House hacking: What Omaha real estate investors should know

With home prices skyrocketing across the country, breaking into real estate investing seems nearly impossible. However, house hacking is still a viable way to live cheaply and make money - even in Omaha’s competitive real estate market. 

What is house hacking and why do people do it?

Despite the name, house hacking isn’t some sort of stealthy cybercrime. House hacking is simply a strategy where a property owner rents out portions of a residence to generate income while living in another area of the home. Ideally, a property owner collects enough in rent to cover the mortgage payments on the property and cover any property repairs or improvements to boost the property value.

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Beginners without a ton of money saved can get a loan through the Federal Housing Authority to finance their first house hack. From there, it’s up to you to find tenants to move in and start generating income. 

House hacking is not only an easier path to homeownership, but it can also be a good way to make passive income and overcome the initial financial hurdles of breaking into real estate investing. Successful house hackers are also able to reduce or eliminate their personal housing costs, live in a desirable area, and generate personal wealth. It also slowly teaches you how to be a good landlord, and how to find the best handymen and building materials in town.

House hackers in Omaha can make a healthy income thanks to the area’s rising rent costs. An average, one-bedroom rental in Omaha costs about $700-$1,000, which can be enough to comfortably make your monthly mortgage payment and perhaps have money left over. 

House hacking also provides better flexibility than other living and real estate investment situations. 

If you get a great job offer in another city, you can simply rent out the unit you’re living in and use the income from the property to cover your living expenses in your new home. This means house hacking can be especially appealing to younger people who may want to have more freedom. 

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Tips for house hacking

1) Keep the rental process professional 

Even if you only have one tenant, you need to take things seriously. Hire a professional to write up a lease agreement for your tenants to sign that outlines all of the rules and requirements for living on your property. If you will be sharing spaces with your tenant, like a garage or backyard, be sure the lease states what areas they’re allowed to use and which areas they can’t. 

2) Factor in higher insurance and repair costs

Your mortgage payment is only one expense you’ll need to factor in. There will likely also be repairs to make and higher insurance rates for a multifamily property, so you may not be able to make all of the optional property improvements right away. 

Make sure you have enough money to cover any unexpected repairs if something on the property breaks down. Also account for the possibility that your property may not have a tenant, so you’ll need to cover the mortgage and other monthly costs on your own until you can find someone to move in.  

3) Choose your tenants wisely

The people you choose to rent to won’t only be your tenants - they’ll also be your neighbors. Do a background check on your tenants and make sure they’re financially stable enough to make rent each month. If you’re having trouble finding a long-term tenant, you can also list the unit on vacation rental websites like Airbnb to generate income with short-term guests. 

4) Use the 1% rule

The 1% rule is a house-hacking rule of thumb that states your gross rent should be about 1% of your property’s total value each month. So, if your property is $500,000, you should collect at least $5,000 in rent each month. Keep in mind that you’ll need to charge rent that reflects the local rates and the quality of your property, so you might have to start with living in a fixer-upper before moving into more desirable properties or parts of town. 

Omaha duplexes give investors a chance to generate wealth 

Duplex buildings are an ideal type of property to get into house hacking as a beginner - though it’s possible to get started with a triplex or a four-plex if you have the time. Smaller, multifamily homes are big enough to have some privacy, but not too big to be overwhelming for a beginner. 

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Since the property will be your primary residence, you can purchase the property without a huge down payment and still capitalize on the tax benefits of homeownership. Living in the same spot as your tenants also makes it easier to manage the property and cuts down on commute times. 

As you generate rental income, you can repair and improve the unit you’re living in, or save the money for future investments. When it’s time for a new renter, you can switch to living in the other unit and rent out the improved unit for a higher price. 

Hackers can keep making improvements to the property as long as they want, or they can save the rental income for future real estate investments. When you’re ready, you can move out of the multifamily property and rent out all of the units to generate passive income as you move on to a better home or another house hacking arrangement. 

How to get started with house hacking

  • Talk to local real estate agents about the multi-family properties in your area and keep an eye on foreclosure listings, which can be your best deal for an investment property. 

  • Research the best grants and mortgage loans you qualify for. The Federal Housing Administration offers loans for multi-family properties that are popular for house hackers for the low down payments they require. You can also get reasonable financing through Freddie Mac’s Home Possible program and Fannie Mae’s HomeReady loan programs. 

  • Find out the standard rental rates for your area so you know how much you can charge and how quickly you can pay off your mortgage.  

Sources

Will Foster