Are you looking to invest and start growing a real estate portfolio? If so, you have probably heard the term, “House Hacking”. This is one of many ways to start a real estate portfolio with not much money. I personally know a few people who chose this as their first investment.

With this strategy, you are looking to purchase a multi-unit property. This is typically a residential unit that has 2-4 different units. These can be more common in larger cities and not in the suburbs. Since you will be living at the property you have many advantages. The biggest advantage is you can benefit from a low down payment program. Often times investors would use an FHA loan which is only 3.5% down. This is an owner occupied loan program so you do have to live in the property for at least one year.

The second biggest advantage to house hacking is free living. Often times when you purchase a multi-unit building and you rent out the other units you do not occupy the collected rent can pay your mortgage. Not only did you purchase a property for little down you also can live for free. While living for free you may even cash flow and have a monthly income. On top of that you’re gaining equity in the property you purchased.

For example, say you buy a $500,000 four unit property. Your down payment at 3.5% would be $17,500 plus your closing costs. Your monthly payment without taxes and insurance would be $3,250 (including 6.5% interest rate and 0.5% PMI). If you’re able to rent the other three units for $1,500 each you would be collecting $4,500 each month. That gives you a positive cash flow of $1,750 but don’t forget about other expenses. You still have your tax and insurance.

House hacking is a great option for investors with little cash on hand. It can even be one of the best ways to start your portfolio. You will be living near your tenants which some investors don’t like. A quick trick would just be telling everyone else you also rent and help the owner show and manage the property. You can work with a management company or communicate mostly through phone and email.

Contact me with questions and we can start your portfolio today!

We always hear everyone talking about the appreciation they are receiving on their home and how it pays off in the long run. I figured I’d write a quick blog to briefly explain what appreciation is and how it works. To start, you have two types of appreciation, natural and forced. Both result in the value of your property increasing but they are for different reasons.

Natural Appreciation

This refers to the value of your real estate due to the changes in the market. You have no control over this increase or decrease as it is natural market effects based on the amount of supply and demand in the market. Interest rates and inflation do have an impact on this as they are driving factors for the supply and demand in the market. Your property can be positively effected in a booming market. However your property value can be impacted in the other direction as markets slow down. This is determined on the comparable properties that are selling. A comparable property is a property that located nears yours and has the same features (square footage, # of bedrooms, # of bathrooms, etc.). If you’re ever wanting to know what the value of your real estate, this is the first thing professionals will review and analyze.

Historically overtime real estate has always increased in natural appreciation. I know we all hear our grandparents say I bought my home in 1970 for $60,000 and now it is worth $600,000 today. Who knows maybe 50 years from now a property worth $600,000 will be worth $3,000,000.

Forced Appreciation

This refers to the value of your real estate due to the actions made by the owner. This area you do have control over the value of your real estate. Forced appreciation often times occurs when you’re purchasing a property in need of many updates and repairs, many know the industry as “flipping”. Investors often times will purchase a property significantly below market value. Then remodel the home increasing its value to the standard of the market value. Market value is the value given based on the comparable properties. Forced appreciation can occur from remodeling your kitchen, bathrooms, putting an addition on your home, and any large project that has significant value. Forced appreciation is referred to as “sweat equity” for home owners.