We have a passion for helping people build wealth through real estate and one of our favorite ways to do that is through a strategy called house hacking. We’ve helped many of our clients purchase homes and benefit from house hacking. Over the years we’ve answered a multitude of questions regarding house hacking and we’d like to share some of our top frequently asked questions with you!
So in this blog, we’ll answer some of the most common questions we get regarding house hacking, which, simply put, is purchasing a small multi-unit property, living in one unit and renting out the rest. So the first question:
Why would I want to house hack?
Most people look to house hack in an effort to own property for a smaller monthly out-of-pocket expense. House hackers can often reduce their housing payment by around 50% compared to owning a similar single family home.
Our next most common set of questions deals with tenants. We get asked things like:
Won’t I get stuck with a tenant that I can never get rid of? And What do I need to know about rent control?
Ending up with tenants that you don’t get along with is a very common fear among house hackers. And with tenant protection laws now in effect state-wide, it can be challenging to part ways with tenants. This is why the tenant selection process is so crucial, so that you can mitigate that risk as much as possible. I also highly recommend including a landlord-focused attorney on your team, and be sure to defer to their advice especially if there’s a dispute.
For a vacant unit, you can choose your tenant. Though you’ll need to be aware of anti-discrimination laws in housing, and also that you must not reject applicants because they’re using section 8 housing vouchers.
As far as rent control goes, you need to know that it exists and will likely impact you during your career as a landlord. The current movement in the bay area is for continued expansion of rent control. Here in Oakland, we have some of the most restrictive rent control ordinances, which generally apply to house hackers and limit how much rent can be increased each year.
The best place to get information is to contact your city’s rent board, which will provide allowable increases, exemptions, required notices, and everything else you’ll need.
Everything except leases. Generally, local rental housing associations are great places to find good leases. Here in Oakland, Berkeley, and surrounding areas, it’s the East Bay Rental Housing Association that I point people to to get a decent lease. Because leases are legal contracts, it’s a good idea to get any lease you use approved by your attorney.
The next question is also related to tenant relations. And that is:
What if the tenant damages my property?
We once had a tenant maliciously flood three units the night before she was being evicted for months of non-payment. It sucks, it occupies a lot of time and mindshare, and could cost a lot of money. Insurance helped us in that case–it was a vandalism claim–, however insurance isn’t always there to save the day.
Collecting a security deposit helps self-insure against damage. That gives you some funds to work with in the case of damage–purposeful or not. Whether you have a security deposit or not, it’s a good idea to have reserves on hand. These reserves come in handy for damage like this question alludes to, but also comes in handy for other unexpected repairs or replacements, such as a faulty heater, stove, or some other appliance.
Speaking of unexpected expenses, don’t let required business fees and taxes be one of those. Rental income is taxable income, so good bookkeeping is key so that you can offset as much of that income as possible with deductions such as mortgage interest, property taxes, repairs, maintenance, utilities, and, my favorite, depreciation. That last one–depreciation– is the ability to write off the value of the asset over its useful life. I won’t get into specifics here, yet it generally adds up to thousands of dollars of write-offs each year.
Some cities, like Oakland, require landlords to pay a business fee. Some areas it’s a flat fee per unit and others, like Oakland, it’s a percentage of the gross rents that you collect. Additionally, you may have to file with the local rent board like Oakland’s Rent Adjustment Program. Though the city’s ordinances show an exemption from the Rent Adjustment Program for owner-occupied duplexes and triplexes, the administrators of that program don’t appear to take heed.
Our next question is about the purchase itself. And that’s:
How will house hacking impact my ability to qualify for financing?
That answer is that it depends! If you’re purchasing a single-family home with an in-law unit or rooms that you’re planning to rent out, it doesn’t generally impact your financing qualifications. However, if you’re house hacking a duplex, triplex, et cetera, lenders will generally allow you to use the rents for the units you will be renting out to help you qualify for a loan.
The ability to add rental income to help qualify has made a huge impact on several of our past clients and current house hackers. In one case, instead of feeling stretched financially in a purchase of a six hundred thousand dollar single family home, our clients were able to comfortably purchase an eight hundred thousand dollar duplex, and ultimately spend less each month on their housing payment.
It is possible that looking at house hacking may change the required downpayment on your purchase. Single family homes and condos generally have more types of loans available to them, especially at lower downpayments. Most commonly for duplexes and triplexes, buyers are putting 20 percent down. Though, there is still a very relevant low downpayment program for multi-unit buildings. We’ve had several clients purchase duplexes with an FHA program with only 3-point-5 percent down.
Ok, one more question. And that is:
The property I’m considering for house hacking is fully occupied by tenants, can I get rid of them?
Let me point you straight to an attorney to answer that question more completely. The short answer is often you can. But it’s more complicated than it may seem. Owners are generally allowed to evict tenants from a unit that they intend to occupy, though many jurisdictions require a payment to be made to the tenant to help with relocation. Additionally, if the tenant is elderly, disabled, or otherwise part of a protected class, they may be protected from the eviction that you’d like to perform. So, like I said, consult an attorney.
That covers out most commonly asked questions. Do you have any questions we missed? Or have ideas on how you handle some of the issues we talked about? Let us know!
If you’re looking for more real-world tools on how to get started house hacking, come check out one of our live upcoming house hacking classes offered in both Oakland and San Francisco. We’ll walk you through multiple examples, answer your questions, and even provide some free snacks and goodies. We hope to see you at one of our classes soon!
