House hacking in NJ is complicated, but not so complicated that it can’t be broken down into 5 simple steps. Build a confident understanding in this process and you will unleash the powerful wealth-building strategy of house hacking.
Know Your Criteria
Fortunately, you’ve stumbled on an incredible wealth-building strategy. House hacking is the process of buying a single-family home or multifamily property, living in one space, and renting out the rest.
If done correctly, there are numerous benefits to house hacking, such as lowering your cost of living, building equity, appreciation, tax benefits, and more. As such, it may be the most common recommendation experienced real estate investors make to those just getting started.
Why is house hacking so good? House hacking, in many ways, is so good because it is not for everyone. In other words, not everyone could live in a house hacking duplex next to a neighbor they collect rent from.
Not everyone is willing or able to accept the responsibility of providing housing to someone. But for you, someone who is willing to combine their lifestyle and living situation with their wealth-building goals? You have a competitive advantage.
Before you start looking for your house hack in NJ, consider the criteria of a place you would personally be willing and able to live.
You may have a family, pets, or side projects that need privacy, and there only a duplex, triplex, or fourplex would work for you.
Possibly, you work from home and you can expand the radius in which you search for a property from house hacking in southern NJ to house hacking in northern NJ.
In this step, it is critical you focus on absolute necessities because the reality is you only need to live in this location for one year (which we will explain soon) and sometimes compromises are good for the bottom line.
Find Your House Hack
Once you’ve identified the criteria of your house hack, you must “build a funnel” for deals that fit your criteria. The phrase build a funnel is thrown around in real estate, but depending on the scale of your real estate operations it can mean drastically different things.
For someone just getting started, potentially a house hacker, the funnel can be as simple as telling all of your friends and family what you’re looking for. Then, just like that, the likelihood of finding the right property multiplies.
Building a funnel can be as complicated as sending mailers to thousands of properties, hiring cold callers, or driving door-to-door to talk to homeowners about selling their properties. But, for someone looking to house hack in NJ, you only need to find the one property that works for you.
To further increase your odds, check out local NJ and NYC real estate meetups, where you will meet people who have house hacked or are implementing the house hacking strategy.
You can, and should, continue building up the network you will need once you’ve secured your first property. Your network, over time, may include property managers, cleaners, photographers, attorneys, real estate agents, construction workers, pest control providers, landscapers, and more. These people will be instrumental in maintaining your property, and in some cases can help you find your next opportunity.
Also, keep in mind that you want to be an asset to them as well. How can you help them succeed?
Creative Deal Sourcing Strategies
As you get more advanced and are trying to increase the likelihood of finding the right deal, you can explore a number of marketing and research techniques to find the right seller.
Firstly, make sure to frequently check the MLS, Facebook marketplace, and Craigslist for on-market properties. If a good deal makes it to market, it could be under contract quickly, so speed is important.
Off-market deals are properties that are not publicly for sale, but the owner is interested in selling. To find these owners you can cold call, drive for dollars, snail mail marketing, and push your network to talk with friends and family who may be ready to sell. Simply putting yourself out there might put you in front of the right person at the right time.
Finance Your Purchase
Through steps 1 and 2 above, you’ve found the right house hack in NJ, and now you need to finance it.
A significant advantage to living in your investment property for one year is a lower down payment. Most investment property financing requires 20-25% as a down payment.
In both northern NJ and southern NJ, multi-family properties are becoming increasingly expensive, which means higher down payments. However, when you live in the property, you get significantly better terms, lowering the barrier to entry. You have 3-5% down payment options available to you as an owner-occupant.
In real estate generally, there are solutions to whatever limiting factors are preventing you from doing your first or next deal. Between partners, knowledge, and time, you can navigate barriers to entry and close deals. House hacking is one of the best solutions for those with a lack of capital to get started.
There are a few loan types that range from 0-5% down. If you qualify for the VA loan, you could get terms at 0% down. You can also find conventional loans that have more flexible qualifications.
Fannie Mae and Freddie Mac, government-sponsored enterprises, offer HomeReady and Home Possible loan programs respectively. These are typically offered with low down payments, and reasonable credit and income requirements, making these loans a good place to often start.
Rental Income Used By Lenders
When using traditional financing, most lenders will include a percentage of the rental income in your debt-to-income ratio calculation if you are purchasing a multifamily property. Typically this can range from 70-80%, but it varies from lender to lender.
