House hacking is one strategy that many people are using to achieve financial freedom through real estate investing. In his four-bedroom furnished home in Riverside, California, Eric Chiang, a pharmacist and real estate investor, has successfully implemented the "rent-by-room" house hacking strategy. Eric generates passive income by renting out each room individually, which covers his mortgage payments and other expenses.
This article talks about how Eric got into house hacking, how he chooses tenants, and why it's a good idea to require renters insurance. We also talk about how house hacking can be a great option for first-time homebuyers and real estate investors looking to generate income and equity in their property portfolio.
Eric Chiang, a pharmacist, embarked on a journey fueled by the desire for financial freedom, with real estate as his vehicle of choice. Currently, he owns two properties - a duplex rented out on a long-term basis and a four-bedroom furnished house where he rents out each room individually. His journey began with the purchase of a duplex in Riverside, California, but he wanted to acquire more properties. Eventually, he found a great single-family home but had to get creative to make the numbers work due to its price. Eric turned to "house hacking" to offset the cost and make the investment profitable.
House Hacking
House hacking is a way to invest in real estate by buying a property with more than one unit and living in one while renting out the others. In Eric's case, he decided to furnish and rent the rooms individually, while living in one himself. This approach allowed him to generate rental income that could offset the cost of his mortgage and other living expenses. In essence, the strategy allows for a form of passive income by taking advantage of the rental market.
House hacking can take many forms, including purchasing a duplex or triplex and living in one unit while renting out the others, or converting a single-family home into multiple rental units. This method can be especially appealing to first-time homebuyers who want to get into the housing market and make money at the same time. By living in one of the units, homeowners can also act as landlords, gaining valuable experience in property management and building equity in their real estate portfolio.
Eric's standard "rent-by-room" strategy tends to attract traveling professionals, but he also gets graduate students that attend the university a couple miles away. While he requires a minimum stay of 30 days, most tenants stay three months to a year.
Despite renting out each room individually, furnishing the home is basically what you would expect. The living room and kitchen are furnished as well as possible to provide a comfortable, relaxing shared space that everyone can enjoy. The only distinction is that each bedroom has its own desk; otherwise, they're typical bedrooms.
The Vetting Process
The vetting process Eric follows to ensure that the tenants will all have a good relationship starts with the initial email communication, in which he makes sure the applicants do not have any prior evictions and have a good credit score, followed by a completed application. A phone conversation takes place to iron out any remaining questions and get a feel for the person's personality. Finally, since Eric lives in one of the rooms, he's able to meet with the applicant and provide a tour of the home.
When he eventually moves out and rents out his then-vacant room, he's unlikely to do tours or meet in person as frequently. He will rely more on the short-term rental method, which is to just let people rent based on the pictures on Furnished Finder.
Keycheck (opens in new tab)offers a simple and straightforward option to help with tenant screening. Landlords can easily vet their potential tenants without having to go through a complicated and expensive process. Keycheck gives landlords free access to criminal and credit check reports, allowing them to get a complete and accurate picture of each applicant's payment and legal history. Armed with this information, landlords can make informed decisions about which applicant would be the best fit for their property, leading to a better rental experience overall.
House Hacking Details
While Eric is living in one of the rooms, the rent he charges is sufficient to cover the mortgage. Additional expenses, such as landscaping, come out of pocket; however, when he moves out, the additional rent will cover that and provide cash flow of approximately $350 per month.
House hacking is a great way to help combat the high prices of real estate today since you're able to offset the mortgage with your rental income. FHA loans are good for real estate investors because they usually only require a 3.5% down payment of the property's price, while conventional loans may require a 20% down payment. This lower down payment requirement can be helpful for real estate investors who may not have a large amount of cash on hand or who want to conserve their cash for other investments.
FHA loans also have more lenient credit requirements compared to conventional loans. While conventional lenders may require a credit score of 700 or higher, FHA lenders may accept borrowers with credit scores as low as 500, although a higher credit score may be required for a lower down payment. This can make it easier for real estate investors with less-than-perfect credit to qualify for financing.
Lease Considerations When Renting Rooms
When renting out individual rooms in a house, it's important to carefully consider the terms of your lease agreement. Since you have more than one tenant, it's important that everyone knows what's expected of them and what their responsibilities are. Some key considerations include outlining the common areas of the property and establishing guidelines for their use, determining how utility bills will be split among tenants, setting rules for guests and overnight visitors, and clarifying each tenant's responsibilities for maintaining their individual room. Additionally, it's important to include provisions for how to handle disputes between tenants, as well as any consequences for violating the lease agreement. A well-crafted lease agreement can help prevent misunderstandings and conflicts down the line and can lead to a more positive and successful rental experience for everyone involved.
Requiring Renters' Insurance
Renters' insurance is a good idea for landlords for several reasons. Firstly, it provides protection for tenants' personal belongings in case of damage or loss due to events such as theft, fire, or water damage. This can help prevent disputes and liability issues between landlords and tenants. In addition, renters' insurance can also provide liability coverage, which can protect tenants in case of accidents or injuries that occur on the rental property.
From the landlord's point of view, making tenants get renters' insurance can give the rental property more protection. If a tenant causes damage to the property, the landlord's insurance may cover the cost of repairs, but the landlord may still be responsible for paying the deductible or other costs not covered by the insurance. Renters' insurance can help cover these costs, reducing the landlord's financial liability.
Also, renters' insurance is usually very cheap, costing between $10 and $20 per month on average. Given the relatively low cost, requiring tenants to have renters' insurance can be a simple way for landlords to protect their property and reduce their financial risk.
It is important to note that landlords should carefully look over their rental agreements and state laws to make sure that they are allowed to require renters' insurance and that the requirements are reasonable and legal. Also, landlords should make it clear that renters' insurance is required and tell tenants how to get it. This will help make sure that the law is followed.
Rent Considerations with Multiple Tenants
In a home with four tenants, there are four different rent obligations. Managing rent payments can be challenging because some people may prefer to pay with a check, some with a card, and some through Venmo or Zelle. Furnished Finder developed Keycheck (opens in new tab)as a solution. With KeyCheck, landlords can accept credit card payments for rent without having to pay any extra fees. Renters prefer using credit cards to pay their rent because it makes it easier for them to keep track of their finances and set aside money for large purchases that they would have to make anyhow. Online rent payments are free for landlords; all you need to do is set up the appropriate type of account, which takes just a few minutes. KeyCheck can help tenants save hundreds of dollars compared to Airbnb and other vacation rental websites, which can charge tenants up to 18%.
In conclusion, house hacking is an excellent way to invest in real estate and generate rental income while offsetting the cost of the mortgage. It allows for a form of passive income by taking advantage of the rental market, making it a great option for first-time homebuyers or those looking to build their real estate portfolio. As Eric Chiang's story shows, there are many different ways to approach house hacking, from renting out individual rooms to converting a single-family home into multiple rental units. Regardless of the approach, it's crucial to carefully vet tenants and set clear expectations to ensure a positive experience for all parties involved. With the right strategy and guidance, anyone can use house hacking as a tool to achieve their financial goals and build wealth through real estate investing.
Would you like more details about Eric’s home and the rooms he’s renting? Check out his listing on Furnished Finder (opens in new tab).
www.furnishedfinder.com