house hacking 101
House hacking: a place to live and a place to profit
what is house hacking?
House hacking is an amazing way to get your foot in the door, literally and figuratively, in the real estate market. In its simplest form house hacking is any time you generate income from your principal residence, but strategic house hacking involves a bit more than that.
There are so many house hacking strategies with a spectrum of risk, investment, and returns.
house hacking strategies:
Strategy #1 – low risk, low short-term return, moderate long-term return
Purchase an existing duplex that is turnkey. Live in one unit and rent out the other.
Strategy #2 – low risk, moderate short-term return, moderate long-term return
Purchase an existing duplex that needs work. Complete the cosmetic upgrades of the rental unit upfront, move a tenant in, and then complete the upgrades on the unit you live in while you live there.
Strategy #3 – moderate risk, high short-term return, high long-term return
Purchase a single-family home that is duplex-ready, ie. separate entrance, existing finished basement with plumbing, high basement ceilings. Convert the home to a duplex. Rent out one unit and live in the other.
Strategy #4 – high risk, high short-term return, high long-term return
Purchase a single-family home that is duplex-ready AND requires updating (outdated carpet, cabinetry, not been renovated in 30+ years). Convert it to a duplex. You’re still searching for a home that is structurally duplex-ready (ie. separate entrance, high ceilings, existing basement plumbing), but this may have an unfinished basement that needs a full renovation. Live in one unit and rent out the other.
What’s my go-to strategy recommendation? #4 all the way BUT specifically buying a single-family home that needs cosmetic updates (not major structural repairs!) and that is duplex-ready for conversion.
maximizing your return:
One of the best ways to maximize your return in the short-term is to live in the lowest profiting unit. In most cases, this means converting a single-family home to a duplex, renovating the main unit (for example, a 3 bed, 1 bath, two-story home) and tenanting it, and then living in the basement while you fix it up. You need to purchase a home with a liveable basement, but it should require cosmetic updates that you can do a bit at a time while living there.
Everything you need to know about house hacking: tips, tricks, strategy, how-to.
Things to consider:
Age and stage of life. How much time you have available to dedicate to house projects and how much comfort you’re seeking in your living arrangements are huge determinants of which house hacking format suits you. What works for you when you’re single and 23 with lots of time on your hands, might be very different than what works for you at 43 with 2 kids, and a busy job. Know where you’re at in life, and what makes sense for you so that you can balance strategy against quality of life.
Risk threshold. If you are a low-risk kind of person, then a less speculative play is likely a better fit. This might be an existing duplex that you can fix up a bit as you go, but where you can see reliable rent rolls and existing leases. If your risk threshold is a bit higher, then a duplex conversion is likely for you. There is no right or wrong. All the high yields in the world won’t be worth it if you’re a risk averse person forcing yourself to live through 10 months of uncertainty and anxiety while you renovate a house for future tenants. Know yourself and your needs and decision on them accordingly. There are many ways to get there. :)
Future plan. Is it a short-term hold or a long-term investment strategy? How long you plan to keep the property has a huge impact on investment decisions. For example, an existing duplex with a moderate rate of return would be just fine if you’re planning to hold the property for the next twenty years, but if you’re planning to leverage forward into your next purchase within 3-5 years then you need something with an opportunity to inject capital with a high return on investment like strategy #3.
Profit margins. Any time you are investing money to update a home, ensure that when you factor in your purchase price + the renovation cost, your final state comps leave plenty of margin for profit. Hiring an expert goes a long way in ensuring you are making a sound investment with realistic final state comps.
You’re a landlord. Take this seriously.
o Know the landlord tenancy act in Ontario
o Consult with your accountant to be in the know on tax obligations
o Understand your liability and disclose your rental plans to your insurance company
HOUSE HACKING FUN FACTS:
· Banks will typically qualify 50% of rental income towards your qualification of purchasing a home giving you more borrowing power
· Some banks will qualify 100% of rental income for buyers who are putting less than 20% down
The beach hill advantage
I started house hacking when I was 21 and hacked over $3.5M in transactions before the age of 30. I’ve spent the last twenty years transforming homes across the east end of Toronto while concurrently working as the CEO of a national children’s charity. I combine my business and sales acumen with my experience as an investor, builder, and designer to offer clients a new kind of real estate expertise; a one stop shop to get you started in investing.
my real estate Clients benefit from:
· Strategic guidance
· 1:1 house hacking coaching
· Investment locating, ie. I help you find properties with high opportunity and rates of return with guided calculations
· Comprehensive renovation and design consultation (so that you know exactly what to do and how much it will cost)
· Project planning (so that your renovation goes off without a hitch), and
· A LOT OF FUN – because life’s too short not to have fun!