For example, if you make $36,000 a year before your first house hack, and the triplex you’re purchasing brings in another $36,000 a year in gross rent, the lender will likely add roughly 70-80% of that (roughly $25,000) to your income. Our house hacking calculator can help determine how much you might qualify for.
This can help make qualifying for loans much easier, especially since multifamily properties are typically a bit more expensive than single-family homes.
When house hacking a single-family home, utilizing the rent-by-the-room strategy, most traditional lenders will not count gross rent towards your income like they would for a multifamily property.
This does not mean that house hacking a single-family home is a bad strategy, you just have to be able to qualify for the purchase price using your own income.
Creative Financing Strategies
When corresponding with the seller, you can also gauge their interest in seller financing. Seller financing is considered a creative financing strategy where the seller takes the place of the bank.
The benefit to the seller is that they not only sell their property, but they get additional benefits, such as interest, as a bank would, and even tax benefits.
For you, the buyer, it may lower your financing cost and can provide incredibly flexible terms. For example, maybe the property needs a lot of work and therefore is not rent ready, with seller financing you may be able to negotiate a six-month hold on your first payment. Something a bank would never do.
Seller financing is not defined by red tape or lending regulations like traditional financial institutions are. With seller financing, and creative financing more broadly, the only limitation is your creativity.
Find and Manage Tenants
Finally, you’ve secured a house hack in NJ and you’re ready to start renting out the extra space to begin building wealth through the house hacking strategy.
While you’ve reached the most rewarding part of house hacking, the work is not over. You need to find tenants (or manage inherited ones) in either your extra rooms or extra units. Finding tenants promptly, who will pay on time and treat you and the property with respect, is critical to the success of any house hack.
To self-manage or hire a property manager, that is the question.
Self-managing tenants requires more effort on your part but can increase cash flow or increase the portion of your mortgage covered by tenant contributions.
It is important to be updated on federal, state, and local laws before renting the property, but there are various ways to stay up-to-date. You can take property management courses, find a mentor, research laws online, follow active property management groups, and/or check with local agencies on best practices.
Fortunately, when house hacking in NJ, you do not need to be a licensed property manager or broker because you own the property.
However, New Jersey is generally quite tenant-friendly, which means you should do extra due diligence when studying the laws and screening your potential tenants.
A property management company can help take the tenant-management headache away — for a fee, of course.
Typically, a combination of leasing fees, management fees, and a percentage of the monthly rent will get you a professional who deals directly with the tenants, leases your property upon vacancy, and brings to your attention any repairs, maintenance, or capital expenditures that need to be handled.
If you are renting by-the-room, you should plan on self-managing. Firstly, because you will be living in the same common space, you have more control over who you live with. Secondly, most property management companies will not manage rent by the room properties, if they do, they will expect larger management fees.
Repeat Your House Hack
Now that you’ve stabilized your house hack in NJ the waiting game begins.
Typical financing terms require you to live in your property for one year to qualify for low money down loans. (Unless you use a creative financing strategy, like seller financing — another benefit!)
The good news is that after one year you can repeat the exact same process and add another property to your portfolio.
Even if you don’t buy your next property immediately, which you’re not required to do, you’re still living with drastically lower expenses, enabling more flexibility in how you live your life.
Depending on your lifestyle and the compromises you made moving into your house hack, waiting one year may seem like a long time. Use this time as an opportunity to network, learn more about real estate, and do some self-reflecting.
Document your experience and make special note of what worked and what didn’t.
Think about what you like about your current house hack and what you don’t.
List out what you wish was different and what you’ll do differently going forward.
Plan your next attack.
Building A Portfolio of Rentals Through House Hacking
Imagine this, your first house hack in NYC is cash flowing $100 a month for the first year while you live there. Maybe this doesn’t seem like much, but after one year you move on to your next house hack in NJ and you rent the space you were occupying in NYC for $2,000 a month to a new tenant.
Now, you’re cash-flowing $2,100 a month at just one of your properties – and you can do this nearly as many times as you want.
You may start to run into some increased difficulty and speed bumps as you get to 10 properties in your name, but that’s a great problem to have. You’re almost certainly financially free by that point!
House hacking is the start to a snowball of real estate wealth.
To grow that snowball faster, repeat these five steps and over time you can master house hacking in NJ.
Also, if you’re looking to learn more about house hacking, check out our book The Everything Guide to House Hacking.