The answer to your question, “How much do I need to house hack?” kind of sucks.
Why?
Because the answer is, “it depends.”
Everyone knows “it depends” is a shitty answer. No one wants to hear that as an answer to their question.
Before you hit the back button or exit this article, let me try to make it up to you. Let me explain why it depends and what it depends on.
What Impacts How Much You Need to House Hack
There are three major factors that impact how much you need to house hack:
- Location of your property
- Type of property
- Financing situation
Ultimately, where you buy your property, what kind of property you buy, and how you buy it determine how much you need to house hack.
Location of Your Property
Real estate prices vary across the country (and the world). A house in the Midwest is usually much cheaper than one on the coasts or in major cities. If you’re buying in a state or city where property values aren’t as expensive as in other parts of the country, then you’re going to need less money to house hack than you would if you were buying in an expensive part of the country.
It’s not just the state and city you buy in, but it’s also the area within that city. If you buy in the worst part of town, a property is going to cost less than if you buy in the best part of town. A higher purchase price means that you need more money to buy it.
This doesn’t mean you should move to the Midwest and/or live in a shitty neighborhood. It just means that these things impact how much you need to house hack.
Property Type
Not only does the location impact how much you need, but so does the type of property you decide to buy, from two different angles: 1) the style of the property, and 2) the condition.
Not always, but usually, when you buy a duplex it costs less than a fourplex or more than a single-family home. Often, the more the units, the higher the purchase price.
When it comes to house hacking, there are a lot of different strategies you can implement, so you’re not required to pick any one specific type of property. But, the property type you do choose will impact the purchase price, which impacts the amount you need to house hack.
Regardless of which property type you buy, the condition of that property impacts how much you need as well. If you buy a newly renovated property, you may have to pay more for the purchase price, but that could mean less in renovations. If you buy a property that needs work, you’ll likely get a lower purchase price, but may need to put more money into fixing it up.
How those numbers play out really depends on the situation, but they all impact how much you need.
Financing Situation
Within this one category, there are three ways that your financing situation could impact how much you need to house hack.
The first is which type of financing program you use, if you use financing at all.
You could pay cash for the property, which would mean you need a lot more than someone who is financing the property. It’s highly unlikely a house hacker will pay cash for their property, but it is possible so I had to mention it.
Even within financing, there are a few different things that can impact how much you need. If you use an FHA loan, you could get as low as 3.5% down. If you use a conventional loan, you may need upwards of 10, 15, or even 20% down depending on which type of property you buy (single-family, duplex, triplex, fourplex).
If you buy a $100,000 property with 3.5% down, of course, that means you’ll need less cash to house hack than if you had to put 10 or 15% down.
Your credit score and credit history are the second items that can also impact how much money you need. Just because FHA loans can go as low as 3.5%, that doesn’t mean that your credit score will qualify you for that. If you have less than stellar credit, you may be required to put more money down.
The economic environment (and potentially interest rates) is the third financing factor that can impact how much you need to house hack.
When the economy is uncertain, banks can pull back or tighten their lending standards. This could, and often does, mean that you may need to put a larger down payment than you otherwise would during good economic times.
Bonus: Seller’s Credit
This is one of my personal favorite moves when interest rates are low, which they may or may not be when you’re reading this – it’s a seller’s credit.
I don’t see this talked about too often, but it can be powerful.
A seller’s credit is when the seller gives you cash back at closing towards your closing costs.
Why would they do that?
Well, because you negotiated it.
In a competitive environment, this strategy may not work, but it really depends on how you structure it.
Let’s assume there are two offers on the table for a property that’s for sale for $250,000:
- Offer 1: $250,000 with $10,000 seller credit (your offer)
- Offer 2: $250,000, no seller’s credit
In this case, your offer (offer 1) only gives the seller $240,000 because the $10,000 seller’s credit that they’re giving you at closing comes out of their sale price. Whereas the second offer gives them the full $250,000. All else equal, the seller would likely take the $250,000 with no seller’s credit.
But, in this case, if interest rates are low, you could offer $260,000 with a $10,000 seller’s credit. That makes your offer essentially equivalent to the other offer, and you still get your seller’s credit.
Why would you want to do this?
Because it reduces the amount of cash you need to house hack.
When you go to buy a property, you need to pay for closing costs, not just your down payment, and sometimes, closing costs can be significant – especially for house hackers.
If you’re a house hacker, you know that you’re doing it as a way to get started in your real estate career because you don’t have a lot of cash. A seller’s credit can help you with that problem when used right.
How Much I Needed for My House Hack
I can’t stand when people teach or talk about things on the internet when they have no experience doing it themselves. Drives me crazy.
Because of that, I want to tell you how much I needed for the duplex that I’m house hacking, which I’m living in right now as I write this article.
I purchased it for roughly $330,000 in 2020 using a 3.5%-down FHA loan (fun fact: this was my 4th or 5th property – FHA loans are just for first-time homebuyers as most people think).
Just for the down payment, I needed $11,550.
For closing costs and prepaids, I need another roughly $10,000, putting my total at just under $22,000.
Guess what?
I didn’t have $22,000 to my name…
I was a 25-year-old single dad. $22,000 wasn’t happening for me.
But, remember the seller’s credit from above? I used that to reduce the amount of cash I needed.
I was able to negotiate a $10,000 seller’s credit to cover all of my closing costs, bringing down the amount of cash I needed from $22,000 to $12,000.
That was more manageable. I could make that happen.
In reality, I should have had more cash set aside to cover reserves in case something went wrong when I purchased the property (that’s what I recommend to other people), but it just wasn’t possible for me at the time and I needed somewhere to live.
I also wasn’t too concerned about the seller’s credit in the purchase price because my interest rate is 2.25% for a 30-year fixed-rate loan, with no points or buy-down.
So, to answer your question, “How much do I need to house hack?” – it depends.
For me, it was $12,000.
For you, it could be $7,000, $13,000, $27,000, or really anything, depending on where you buy your property, what kind of property you buy, and how you pay for it.
P.S. Make sure you put money aside for reserves too, on top of the amount you need for your down payment.