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The return of house hacking

History is replete with stories of heroes setting out to search for nearly unattainable objects that will grant the finder a great reward.

Jason and his Argonauts sought the golden fleece, King Arthur and his Knights of the Round Table the Holy Grail, Ahab had his white whale, even Fox Mulder and his search for the elusive “truth” that was allegedly “out there”.

For the past few years real estate investors have searched, largely in vain, for affordable two-to-four unit buildings to do what is called house hacking. The object is to find a small multi-unit building, live in one unit and rent the others out. When done properly you can live rent/mortgage payment free, or even make money every month.  It is touted by many as the ideal entry point to real estate investing and therefore step one in building a portfolio of rental properties.

What makes house hacking so attractive to owner-occupant buyers is the ease and number of options for favorable financing. Banks have two main categories of loans: owner-occupied and investment properties. Banks treat multi-unit buildings with an owner living in one of the units much more like an owner-occupied loan than an investment loan.

Because owner-occupied mortgages have a significantly lower rate of default, banks can have down payment requirements as low as 3.5% to 5%, and the interest rates offered are the lowest there are.

Where it gets difficult

When you move to more than four units, the lending laws change. Lenders treat properties with more than four units as commercial whether the owner lives on site or not. This eliminates many of these potential benefits.

The challenge has been too many searchers and too little available inventory. So, even though many blogs, gurus, and coaches teach people to set out on this crusade, precious few attain their goal.

The Central PA real estate market has recovered from the last dip brought on by the financial markets crash of 2008. As prices went up, investing in real estate became an attractive option again.

In the hot real estate market we have been experiencing, two- to four-unit buildings have been gobbled up by seasoned investors. This has pushed up their value to the point where they don’t make sense for house hackers, or limited the available options to undesirable locations for most middle class investors looking to occupy as an owner.

A turn for the better

All this is about to change. The troubles in the economy are going to spark investors needing to liquidate some of their current holdings to raise capital so they can weather the storm

Some of the properties they will be selling will make ideal candidates for house hacking. It is also very likely that seasoned investors and full time landlords that have been absorbing any two- to four-unit properties coming on the market will slow down or even pause their buying activity. These old salts have enough on their plate with eviction delays and bills to pay, that it is likely they won’t be looking to add to the portfolio they own.

More opportunities are out there, or will be soon, than have been in recent memory. Your aim should be to prepare and be ready for them. If you are not ready, you should focus on two major relationships: a lender who knows investment loans, and a trusted Realtor experienced in the rental market.

Are you working with a realtor sending you multi-unit properties in your price range in your targeted school districts? Are you talking to a lender that has given you an approval in the last 30 days? (Now is not the time to waste anyone’s time with a pre-approval, much a pre-qualification) If you can’t answer an emphatic yes to both questions, and you have been telling yourself you want to invest, you have your homework.

With great mortgage options, and a very likely increase in inventories, now is the time for the return of the house hacker! If you have looked to take advantage of this strategy in the past only to give up, this could very well be your chance to jump in the lucrative world of investment real estate.

When the opportunity presents itself you need to be ready to strike. It will still be hard, you will still likely be competing against other investors.

Lending guidelines have tightened some even as rates have gone down. The point is not that it is difficult, but that is for the first time in years attainable.  Who knows how long this window of opportunity will be open, don’t miss it.


Judah Hoover is the vice president of business development for SlateHouse Group Property Management in Harrisburg. Hoover bought his first rental property when he was 22 and for the past 20 years, has been a full time investor and full time servicer of the real estate community. Hoover lives in Lancaster County with his four children where he enjoys serving at his church, good wine with friends and skydiving.

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