for a couple years and then back again. All the while I maintained that first property as a traditional rental. When I did move back I decided to go through the whole process once again. Yes, I have house hacked twice and now currently live with three other guys who are in the process of finishing their undergrad.

My ultimate goal isn’t to house hack my whole life. While I’m not sure what the future may hold I do know that I want to continue investing in some form of real estate.

For me, the ultimate goal is to get into something more commercial. Higher cash flow, longer leases, and less hands on maintenance all sound great to me. Of course, this comes at a large cost which I just can’t afford yet. I believe that house hacking when you’re under 25 lays the groundwork for those opportunities down the road. Being exposed to the financials, the people, and the properties on a small scale can only make the big stuff easier.

The Bottom Line

House hacking when you’re under 25 is a great way to get into real estate investing. Over the last five years I’ve gone from a novice who just didn’t want to pay rent to someone who feels confident as a small real estate investor. Don’t get me wrong there is still a ton to learn as there always will be.

Hopefully after reading through this article I’ve instilled a little confidence in you. You’re never going to be 100% ready to step into the world of real estate. By taking your time, analyzing the property properly, and using some common sense then you too can house hack.

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